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, 2009
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 has submitted electronically and posted on its corporate Website
, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (SEC. 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes___ No___.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See definition of “large accelerated filer”, "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer o
|
Accelerated filer
o
|
Non-accelerated filer
o
|
Smaller reporting
company þ |
|
|
(Do not check if a smaller reporting
company)
|
|
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, 2009
|
Common
stock, $1.00 par value per share
|
|
9,987,913 shares
|
Champion
Industries, Inc.
INDEX
|
Page
No.
|
Part
I. Financial
Information
|
|
Item
1. Financial Statements
|
|
Consolidated
Balance Sheets (Unaudited)
|
3
|
Consolidated
Statements of Income (Unaudited)
|
5
|
Consolidated
Statements of Shareholders' Equity
(Unaudited) |
6 |
Consolidated
Statements of Cash Flows (Unaudited)
|
7
|
Notes
to Consolidated Financial Statements
|
8
|
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
17
|
Item
3a. Quantitative and Qualitative Disclosure About Market
Risk
|
23
|
Item
4T. Controls
and Procedures
|
23
|
Part
II. Other
Information
|
|
Item
1A. Risk Factors |
24 |
Item
4. Submission of Matters to a Vote of Security
Holders |
24 |
Item
6.
Exhibits
|
24
|
Signatures
|
25
|
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
Champion
Industries, Inc. and Subsidiaries
Consolidated
Balance Sheets
ASSETS
|
|
April
30,
|
|
|
|
October
31,
|
|
|
|
2009
(Unaudited)
|
|
|
|
2008
(Audited)
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
-
|
|
|
$
|
-
|
|
Accounts
receivable, net of allowance of $1,228,000 and
$1,851,000
|
|
18,841,569
|
|
|
|
23,888,688
|
|
Inventories
|
|
11,109,594
|
|
|
|
12,014,118
|
|
Income
tax refund
|
|
1,871,502
|
|
|
|
711,096 |
|
Other current assets
|
|
1,421,989
|
|
|
|
833,066
|
|
Deferred income tax assets
|
|
937,832
|
|
|
|
1,130,742
|
|
Total
current assets
|
|
34,182,486
|
|
|
|
38,577,710
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost:
|
|
|
|
|
|
|
|
Land
|
|
2,120,689
|
|
|
|
2,120,689
|
|
Buildings
and improvements
|
|
12,148,868
|
|
|
|
12,110,480
|
|
Machinery
and equipment
|
|
56,665,399
|
|
|
|
55,407,620
|
|
Furniture
and fixtures
|
|
4,154,712
|
|
|
|
4,089,466
|
|
Vehicles
|
|
3,112,151
|
|
|
|
3,144,682
|
|
|
|
78,201,819
|
|
|
|
76,872,937
|
|
Less
accumulated depreciation
|
|
(51,684,734
|
)
|
|
|
(49,764,709
|
)
|
|
|
26,517,085
|
|
|
|
27,108,228
|
|
|
|
|
|
|
|
|
|
Cash
surrender value of officers’ life insurance
|
|
874,397
|
|
|
|
874,397
|
|
Goodwill
|
|
38,894,778
|
|
|
|
38,894,778
|
|
Deferred financing
costs
|
|
1,353,934 |
|
|
|
1,508,669 |
|
Other
intangibles, net of accumulated amortization
|
|
15,210,490
|
|
|
|
15,730,841
|
|
Trademark
& masthead |
|
18,515,316 |
|
|
|
18,515,316 |
|
Other assets
|
|
60,322
|
|
|
|
68,906
|
|
|
|
74,909,237
|
|
|
|
75,592,907
|
|
Total
assets
|
$
|
135,608,808
|
|
|
$
|
141,278,845
|
|
See notes
to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Consolidated
Balance Sheets (continued)
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
April
30,
|
|
October
31,
|
|
|
2009
(Unaudited)
|
|
2008
(Audited)
|
|
Current
liabilities:
|
|
|
|
|
|
|
Notes
Payable, line of credit |
$ |
9,725,496 |
|
$ |
- |
|
Negative book cash balances |
|
527,349 |
|
|
986,704 |
|
Accounts
payable
|
|
3,582,823
|
|
|
4,844,725
|
|
Accrued
payroll
|
|
2,262,172
|
|
|
2,726,911
|
|
Taxes
accrued and withheld
|
|
1,433,782
|
|
|
987,385
|
|
Accrued
expenses
|
|
1,862,284
|
|
|
1,546,055
|
|
Current
portion of long-term debt:
|
|
|
|
|
|
|
Notes Payable |
|
59,242,398 |
|
|
7,118,543 |
|
Total
current liabilities
|
|
78,636,304
|
|
|
18,210,323
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion:
|
|
|
|
|
|
|
Notes
payable, line of credit
|
|
-
|
|
|
9,125,496
|
|
Notes
payable, term
|
|
478,391
|
|
|
57,206,307
|
|
Other
liabilities
|
|
1,297,369
|
|
|
939,006
|
|
Deferred
income tax liabilities
|
|
3,808,516
|
|
|
3,937,658
|
|
Total
liabilities
|
|
84,220,580
|
|
|
89,418,790
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
Common
stock, $1 par value, 20,000,000 shares
authorized;
9,987,913
and 9,987,913 shares issued and
outstanding
|
|
9,987,913
|
|
|
9,987,913
|
|
Additional
paid-in capital
|
|
22,768,610
|
|
|
22,768,610
|
|
Retained
earnings
|
|
19,405,176
|
|
|
19,661,445
|
|
Other
comprehensive loss |
|
(773,471 |
) |
|
(557,913 |
) |
Total
shareholders’ equity
|
|
51,388,228
|
|
|
51,860,055
|
|
Total
liabilities and shareholders’
equity
|
$
|
135,608,808
|
|
$
|
141,278,845
|
|
See notes
to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Consolidated
Statements of Income
(Unaudited)
|
|
Three
Months Ended
April
30,
|
Six
Months Ended
April
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
$
|
22,357,699
|
|
$
|
|
|
$
|
44,873,128
|
|
$
|
51,463,289
|
|
Office
products and office furniture
|
|
|
|
|
|
|
|
|
18,343,247
|
|
|
18,518,254
|
|
Newspaper |
|
|
3,861,516 |
|
|
4,547,667 |
|
|
8,374,306 |
|
|
9,583,449 |
|
Total
revenues
|
|
|
|
|
|
39,271,220
|
|
|
71,590,681
|
|
|
79,564,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales & newspaper operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
|
16,329,302
|
|
|
18,467,880
|
|
|
33,678,703
|
|
|
36,268,934
|
|
Office
products and office furniture
|
|
|
6,424,851
|
|
|
5,694,004
|
|
|
13,121,501
|
|
|
13,019,447
|
|
Newspaper
cost of sales & operating costs |
|
|
2,132,349 |
|
|
2,338,883 |
|
|
4,572,651 |
|
|
4,609,613 |
|
Total
cost of sales & newspaper operating
costs
|
|
|
24,886,502
|
|
|
26,500,767
|
|
|
51,372,855
|
|
|
53,897,994
|
|
Gross
profit
|
|
|
10,438,558
|
|
|
12,770,453
|
|
|
20,217,826
|
|
|
25,666,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
8,821,989
|
|
|
9,696,180
|
|
|
18,629,460
|
|
|
19,388,887
|
|
Hurricane
and relocation costs, net of recoveries |
|
|
(8,315 |
) |
|
- |
|
|
(38,673 |
) |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,624,884
|
|
|
3,074,273
|
|
|
1,627,039
|
|
|
6,278,111
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
47
|
|
|
25,999
|
|
|
2,771
|
|
|
51,235
|
|
Interest expense
|
|
|
(1,169,984
|
)
|
|
(1,365,777
|
)
|
|
(2,269,317
|
|
|
(3,114,959
|
)
|
Other
|
|
|
10,653
|
|
|
19,700
|
|
|
34,766
|
|
|
32,915
|
|
|
|
|
(1,159,284
|
)
|
|
(1,320,078
|
)
|
|
(2,231,780
|
|
|
(3,030,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
before income taxes
|
|
|
465,600
|
|
|
1,754,195
|
|
|
(604,741
|
)
|
|
3,247,302
|
|
Income tax benefit (expense)
|
|
|
170,796
|
|
|
(359,279
|
)
|
|
947,749
|
|
|
(574,138
|
|
Net
income
|
|
$
|
636,396
|
|
$
|
1,394,916
|
|
$
|
343,008
|
|
$
|
2,673,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
$
|
0.14
|
|
$
|
0.03
|
|
$
|
0.27
|
|
Diluted
|
|
$
|
0.06
|
|
$
|
0.14
|
|
$
|
0.03
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,988,000
|
|
|
9,988,000
|
|
|
9,988,000
|
|
|
9,985,000
|
|
Diluted
|
|
|
9,988,000
|
|
|
10,041,000
|
|
|
9,988,000
|
|
|
10,043,000
|
|
Dividends
per share
|
|
$
|
-
|
|
$
|
0.06
|
|
$
|
0.06
|
|
$
|
0.12
|
|
See notes to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Consolidated
Statements of Shareholders’ Equity
|
|
|
|
|
Additional
|
|
|
|
Other
|
|
|
|
|
Common
Stock
|
|
Paid-In
|
|
Retained
|
|
Comprehensive
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Loss
|
|
Total
|
|
Balance, October 31,
2008 |
|
9,987,913 |
|
$ |
9,987,913 |
|
$ |
22,768,610 |
|
$ |
19,661,445 |
|
$ |
(557,913 |
) |
$ |
51,860,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income for 2009
|
|
-
|
|
|
-
|
|
|
-
|
|
|
343,008
|
|
|
-
|
|
|
|
|
Other
comprehensive loss (net of tax)
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(215,558 |
) |
|
(215,558
|
) |
Total
comprehensive income |
|
- |
|
|
- |
|
|
- |
|
|
343,008 |
|
|
(215,558 |
) |
|
127,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
($0.06 per share)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(599,277
|
)
|
|
-
|
|
|
(599,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
April 30, 2009
|
|
9,987,913
|
|
$
|
9,987,913
|
|
$
|
22,768,610
|
|
$
|
19,405,176
|
|
$
|
(773,471
|
|
$
|
51,388,228
|
|
See notes
to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows (Unaudited)
|
|
Six
Months Ended April 30,
|
|
|
|
2009
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
343,008
|
|
$
|
|
|
Adjustments
to reconcile net income to cash
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,622,704
|
|
|
|
|
Gain
on sale of assets
|
|
|
(15,844
|
)
|
|
|
) |
Deferred
income taxes
|
|
|
207,473
|
|
|
|
|
Deferred financing costs or compensation |
|
|
154,735 |
|
|
154,735 |
|
Bad debt expense
|
|
|
514,607
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
4,532,512
|
|
|
|
|
Inventories
|
|
|
904,526
|
|
|
|
)
|
Other
current
assets
|
|
|
(588,923
|
)
|
|
|
)
|
Accounts
payable
|
|
|
(1,261,903
|
)
|
|
|
)
|
Accrued
payroll
|
|
|
(464,739
|
)
|
|
|
)
|
Taxes
accrued and
withheld
|
|
|
446,397
|
|
|
|
)
|
Income
taxes
|
|
|
(1,160,406
|
|
|
|
|
Accrued
expenses
|
|
|
316,229
|
|
|
|
)
|
Other
liabilities
|
|
|
(900
|
)
|
|
|
)
|
Net cash provided by operating activities
|
|
|
6,549,476
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(1,544,375
|
)
|
|
|
)
|
Proceeds
from sales of property
|
|
|
55,008
|
|
|
|
|
Businesses
acquired
|
|
|
-
|
|
|
|
|
Change in
other assets
|
|
|
2,584
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,486,783
|
)
|
|
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Borrowings
on line of credit
|
|
|
600,000
|
|
|
-
|
|
Payments
on line of credit
|
|
|
-
|
|
|
|
)
|
Decrease in
negative book cash balances |
|
|
(459,355 |
) |
|
- |
|
Proceeds
from term debt and leases
|
|
|
-
|
|
|
|
|
Principal
payments on long-term debt
|
|
|
(4,604,061
|
)
|
|
|
)
|
Proceeds
from exercise of stock options
|
|
|
-
|
|
|
54,310
|
|
Dividends
paid
|
|
|
(599,277
|
)
|
|
|
)
|
Net cash used in financing activities
|
|
|
(5,062,693
|
) |
|
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
-
|
|
|
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
-
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
-
|
|
$
|
|
|
See notes
to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
April
30, 2009
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, 2008, and related notes thereto
contained in Champion Industries, Inc.’s Form 10-K dated January 19, 2009. 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, 2008
was derived from our audited financial statements.
In
September 2006, the FASB issued FAS No. 157, “Fair Value Measurements.” FAS No.
157 provides guidance for using fair value to measure assets and liabilities and
only applies when other standards require or permit the fair value measurement
of assets and liabilities. It does not expand the use of fair value
measurements. FAS No. 157, as issued, is effective for fiscal years beginning
after November 15, 2007. FASB Staff Position (FSB) FAS No. 157-2 was issued in
February 2008 and deferred the effective date of FAS No. 157 to fiscal years
beginning after November 15, 2008 for nonfinancial assets and nonfinancial
liabilities. Accordingly, as of November 1, 2008, the Company adopted FAS No.
157 for financial assets and liabilities only. The Company's interest rate swap
derivative liability is based on third party valuation models, and is therefore
classified as having Level 2 inputs. The adoption of FAS No. 157 for financial
assets and financial liabilities did not have a material impact on the Company's
results of operations, financial condition or liquidity. The full adoption of
FAS No. 157 for nonfinancial assets and nonfinancial liabilities is also not
expected to have a significant impact on the Company's results of operations,
financial condition or liquidity.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115.” SFAS No. 159 permits entities to choose to measure at fair
value many financial instruments and certain other items at fair value that are
not currently required to be measured. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS No.
159 does not affect any existing accounting literature that requires certain
assets and liabilities to be carried at fair value. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The Company elected to not
apply the provisions of SFAS No. 159; therefore the adoption of SFAS No. 159 did
not affect our consolidated financial position, results of operations or cash
flows.
The
company measures and records in the accompanying consolidated financial
statements certain liabilities at fair value on a recurring basis. SFAS No. 157
establishes a fair value hierarchy for those instruments measured at fair value
that distinguishes between assumptions based on market data (observable inputs)
and our own assumptions (unobservable inputs). The hierarchy consists of three
levels:
Level 1 -
Quoted market prices in active markets for identical assets or
liabilities;
Level 2 -
Inputs other than Level 1 inputs that are either directly or indirectly
observable; and
Level 3 -
Unobservable inputs developed using estimates and assumptions developed by the
company, which reflect those that a market participant would use.
The
following table summarizes the financial instruments measured at fair value in
the accompanying consolidated balance sheet as of April
30, 2009:
|
|
Fair
Value Measurements as of
|
|
|
|
April
30, 2009
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap
|
|
$
|
-
|
|
|
$
|
1,289,119
|
|
|
$
|
-
|
|
|
$
|
1,289,119
|
|
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
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 0 shares for the three
and six months ended April 30, 2009 and 53,000 and 58,000 shares for the
three and six months ended April 30, 2008.
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,
|
|
|
|
2009
|
|
2008
|
|
Printing
and newspaper:
|
|
|
|
|
|
Raw
materials
|
|
$
|
2,986,213
|
|
$
|
3,137,060
|
|
Work
in process
|
|
|
1,731,635
|
|
|
1,929,581
|
|
Finished
goods
|
|
|
3,897,432
|
|
|
3,867,023
|
|
Office
products and office furniture
|
|
|
2,494,314
|
|
|
3,080,454
|
|
|
|
$
|
11,109,594
|
|
$
|
12,014,118
|
|
4.
Long-Term Debt
Long-term
debt consisted of the following:
|
|
April
30,
|
|
October
31,
|
|
|
|
2009
|
|
2008
|
|
Installment
notes payable to banks
|
|
$
|
638,347
|
|
$
|
749,850
|
|
Term
loan facility with a bank |
|
|
59,082,442 |
|
|
63,575,000 |
|
|
|
|
59,720,789 |
|
|
64,324,850 |
|
Less
current portion
|
|
|
|
|
|
7,118,543
|
|
Long-term
debt, net of current portion
|
|
$
|
|
|
$
|
57,206,307
|
|
The
secured and unsecured credit facilities contain restrictive financial covenants
requiring the Company to maintain certain financial ratios. The Company was
unable to remain in compliance with certain of its financial covenants arising
under substantially all of its long-term note agreements. The creditors have not
waived the financial covenant requirements. The Company has been working with
the different creditors to restructure the existing debt; however, an agreement
satisfactory to the Company has not been reached. A total of $68,808,000 of
long-term debt and outstanding revolving line of credit borrowing are subject to
accelerated maturity and, as such, the creditors may, at their option, give
notice to the Company that amounts owed are immediately due and payable. As a
result, the full amount of the related long-term debt has been classified as a
current liability in the accompanying Balance Sheet at April 30, 2009
representing $ 63,908,000. Regardless of the non-compliance with financial
covenants, the Company has made every scheduled payment of principal and
interest, including an excess cash flow recapture payment of approximately $2.0
million in January 2009.
The
Company is required to make certain mandatory payments on its credit facilities
related to (1) net proceeds received from a loss subject to applicable
thresholds, (2) equity proceeds and (3) effective January 31, 2009, and
continuing each year thereafter under the terms of the agreement the Company is
required to prepay its credit facilities by 75% of excess cash flow for its most
recently completed fiscal year. The excess cash flow for purposes of this
calculation is defined as the difference (if any) between (a) EBITDA for such
period and (b) federal, state and local income taxes paid in cash during such
period plus capital expenditures during such period not financed with
indebtedness plus interest expense paid in cash during such period plus the
aggregate amount of scheduled payments made by the Borrower and its Subsidiaries
during such period in respect of all principal on all indebtedness (whether at
maturity, as a result of mandatory sinking fund redemption, or otherwise), plus
restricted payments paid in cash by the Borrower during such period in
compliance with the credit agreement. The Company paid its prepayment obligation
of approximately $2.0 million in January 2009.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
The
Company can borrow a maximum of $30,000,000 under its revolving line of credit
subject to a borrowing base limitation with interest payable monthly at the
prime rate of interest and/or LIBOR plus a margin. The Company had borrowed
$9,725,496 under this facility at April 30, 2009 and $9,125,496 in
October 31, 2008. Pursuant to its borrowing base calculation, the Company had
approximately $5.9 million and $9.1 million in additional availability under its
$30.0 million revolving credit line at April 30, 2009 and October 31, 2008.
The Company’s credit availability is calculated pursuant to a minimum excess
availability plus cash and cash equivalents calculation subject to a $3.0
million threshold. The line of credit expires in September 2012 and contains
certain restrictive financial covenants, is subject to borrowing base
limitations and is collateralized by substantially all of the assets of the
Company. The Company has not received any notice of line of credit limitations
as a result of its debt covenant non-compliance.
There
were no non-cash financing and investing activities for the three and six months
ended April 30, 2009 and for 2008.
5.
Shareholders’ Equity
The
Company paid a dividend of six cents per share on December 26, 2008 to
stockholders of record on December 5, 2008. The Company's Board of Directors did
not declare a dividend for this quarter due to the Company's current credit
position.
6.
Commitments and Contingencies
As of
April 30, 2009 the Company had contractual obligations in the form of leases and
debt as follows:
|
|
Payments
Due by Fiscal Year
|
Contractual
Obligations
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
|
Residual
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable
operating leases
|
|
$
|
693,398
|
|
$
|
1,098,549
|
|
$
|
941,930
|
|
$
|
782,343
|
|
$
|
695,884
|
|
$ |
121,640
|
|
$
|
4,333,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
line of credit
|
|
|
9,725,496 |
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,725,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
debt
|
|
|
59,242,398
|
|
|
162,467
|
|
|
167,827
|
|
|
148,097
|
|
|
-
|
|
|
|
|
|
59,720,789
|
|
|
|
|
|
|
|
1,261,016
|
|
|
1,109,757
|
|
|
930,440
|
|
|
695,884
|
|
$ |
121,640 |
|
|
73,780,029
|
|
The Company paid $260,000 in December 2008 of an approximate aggregate
commitment of $650,000 for certain equipment. The remaining payment for
this equipment of approximately $390,000 was paid in May of 2009.
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, 2009 and 2008.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited) (continued)
8.
Income Taxes
The
Company adopted FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes" (FIN 48) effective November 1, 2007 with
no effect on the Company's consolidated financial statements. As of the date of
adoption, the Company had approximately $150,000 of unrecognized tax benefits,
all of which would impact the effective tax rate if recognized. The Company was
notified in April 2008 and an examination began in May 2008 by the IRS covering
our fiscal year-end 2005 federal tax return. This audit was completed and
settled during the third quarter of 2008. As of April 30, 2009, the Company
is subject to U.S. Federal income tax examinations for the fiscal tax years
ended October 31, 2006, 2007 and 2008. State Income Tax returns are generally
subject to a period of examination for a period of three to five years. We have
one state income tax return covering our fiscal years ended 2004 and 2005
currently under examination and one state income tax return covering our fiscal
year ended October 31, 2007 scheduled for examination. Tax interest
and penalties are classified as income taxes in the accompanying statements of
income and were insignificant for all periods presented. The Company's
unrecognized tax benefit at April 30, 2009 was approximately $36,000. The
Company is currently unable to assess whether any significant increase or
decrease to the unrecognized tax benefit will be recorded during the next 12
months.
9.
Acquisitions
On
September 14, 2007, the Company completed, pursuant to an asset purchase
agreement, the acquisition of The Herald-Dispatch daily newspaper in Huntington,
WV. The purchase price was $77.0 million and subject to a working capital
payment of $837,554 plus or minus any change in working capital from the index
working capital base of $1,675,107 at the closing date of September 14,
2007. The working capital payment totaled approximately $1.6 million and
was paid in January 2008.
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. On December 14,
2006, the Company paid the contingent purchase price in the amount of
$1,350,725.
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.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited) (continued)
10.
Industry Segment Information
The Company
operates principally in three 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) the sale of office products and office furniture
including interior design services, and publishes
The Herald-Dispatch daily newspaper in Huntington, WV with a total daily and
Sunday circulation of approximately 26,000 and 31,000,
respectively.
The table
below presents information about reported segments for the three and six months
ended April 30:
2009
Quarter 2
|
|
Printing
|
|
Office
Products & Furniture
|
|
Newspaper
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
25,057,118
|
|
$
|
10,777,243
|
|
$
|
3,861,516
|
|
$
|
39,695,877
|
|
Elimination
of intersegment revenue
|
|
|
(2,699,419
|
)
|
|
(1,671,398
|
)
|
|
-
|
|
|
(4,370,817
|
)
|
Consolidated
revenues
|
|
$
|
22,357,699
|
|
$
|
9,105,845
|
|
$
|
3,861,516
|
|
$
|
35,325,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
691,331
|
|
|
548,318
|
|
|
385,235
|
|
|
1,624,884
|
|
Depreciation
& amortization
|
|
|
834,143
|
|
|
45,569
|
|
|
426,672
|
|
|
1,306,384
|
|
Capital
expenditures
|
|
|
968,343
|
|
|
10,734
|
|
|
4,551
|
|
|
983,628
|
|
Identifiable
assets
|
|
|
51,560,070
|
|
|
2,150,999
|
|
|
81,897,739
|
|
|
135,608,808
|
|
Goodwill
|
|
|
2,226,837
|
|
|
1,230,485
|
|
|
35,437,456
|
|
|
38,894,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Quarter 2
|
|
Printing
|
|
Office
Products & Furniture
|
|
Newspaper
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
29,624,176
|
|
$
|
10,513,065
|
|
$
|
4,547,667
|
|
$
|
44,684,908
|
|
Elimination
of intersegment revenue
|
|
|
(3,341,020
|
)
|
|
(2,072,668
|
)
|
|
-
|
|
|
(5,413,688
|
)
|
Consolidated
revenues
|
|
$
|
26,283,156
|
|
$
|
8,440,397
|
|
$
|
4,547,667
|
|
$
|
39,271,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,844,897
|
|
|
472,077
|
|
|
757,299
|
|
|
3,074,273
|
|
Depreciation
& amortization
|
|
|
840,732
|
|
|
56,405
|
|
|
455,285
|
|
|
1,352,422
|
|
Capital
expenditures
|
|
|
644,434
|
|
|
10,028
|
|
|
21,022
|
|
|
675,484
|
|
Identifiable
assets
|
|
|
56,219,332
|
|
|
2,550,617
|
|
|
81,369,072
|
|
|
140,139,021
|
|
Goodwill
|
|
|
2,226,837
|
|
|
1,230,485
|
|
|
35,397,042
|
|
|
38,854,364
|
|
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
2009
Year to Date
|
|
Printing
|
|
Office
Products
&
Furniture
|
|
Newspaper
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
50,244,044
|
|
$
|
21,788,166
|
|
$ |
8,374,306
|
|
$
|
80,406,516
|
|
Elimination
of intersegment revenue
|
|
|
(5,370,916
|
)
|
|
(3,444,919
|
)
|
|
-
|
|
|
(8,815,835
|
)
|
Consolidated
revenues
|
|
$
|
44,873,128
|
|
$
|
18,343,247
|
|
$ |
8,374,306
|
|
$
|
71,590,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
(218,420
|
)
|
|
797,969
|
|
|
1,047,490
|
|
|
1,627,039
|
|
Depreciation
& amortization
|
|
|
1,674,256
|
|
|
95,958
|
|
|
852,490
|
|
|
2,622,704
|
|
Capital
expenditures
|
|
|
1,436,316
|
|
|
67,871
|
|
|
40,188
|
|
|
1,544,375
|
|
Identifiable
assets
|
|
|
51,560,070
|
|
|
2,150,999
|
|
|
81,897,739
|
|
|
135,608,808
|
|
Goodwill
|
|
|
2,226,837
|
|
|
1,230,485
|
|
|
35,437,456
|
|
|
38,894,778
|
|
2008
Year to Date
|
|
Printing
|
|
Office
Products
&
Furniture
|
|
Newspaper
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
58,131,943
|
|
$
|
22,571,197
|
|
$ |
9,583,449
|
|
$
|
90,286,589
|
|
Elimination
of intersegment revenue
|
|
|
(6,668,654
|
)
|
|
(4,052,943
|
)
|
|
-
|
|
|
(10,721,597
|
)
|
Consolidated
revenues
|
|
$
|
51,463,289
|
|
$
|
18,518,254
|
|
$ |
9,583,449
|
|
$
|
79,564,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
3,188,977
|
|
|
971,776
|
|
|
2,117,358
|
|
|
6,278,111
|
|
Depreciation
& amortization
|
|
|
1,759,503
|
|
|
111,292
|
|
|
808,743
|
|
|
2,679,538
|
|
Capital
expenditures
|
|
|
927,075
|
|
|
53,030
|
|
|
55,012
|
|
|
1,035,117
|
|
Identifiable
assets
|
|
|
56,219,332
|
|
|
2,550,617
|
|
|
81,369,072
|
|
|
140,139,021
|
|
Goodwill
|
|
|
2,226,837
|
|
|
1,230,485
|
|
|
35,397,042
|
|
|
38,854,364
|
|
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 consolidated income (loss) before income taxes, for the three and
six months ended April 30, 2009 and 2008, is as follows:
|
|
Three
months
|
Six
months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment revenues
|
|
$
|
39,695,877
|
|
$
|
44,684,908
|
|
$
|
80,406,516
|
|
$
|
90,286,589
|
|
Elimination
of intersegment revenue
|
|
|
(4,370,817
|
)
|
|
(5,413,688
|
)
|
|
(8,815,835
|
)
|
|
(10,721,597
|
)
|
Consolidated
revenue
|
|
$
|
35,325,060
|
|
$
|
39,271,220
|
|
$
|
71,590,681
|
|
$
|
79,564,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating income
|
|
$
|
1,624,884
|
|
$
|
3,074,273
|
|
$
|
1,627,039
|
|
$
|
6,278,111
|
|
Interest
income
|
|
|
47
|
|
|
25,999
|
|
|
2,771
|
|
|
51,235
|
|
Interest
expense
|
|
|
(1,169,984
|
)
|
|
(1,365,777
|
)
|
|
(2,269,317
|
)
|
|
(3,114,959
|
)
|
Other
income
|
|
|
10,653
|
|
|
19,700
|
|
|
34,766
|
|
|
32,915
|
|
Consolidated
income (loss) before income taxes
|
|
$
|
465,600
|
|
$
|
1,754,195
|
|
$
|
(604,741
|
)
|
$
|
3,247,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment identifiable assets
|
|
$
|
135,608,808
|
|
$
|
140,139,021
|
|
$
|
135,608,808
|
|
$
|
140,139,021
|
|
Elimination
of intersegment assets
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
Total
consolidated assets
|
|
$
|
135,608,808
|
|
$
|
140,139,021
|
|
$
|
135,608,808
|
|
$
|
140,139,021
|
|
11.
Derivative Instruments and Hedging Activities
The
Company adopted Statement of Financial Accounting Standards No. 161,
"Disclosures about Derivative Instruments and Hedging Activities- an amendment
of FASB Statement No. 133" (SFAS 161) effective February 1, 2009. SFAS 161
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about how and
why an entity uses derivative instruments, how derivative instruments and
related hedged items are accounted for under Statement 133 and its related
interpretations, and how derivative instruments and related hedged items affect
an entity's financial position, financial performance and cash
flows.
Cash
Flow Hedges Designated as an Effective Hedging Instrument
Instrument |
|
|
Notional
Amount
April 30,
2009
|
Maturity
Date |
|
|
Fair
Value at
April
30, 2009
|
|
|
Fair
Value at
October
31, 2009
|
|
|
Gain
(loss) in OCI for six months ending April 30, 2009 |
|
|
Balance
in accrued liabilities and OCI as at April
30, 2009 (1)
|
Interest
Rate Swap,
net of
tax
|
|
$
|
22,375,000 |
October 29,
2010 |
|
$
|
(773,471) |
|
$
|
(557,913) |
|
$
|
(215,558) |
|
$
|
(773,471) |
TOTAL
|
|
$
|
22,375,000 |
|
|
$
|
(773,471) |
|
$
|
(557,913) |
|
$
|
(215,558) |
|
$
|
(773,471) |
(1) This
balance is net of tax, the gross amount recorded as a liability on the Company's
balance sheet at April 30, 2009 is $1,289,119.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
Interest
Rate Swaps
In
connection with its current long-term debt facility, the Company uses an
interest rate swap to limit its exposure to changing interest rates and future
cash outflows for interest. The interest rate swap provides for the Company to
pay an amount equal to a specified fixed rate of interest times a notional
principal amount and to receive in return an amount equal to a variable rate of
interest times the same notional amount (actual one-month LIBOR rate of 0.43% at
April 30, 2009). As of April 30, 2009, the Company has $22,375,000 of interest
rate swaps which convert an aggregate notional principal amount of $22,375,000
(or approximately 32% of its interest-bearing debt). The fixed rate of the
current interest rate swap is 4.78%. The Company does not use its interest rate
swap for speculative purposes.
During
fiscal 2007, the Company entered into an interest rate swap for $25.0 million,
with its principal lender to reduce the risk of changes in cash flows associated
with interest payments due to changes in one-month LIBOR in accordance with
the terms of its credit agreement. The interest rate swap expires prior to
the period which the senior credit extends. The objective of the swap is to
hedge the risk of changes in cash flows associated with the first future
interest payments on floating rate debt with an initial notional amount 25.0
million which is subject to changes in the one-month LIBOR rate, and therefore
the cash flow from the derivative is expected to offset any changes in the first
interest payments on floating rate debt with an initial notional amount of $25.0
million due to changes in one-month LIBOR. This is a hedge of specified
cash flows. As a result, the interest rate swap is a derivative and was
designated as a hedging instrument at the initiation of the swap.
The Company has applied cash flow hedge accounting in accordance with FAS
133. At the end of each period, the interest rate swap is recorded in the
consolidated balance sheet at fair value. The swap is recorded on a gross
basis with the corresponding deferred tax recorded separately and reflected net
of tax for OCI. Any related increases or decreases in the fair value are
recognized on the Company's balance sheet within accumulated other comprehensive
income.
The
Company considers its interest rate swap to be a Level 2 measurement under the
FAS 157 hierarchy. The fair value of the interest rate swap is calculated
monthly by the Company's principal lender. The Company believes the valuation of
the interest rate swap can be sensitive to changes in the current and future one
month LIBOR rates, which can have a material impact on the fair value of the
derivative. However, as these swaps are used to manage the Company's cash
outflows, these changes will not impact its liquidity and capital resources.
Furthermore, since the interest rate swap is deemed as an effective hedging
instrument, these changes do not impact income from operations, as they would be
included in other comprehensive
income.
The
Company assesses the effectiveness of its interest rate swap as defined in FAS
133 on a quarterly basis. The Company has considered the impact of the current
credit crisis in the United States in assessing the risk of the counterparty
default. The Company believes that it is still likely that the counterparty for
the swap will continue to act throughout the contract period, and as a result
continues to deem the swap as an effective hedging instrument. A counterparty's
default risk is considered in the valuation of the interest rate
swap.
Management has assessed
that its cash flow hedges have no ineffectiveness, as determined by the
hypothetical derivative method. If the hedge of the interest rate swap, was
deemed ineffective, or extinguished by either counterparty, any accumulated
gains or losses remaining in other comprehensive income would be fully recorded
in interest expense during the
period.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
12.
Acquired Intangible Assets and Goodwill
The
Company accounts for goodwill in accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. As
required by SFAS No. 142, the Company tests for impairment of goodwill annually
(at year-end) or whenever events occur or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount. The required two-step approach uses accounting judgements and estimates
of future operating results. Changes in estimates or the application of
alternative assumptions could produce significantly different results.
Impairment is done at a reporting unit level. The Company performs this testing
at its operating segments, which are also considered reporting units under SFAS
No. 142. An impairment loss generally is recognized when the carrying amount of
the reporting units net assets exceeds the estimated fair value of the reporting
unit. The estimates and judgements that most significantly affect the fair value
calculation are assumptions related to revenue growth, Earnings Before,
Interest, Taxes, Depreciation and Amortization (EBITDA), newsprint prices,
compensation levels and discount rate. The Company primarily relies on
evaluating cash flows of its segments in evaluating goodwill impairment. The
Company determined that it should perform its impairment testing of goodwill as
of January 31, 2009, due to the continuing challenging business conditions and
the resulting weakness in the Company's operating performance as of the end of
its first quarter. This performance would appear to be related, in part, to the
current global economic crisis.
Newspaper
trademark and masthead (newspaper titles and website domain names) are not
subject to amortization and are tested for impairment annually (at year end), or
more frequently if events or changes in circumstances indicate that the asset
might be impaired. The impairment test consists of a comparison of the fair
value of these intangible assets with their carrying amount. The Company
performed impairment tests on newspaper trademark and mastheads as of January
31, 2009.
Intangible
assets subject to amortization (primarily advertiser and subscriber lists) are
tested for recoverability whenever events or changes in circumstances indicate
that their carrying amounts may not be recoverable. The carrying amount of each
asset group is not recoverable if it exceeds the sum of the undiscounted cash
flows expected to result from the use of such asset group. The Company performed
impairment tests on its long lived assets (including intangible assets subject
to amortization) as of January 31, 2009.
No
impairment loss was recognized on goodwill, trademarks, masthead or amortizing
intangibles at April 30, 2009. The Company will continue to monitor market
conditions due to existence of certain indicators which may lead to impairment
charges in future periods.
13.
Subsequent Event
On May 22, 2009 the Company announced a reduction in force at its
Champion Publishing subsidiary resulting in the elimination of 24 positions. The
Company anticipates recording a charge of approximately $150,000 during the
third quarter of 2009 associated with employee related separation
costs.
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 Income as a percentage of total
revenues.
|
|
Percentage
of Total Revenues
|
|
|
Three
Months Ended
April
30,
|
Six
Months Ended
April
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
|
63.3
|
%
|
|
66.9
|
%
|
|
62.7
|
%
|
|
64.7
|
%
|
Office
products and office furniture |
|
|
25.8
|
|
|
21.5
|
|
|
25.6 |
|
|
23.3 |
|
Newspaper
|
|
|
|
|
|
11.6
|
|
|
11.7
|
|
|
12.0
|
|
Total
revenues
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and newspaper operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
|
|
|
|
47.0
|
|
|
47.1
|
|
|
45.6
|
|
Office
products and office furniture |
|
|
18.2
|
|
|
14.5 |
|
|
18.3 |
|
|
16.3 |
|
Newspaper
cost of sales and operating costs |
|
|
6.0
|
|
|
6.0 |
|
|
6.4 |
|
|
5.8 |
|
Total cost of sales and newspaper operating
costs
|
|
|
|
|
|
67.5
|
|
|
71.8
|
|
|
67.7
|
|
Gross profit
|
|
|
|
|
|
32.5
|
|
|
28.2
|
|
|
32.3
|
|
S Selling,
general and administrative expenses
|
|
|
25.0
|
|
|
24.7
|
|
|
26.0
|
|
|
24.4
|
|
|
|
|
0.0 |
|
|
0.0 |
|
|
(0.1 |
) |
|
0.0 |
|
Income
from operations
|
|
|
4.6
|
|
|
7.8
|
|
|
2.3
|
|
|
7.9
|
|
Interest income
|
|
|
0.0
|
|
|
0.1
|
|
|
0.0
|
|
|
0.1
|
|
Interest expense
|
|
|
(3.3
|
)
|
|
(3.5
|
)
|
|
(3.2
|
)
|
|
(3.9
|
)
|
Other
income
|
|
|
0.0
|
|
|
0.1
|
|
|
0.1
|
|
|
0.0
|
|
|
|
|
(3.3
|
) |
|
(3.3 |
) |
|
(3.1 |
) |
|
(3.8 |
) |
Income
(loss) before taxes
|
|
|
1.3
|
|
|
4.5
|
|
|
(0.8
|
)
|
|
4.1
|
|
Income tax benefit (expense)
|
|
|
0.5
|
|
|
(0.9
|
)
|
|
1.3
|
|
|
(0.7
|
)
|
Net
income
|
|
|
1.8
|
%
|
|
3.6
|
%
|
|
0.5
|
%
|
|
3.4
|
%
|
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued)
Three
Months Ended April 30, 2009 Compared to Three Months Ended April 30,
2008
Revenues
Total
revenues decreased 10% in the second quarter of 2009 compared to the same period
in 2008 from $39.3 million to $35.3 million. Printing revenue
decreased 14.9% in the second quarter of 2009
to $22.4 million from $ 26.3 million in the second
quarter of 2008. Office products and office furniture revenue increased 7.9% in
the second quarter of 2009 to $9.1 million from $8.4 million in
the second quarter of 2008. The decrease in printing sales was
primarily associated with the continued impact of the global economic
crisis. Office products and office furniture sales were stronger in
the second quarter of 2009 when compared to the second quarter of 2008. This was
indicative of higher furniture sales offset by reductions in office products
sales. The company recorded newspaper revenues associated with The
Herald-Dispatch of approximately $3.9 million consisting of advertising
revenue of approximately $2.9 million and $1.0 million in circulation
revenues for the three months ended April 30, 2009. The company recorded
newspaper revenues associated with The Herald-Dispatch of approximately
$4.5 million consisting of advertising revenue of
approximately $3.5 million and $1.0 million in circulation revenues
for the three months ended April 30, 2008. The on-line revenues for the
three months ended April 30, 2009 and April 30, 2008 approximated $230,000 and
$395,000 and are recorded as a component of advertising
revenue. The reduction in newspaper revenues is primarily associated with a
decrease in advertising revenues associated with decreased advertising demand
due to the global economic crisis.
Cost
of Sales
Total
cost of sales decreased 6.1% in the second quarter of 2009 to $24.9
million from $26.5 million in the second quarter of 2008. Printing
cost of sales in the second quarter of 2009 decreased $2.1 million over the
prior year and increased as a percentage of printing sales from 70.3% in 2008 to
73.1% in 2009. The printing gross margin dollar decrease resulted from
lower sales volume coupled with higher cost of goods sold as
a percentage of printing sales. Office products and office furniture
cost of sales increased in 2009 from 2008 levels due to increased sales
which were coupled with higher cost of goods sold as a percentage of office
products and office furniture sales of 67.5% in 2008 to 70.6% in
2009, thus representing compression in gross margin percent in the office
products and office furniture segment. Newspaper cost of sales and
operating costs as a percent of newspaper sales were 55.2% and 51.4%
for the three months ended April 30, 2009 and 2008.
Operating
Expenses
In the
second quarter of 2009, selling, general and administrative expenses decreased
on a gross dollar basis to $8.8 million from $ 9.7 million in 2008, a
decrease of $874,000 or 9.0%. As a percentage of total sales, the selling,
general and administrative expenses increased on a quarter to quarter basis in
2009 to 25.0% from 24.7% in 2008. The
decrease in selling, general and administrative expenses is primarily the result
of payroll related reductions associated in part with cost reduction
initiatives.
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 decreased in the second quarter of 2009 to $1.6
million from $3.1 million in the second quarter of 2008. This decrease
is the result of reduced contributions primarily due to revenue reductions
at the Company's printing and newspaper operating segments. Other expense
(net), decreased approximately $161,000 from 2008 to 2009 primarily due to
decreases in interest expense, resulting from lower average borrowings
and lower rates associated with the financing to purchase The
Herald-Dispatch.
The
Company is subject to various claims and legal actions, as well as various
governmental audits and examinations. In the second quarter of 2008 the
Company was favorably impacted by certain non-tax related multi-state claims
primarily related to various liabilities, specifically related to the Company's
historical accounting treatment. The after tax impact of such items
approximated $220,000.
The
Company’s effective income tax benefit (expense) rate was a benefit of 36.7 %
for the second quarter of 2009 and an expense of (20.5%) for the second
quarter of 2008. The income tax benefit (expense) rate is reflective of
amortization expense deductions recorded as a permanent difference due to the
acquisition of The Herald-Dispatch. 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 2009 was $636,000 compared to $1,395,000
in the second quarter of 2008. Basic and diluted earnings per share for
the three months ended April 30, 2009 and 2008 were $0.06 and $0.14.
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued
Six
Months Ended April 30, 2009 Compared to Six Months Ended April 30,
2008
Revenues
Total
revenues decreased 10.0% in the first six months of 2009 compared to the same
period in 2008 to $71.6 million from $79.6 million. Printing revenue
decreased 12.8% in the six month period ended April 30, 2009 to
$44.9 million from $51.5 million in the same period in 2008.
Office products and office furniture revenue decreased 1.0% in the six month
period ended April 30, 2009 to $18.3 million from $18.5 million in the
same period in 2008. The decrease in printing sales was primarily
associated with the continued impact of the global economic
crisis. The decrease in office products and office furniture sales was
primarily due lower office product sales partially offset by higher office
furniture sales. The Company recorded newspaper revenues associated
with The Herald-Dispatch of approximately $8.4 million consisting of
advertising revenues of approximately $6.4 million and $2.0 million in
circulation revenues for the six months ended April 30, 2009. The
Company recorded newspaper revenues associated with The Herald-Dispatch of
approximately $9.6 million consisting of advertising revenues of
approximately $7.5 million and $2.1 million in circulation revenues
for the six months ended April 30, 2008. The on-line revenues for the six months
ended April 30, 2009 and 2008 approximated $495,000 and $735,000 and
are recorded as a component of advertising revenue. The reduction in newspaper
revenues is primarily associated with a decrease in advertising revenues
associated with decreased advertising demand due to the global economic
crisis.
Total
cost of sales decreased 4.7% in the six months ended April 30, 2009 to
$51.4 million from $53.9 million in the six months ended
April 30, 2008. Printing cost of sales decreased 7.1% in the six months ended
April 30, 2009 to $33.7 million from $36.3 million in the
six months ended April 30, 2008. The decrease in printing cost of sales was
primarily due to the decrease in printing sales partially offset by
a reduction in gross margin percent. Office products and office
furniture cost of sales remained essentially flat in the six months ended April
30, 2009. Newspaper cost of sales and operating costs as a percent of
newspaper sales were 54.6% and 48.10% for the six months ended April 30, 2009
and 2008.
Operating
Expenses
During
the six months ended April 30, 2009 compared to the same period in 2008,
selling, general and administrative expenses increased as a percentage of sales
to 26% from 24.4%. Total selling, general and administrative expenses (S,G &
A) decreased $759,000. The increase in S, G & A expenses as a percent of
sales is primarily due to lower sales. The decrease in total S,G & A costs
is primarily reflective of payroll related reductions associated in part with
cost reduction initiatives. These actions were partially offset by increases in
bad debt expense.
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued)
The
Company accounts for goodwill in accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. As
required by SFAS No. 142, the Company tests for impairment of goodwill annually
(at year-end) or whenever events occur or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount. The required two-step approach uses accounting judgements and estimates
of future operating results. Changes in estimates or the application of
alternative assumptions could produce significantly different results.
Impairment is done at a reporting unit level. The Company performs this testing
at its operating segments, which are also considered reporting units under SFAS
No. 142. An impairment loss generally is recognized when the carrying amount of
the reporting units net assets exceeds the estimated fair value of the reporting
unit. The estimates and judgements that most significantly affect the fair value
calculation are assumptions related to revenue growth, Earnings Before,
Interest, Taxes, Depreciation and Amortization (EBITDA), newsprint prices,
compensation levels and discount rate. The Company primarily relies on
evaluating cash flows of its segments in evaluating goodwill impairment. The
Company determined that it should perform its impairment testing of goodwill as
of January 31, 2009, due to the continuing challenging business conditions and
the resulting weakness in the Company's operating performance as of the end of
its first quarter. This performance would appear to be related, in part, to the
current global economic crisis.
Newspaper
trademark and masthead (newspaper titles and website domain names) are not
subject to amortization and are tested for impairment annually (at year end), or
more frequently if events or changes in circumstances indicate that the asset
might be impaired. The impairment test consists of a comparison of the fair
value of these intangible assets with their carrying amount. The Company
performed impairment tests on newspaper trademark and mastheads as of January
31, 2009.
Intangible
assets subject to amortization (primarily advertiser and subscriber lists) are
tested for recoverability whenever events or changes in circumstances indicate
that their carrying amounts may not be recoverable. The carrying amount of each
asset group is not recoverable if it exceeds the sum of the undiscounted cash
flows expected to result from the use of such asset group. The Company performed
impairment tests on its long lived assets (including intangible assets subject
to amortization) as of January 31, 2009.
No
impairment loss was recognized on goodwill, trademarks, masthead or amortizing
intangibles at April 30, 2009. The Company will continue to monitor market
conditions due to existence of certain indicators which may lead to impairment
charges in future periods.
Income
from Operations and Other Income and Expenses
Income
from operations decreased 74.1% in the six month period ended April 30, 2009 to
$1.6 million from $6.3 million in the same period of 2008.
This decrease is the result of revenue reductions and associated gross
margin compaction at the Company's printing and newspaper operating
segments. Other Expense (net), decreased approximately $800,000 from
2008 to 2009 primarily due to decreases in interest expense, resulting from
lower average borrowings and lower interest rates associated with the
financing to purchase The Herald-Dispatch.
The
Company is subject to various claims and legal actions, as well as various
governmental audits and examinations. In the second quarter of 2008 the
Company was favorably impacted by certain non-tax related multi-state claims
primarily related to various liabilities, specifically related to the Company's
historical accounting treatment. The after tax impact of such items
approximated $220,000.
Income
Taxes
The
Company’s effective income tax benefit (expense) rate was a benefit of 157%
for the six months ended April 30, 2009, and an expense of (17.7%) in the
same period of 2008. The income tax benefit (expense) rate is reflective of
amortization expense deductions recorded as a permanent difference due to the
acquisition of The Herald-Dispatch. The effective income tax rate approximates
the combined federal and state, net of federal benefit, statutory income tax
rate.
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued)
Net
Income
Net
income for the six months ended April 30, 2009 was $343,000 compared to $2.7
million for the same period in 2008. Net income for the first six months of 2009
decreased over 2008 levels due to the reasons discussed above. Basic
and diluted earnings per share for the six months ended April 30, 2009 was
$0.03 compared to 2008, at $ 0.27.
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.
The
United States economy has been in a recession since December 2007, according to
the National Bureau of Economic Research, and it it widely believed that certain
elements of economy, such as housing, were in decline before that time. The
duration and depth of an economic recession in markets in which the Company
operates may further reduce its future advertising and circulation revenue,
printing revenue, office products revenue and office furniture revenue operating
results and cash flows.
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.
Our
business is subject to seasonal fluctuations that we expect to continue to be
reflected in our operating results in future periods. On a historical basis The
Herald-Dispatch's first and third calendar quarters of the year tended to be the
weakest because advertising volume is at its lowest levels following the holiday
season and a seasonal slowdown in the summer months. Correspondingly, on a
historical basis the fourth calendar quarter followed by the second calendar
quarter tended to be the strongest quarters. The fourth calendar quarter
includes heavy holiday season advertising. Other factors that affect our
quarterly revenues and operating results may be beyond our control, including
changes in the pricing policies of our competitors, the hiring and retention of
key personnel, wage and cost pressures, distribution costs, changes in newsprint
prices and general economic
factors.
Liquidity
and Capital Resources
Net cash
provided by operations for the six months ended April 30, 2009, was
$6.5 million compared to net cash provided by operations of
$6.0 million during the same period in 2008. This change in net cash
from operations is due primarily to timing changes in assets and liabilities.
Net cash
used in investing activities for the six months ended April 30, 2009 was
$1.5 million compared to $2.5 million during the same period in
2008. The net cash used in investing activities during the first six months of
2009 primarily relate to the purchase of equipment and vehicles. The net cash
used in investing activities during the first six months of 2008 primarily
related to the payment of the working capital adjustment associated with
the acquisition of The Herald-Dispatch and the purchase of equipment and
vehicles.
Net cash
used in financing activities for the six months ended April 30, 2009 was
$5.1 million compared to $8.5 million during the same period
in 2008. This decrease is primarily due to higher payments on the line of
credit in 2008 and a reduction in dividends paid in 2009.
The
Company’s off balance sheet arrangements at April 30, 2009 relate to the Syscan
acquisition and are associated with 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, 2009 was $(44.5) million and at October 31, 2008 was $20.4
million. The decrease in working capital is associated with the
classification as current liability of $63.9 million of debt which was
long-term. This debt was reclassified due to the Company's inability to remain
in compliance with certain of its financial covenants. The Company has been
working with the different creditors to restructure the existing debt; however
an agreement satisfactory to the Company has not been reached.
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, 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
3a. Quantitative and Qualitative Disclosure About Market Risk
The
Company does not have any significant exposure relating to market
risk.
ITEM
4T. Controls and Procedures
(a) Evaluation
of Disclosure Controls and Procedures. Under the supervision and with the
participation of our management, including our chief executive officer and chief
financial officer, we evaluated the effectiveness of our disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, our
chief executive officer and chief financial officer concluded that our
disclosure controls were effective as of the end of the period covered by this
quarterly report.
(b) Changes
in Internal Controls. There have been no changes in our internal controls
over financial reporting that occurred during the first six months of
fiscal year 2009 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
PART
II - OTHER INFORMATION
Item 1A. Risk
Factors
There were no material changes in risk factors from disclosures
previously reported in our annual report on Form 10-K for the fiscal year ended
October 31, 2008.
Item
4. Submission of Matters to a Vote of Security Holders
At the
annual meeting of shareholders held March 16, 2009, 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
|
9,176,521
|
97,422
|
-0-
|
Philip
E. Cline
|
8,122,937
|
1,151,066
|
-0-
|
Harley
F. Mooney, Jr.
|
9,160,456
|
113,487
|
-0-
|
A.
Michael Perry
|
9,149,735
|
124,208
|
-0-
|
Marshall
T. Reynolds
|
9,103,107
|
170,836
|
-0-
|
Neal
W. Scaggs
|
9,154,301
|
119,642
|
-0-
|
Glenn
W. Wilcox, Sr.
|
9,104,204
|
109,739
|
-0-
|
Item
6. Exhibits
|
a)
Exhibits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31.1)
|
Principal
Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley act of 2002 - Marshall T. Reynolds
|
|
Exhibit
31.1 Page Exhibit 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 15, 2009
|
/s/
Marshall T. Reynolds
|
|
Marshall
T. Reynolds
|
|
Chief
Executive Officer
|
|
|
|
|
Date:
June 15, 2009
|
/s/
Toney K. Adkins
|
|
Toney
K. Adkins
|
|
President
and Chief Operating Officer
|
|
|
|
|
Date:
June 15, 2009
|
/s/
Todd R. Fry
|
|
Todd
R. Fry
|
|
Senior
Vice President and Chief Financial
Officer
|