Item 1. Financial
Statements
Champion Industries,
Inc. and Subsidiaries
Consolidated Balance
Sheets
ASSETS
|
|
January
31,
|
|
|
October
31,
|
|
|
|
2008
(Unaudited)
|
|
|
2007
(Audited)
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
519,748
|
|
|
$
|
5,793,120
|
|
Accounts
receivable, net of allowance of
$1,518,000
and $1,511,000
|
|
|
21,791,060
|
|
|
|
23,239,103
|
|
Inventories
|
|
|
10,882,377
|
|
|
|
11,504,847
|
|
Income tax refund
|
|
|
378,820
|
|
|
|
632,439
|
|
Other
current assets
|
|
|
1,441,819
|
|
|
|
882,535
|
|
Deferred
income tax assets
|
|
|
969,664
|
|
|
|
969,664
|
|
Total
current assets
|
|
|
35,983,488
|
|
|
|
43,021,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land
|
|
|
2,120,689
|
|
|
|
2,120,689
|
|
Buildings
and improvements
|
|
|
12,326,645
|
|
|
|
12,262,229
|
|
Machinery
and equipment
|
|
|
55,936,149
|
|
|
|
55,763,920
|
|
Furniture
and fixtures
|
|
|
4,103,272
|
|
|
|
4,088,761
|
|
Vehicles
|
|
|
3,209,573
|
|
|
|
3,185,555
|
|
|
|
|
77,696,328
|
|
|
|
77,421,154
|
|
Less
accumulated depreciation
|
|
|
(49,172,822
|
)
|
|
|
(48,164,640
|
)
|
|
|
|
28,523,506
|
|
|
|
29,256,514
|
|
|
|
|
|
|
|
|
|
|
Cash
surrender value of officers’ life insurance
|
|
|
834,106
|
|
|
|
834,106
|
|
Goodwill
|
|
|
38,854,364
|
|
|
|
38,853,657
|
|
Deferred financing costs
|
|
|
1,748,426
|
|
|
|
1,818,140
|
|
Other
intangibles, net of accumulated amortization
|
|
|
16,519,048
|
|
|
|
16,779,241
|
|
Trademark & masthead
|
|
|
18,515,316
|
|
|
|
18,515,316
|
|
Other
assets
|
|
|
81,717
|
|
|
|
132,909
|
|
|
|
|
76,552,977
|
|
|
|
76,933,369
|
|
Total
assets
|
|
$
|
141,059,971
|
|
|
$
|
149,211,591
|
|
See notes
to consolidated financial statements.
Champion Industries,
Inc. and Subsidiaries
Consolidated Balance
Sheets (continued)
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
January
31,
|
|
|
October
31,
|
|
|
|
2008
(Unaudited)
|
|
|
2007
(Audited)
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
3,789,015
|
|
|
$
|
5,491,189
|
|
Accrued
payroll
|
|
|
1,857,966
|
|
|
|
2,460,287
|
|
Taxes
accrued and withheld
|
|
|
817,353
|
|
|
|
1,294,125
|
|
Accrued
expenses
|
|
|
1,669,659
|
|
|
|
3,433,971
|
|
Current
portion of long-term debt
|
|
|
5,019,641
|
|
|
|
5,033,637
|
|
Total current liabilities
|
|
|
13,153,634
|
|
|
|
17,713,209
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion:
|
|
|
|
|
|
|
|
|
Notes payable, line of
credit
|
|
|
12,525,496
|
|
|
|
15,540,496
|
|
Notes payable, term
|
|
|
62,515,937
|
|
|
|
63,837,402
|
|
Other
liabilities
|
|
|
670,867
|
|
|
|
10,950
|
|
Deferred
income tax liabilities
|
|
|
3,382,447
|
|
|
|
3,382,447
|
|
Total liabilities
|
|
|
92,248,381
|
|
|
|
100,484,504
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $1 par value, 20,000,000 shares authorized;
9,987,913
and 9,968,913
shares
issued and outstanding
|
|
|
9,987,913
|
|
|
|
9,968,913
|
|
Additional paid-in
capital
|
|
|
22,768,610
|
|
|
|
22,733,300
|
|
Retained earnings
|
|
|
16,715,434
|
|
|
|
16,036,224
|
|
Other comprehensive loss
|
|
|
(660,367
|
)
|
|
|
(11,350
|
)
|
Total shareholders’ equity
|
|
|
48,811,590
|
|
|
|
48,727,087
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
141,059,971
|
|
|
$
|
149,211,591
|
|
See notes
to consolidated financial statements.
Champion Industries,
Inc. and Subsidiaries
Consolidated
Statements of Income
(Unaudited)
|
|
Three
Months Ended January 31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
Printing
|
|
$
|
25,180,134
|
|
|
$
|
25,862,367
|
|
Office
products and office furniture
|
|
|
10,077,857
|
|
|
|
9,076,966
|
|
Newspaper
|
|
|
5,035,782
|
|
|
|
-
|
|
Total
revenues
|
|
|
40,293,773
|
|
|
|
34,939,333
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales & newspaper operating costs:
|
|
|
|
|
|
|
|
|
Printing
|
|
|
17,801,054
|
|
|
|
18,238,302
|
|
Office
products and office furniture
|
|
|
7,325,443
|
|
|
|
6,350,004
|
|
Newspaper
cost of sales & operating costs
|
|
|
2,270,730
|
|
|
|
-
|
|
Total
cost of sales & newspaper operating costs
|
|
|
27,397,227
|
|
|
|
24,588,306
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
12,896,546
|
|
|
|
10,351,027
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
9,692,709
|
|
|
|
8,130,331
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,203,837
|
|
|
|
2,220,696
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
25,237
|
|
|
|
5,230
|
|
Interest expense
|
|
|
(1,749,182
|
)
|
|
|
(133,903
|
)
|
Other
|
|
|
13,214
|
|
|
|
4,023
|
|
|
|
|
(1,710,731
|
)
|
|
|
(124,650
|
)
|
Income
before income taxes
|
|
|
1,493,106
|
|
|
|
2,096,046
|
|
Income
tax expense
|
|
|
(214,859
|
)
|
|
|
(827,885
|
)
|
Net
income
|
|
$
|
1,278,247
|
|
|
$
|
1,268,161
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
Diluted
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,981,000
|
|
|
|
9,939,000
|
|
Diluted
|
|
|
10,045,000
|
|
|
|
10,110,000
|
|
|
|
|
|
|
|
|
|
|
Dividends
per share
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
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, 2007
|
|
|
9,968,913
|
|
$
|
9,968,913
|
|
$
|
22,733,300
|
|
$
|
16,036,224
|
|
$
|
(11,350
|
)
|
$
|
48,727,087
|
|
Net income for 2008
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,278,247
|
|
|
-
|
|
|
1,278,247
|
|
Dividends ($0.06 per share)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(599,037
|
)
|
|
-
|
|
|
(599,037
|
)
|
Stock
options exercised
|
|
|
19,000
|
|
|
19,000
|
|
|
35,310
|
|
|
-
|
|
|
-
|
|
|
54,310
|
|
Other
comprehensive loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(649,017
|
)
|
|
(649,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 31, 2008
|
|
|
9,987,913
|
|
$
|
|
|
$
|
22,768,610
|
|
$
|
16,715,434
|
|
$
|
(660,367
|
)
|
$
|
48,811,590
|
See notes to consolidated financial
statements.
Champion Industries, Inc. and
Subsidiaries
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Three
Months Ended January 31,
|
|
|
|
2008
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
1,278,247
|
|
$
|
|
|
Adjustments
to reconcile net income to cash
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,327,116
|
|
|
|
|
Deferred financing costs
|
|
|
77,368
|
|
|
-
|
|
Loss on
sale of assets
|
|
|
2,523
|
|
|
|
|
Increase
in deferred compensation
|
|
|
-
|
|
|
|
|
Bad
debt expense
|
|
|
140,161
|
|
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,307,882
|
|
|
|
|
Inventories
|
|
|
622,470
|
|
|
|
)
|
Other
current assets
|
|
|
(559,284
|
)
|
|
|
)
|
Accounts
payable
|
|
|
(1,690,823
|
)
|
|
|
)
|
Accrued
payroll
|
|
|
(602,321
|
)
|
|
|
)
|
Taxes
accrued and withheld
|
|
|
(476,772
|
)
|
|
|
|
Income
taxes
|
|
|
253,619
|
|
|
|
|
Accrued
expenses
|
|
|
(148,196
|
)
|
|
|
|
Other
liabilities
|
|
|
(450
|
)
|
|
|
)
|
Net
cash provided by operating activities
|
|
|
1,531,540
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(359,633
|
)
|
|
|
)
|
Proceeds
from sales of property
|
|
|
18,541
|
|
|
|
|
Businesses
acquired
|
|
|
(1,616,823
|
)
|
|
(1,350,725
|
)
|
Change
in other assets
|
|
|
48,191
|
|
|
|
)
|
Net
cash used in investing activities
|
|
|
(1,909,724
|
)
|
|
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Borrowings
on line of credit
|
|
|
-
|
|
|
|
|
Payments
on line of credit
|
|
|
(3,015,000
|
)
|
|
|
)
|
Proceeds
from term debt and leases
|
|
|
-
|
|
|
1,351,225
|
|
Principal
payments on long-term debt
|
|
|
(1,335,461
|
)
|
|
|
)
|
Proceeds
from exercise of stock options
|
|
|
54,310
|
|
|
109,440
|
|
Dividends
paid
|
|
|
(599,037
|
)
|
|
|
)
|
Net
cash used in financing activities
|
|
|
(4,895,188
|
)
|
|
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(5,273,372
|
)
|
|
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
5,793,120
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
519,748
|
|
$
|
|
|
See notes
to consolidated financial statements.
Champion Industries,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements (Unaudited)
January 31,
2008
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, 2007, and related notes thereto
contained in Champion Industries, Inc.’s Form 10-K dated January 21, 2008. 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, 2007
was derived from our audited financial statements.
2. Earnings per
Share
Basic
earnings per share is computed by dividing net income by the weighted average
shares of common stock outstanding for the period and excludes any dilutive
effects of stock options. Diluted earnings per share is computed by dividing net
income by the weighted average shares of common stock outstanding for the period
plus the shares that would be outstanding assuming the exercise of dilutive
stock options. The dilutive effect of stock options was 64,000 and 171,000
shares for the three months ended January 31, 2008 and 2007.
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:
|
|
January
31,
|
|
October
31,
|
|
|
|
2008
|
|
2007
|
|
Printing
and newspaper:
|
|
|
|
|
|
Raw
materials
|
|
$
|
2,454,048
|
|
$
|
2,401,340
|
|
Work
in process
|
|
|
1,734,760
|
|
|
1,906,301
|
|
Finished
goods
|
|
|
4,155,092
|
|
|
4,003,318
|
|
Office
products and office furniture
|
|
|
2,538,477
|
|
|
3,193,888
|
|
|
|
$
|
10,882,377
|
|
$
|
11,504,847
|
|
Champion Industries,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements (Unaudited) (continued)
4. Long-Term
Debt
Long-term
debt consisted of the following:
|
|
January
31,
|
|
October
31,
|
|
|
|
2008
|
|
2007
|
|
Installment
notes payable to banks
|
|
$
|
135,578
|
|
$
|
171,039
|
|
Term loan facility with a bank
|
|
|
67,400,000
|
|
|
68,700,000
|
|
|
|
|
67,535,578
|
|
|
68,871,039
|
|
Less
current portion
|
|
|
5,019,641
|
|
|
5,033,637
|
|
Long-term
debt, net of current portion
|
|
$
|
62,515,937
|
|
$
|
63,837,402
|
|
The
secured and unsecured credit facilities contain restrictive financial covenants
requiring the Company to maintain certain financial ratios. The Company was in
compliance with these covenants at January 31, 2008. The Company is required to
maintain a minimum of $750,000 of compensating balances with Fifth Third Bank
under the terms of its credit agreement. The Company is permitted to pay
dividends under its credit agreement as long as no default or event of default
exists or shall exist after giving effect to the proposed dividend and the
Company has delivered to the credit agreement's administrative agent prior to
the proposed dividend a pro forma compliance certificate evidencing compliance
with applicable covenants as defined in the credit agreement.
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, 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 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
$12,525,496 and $15,540,496 under this facility at January 31, 2008 and October
31, 2007. Pursuant to its borrowing base calculation, the Company had
approximately $5.5 million in additional availability under its $30.0 million
revolving credit line at January 31, 2008. 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 an unsecured revolving line of credit with a bank for borrowings to
a maximum of $1,000,000 with interest payable monthly at the Wall Street Journal
prime rate. The line of credit expires in October 2008 and contains
certain financial covenants. There were no borrowings outstanding under this
facility at January 31, 2008 and October 31, 2007.
There were
no non-cash financing activities fo
r the
three months ended January 31, 2008 and 2007.
5. Shareholders’
Equity
The
Company paid a dividend of six cents per share
on
December 28, 2007
to
stockholders of record
on
December 7,
2007.
Also, the Company declared a dividend of six cents per share to be paid on March
24, 2008 to stockholders of record on March 7, 2008.
The Company issued 19,000 and
34,000 shares for the exercise of stock options during the first quarter of 2008
and 2007, for total proceeds from stock options exercised of approximately
$54,000 and $109,000.
Champion Industries,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements (Unaudited) (continued)
6.
Commitments and
Contingencies
As of
January 31, 2008 the Company had contractual obligations in the form of leases
and debt as follows:
|
|
Payments Due
by Fiscal Year
|
|
Contractual
Obligations
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Residual
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable
operating leases
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
283,200
|
|
$
|
221,200
|
|
$
|
3,234,139
|
|
Line of credit
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
12,525,496
|
|
|
-
|
|
|
12,525,496
|
|
Term
debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,900,000
|
|
|
44,125,000
|
|
|
67,535,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
17,708,696
|
|
$
|
44,346,200
|
|
$
|
83,295,213
|
|
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 employee stock options vest
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 months ended January 31, 2008 and
2007.
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 is not currently
under examination by the IRS. As of November 1, 2007, the Company is subject to
U.S. Federal income tax examinations for the fiscal tax years ended October 31,
2004, 2005, 2006 and 2007. 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 year end 2004 and 2005 currently under
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 does not currently anticipate that any significant
increase or decrease to the unrecognized tax benefit will be recorded during the
next 12 months.
Champion Industries,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements (Unaudited) (continued)
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 commencing September 1, 2009. This option
may be exercised no later than 60 days prior to the end of the lease and closing
of said purchase cannot exceed 45 days from the end of the
lease.
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, West Virginia with a total daily and Sunday circulation
of approximately 27,000 and 32,000, respectively.
The table
below presents information about reported segments for the three months ended
January 31:
2008 Quarter
1
|
|
Printing
|
|
|
Office
Products
&
Furniture
|
|
|
Newspaper
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
28,507,768
|
|
|
$
|
12,058,132
|
|
|
$
|
5,035,782
|
|
|
$
|
45,601,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination
of intersegment revenue
|
|
|
(3,327,634
|
)
|
|
|
(1,980,275
|
)
|
|
|
-
|
|
|
|
(5,307,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
revenues
|
|
$
|
25,180,134
|
|
|
$
|
10,077,857
|
|
|
$
|
5,035,782
|
|
|
$
|
40,293,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,344,079
|
|
|
|
499,699
|
|
|
|
1,360,059
|
|
|
|
3,203,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
& amortization
|
|
|
918,771
|
|
|
|
54,887
|
|
|
|
353,458
|
|
|
|
1,327,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
282,641
|
|
|
|
43,002
|
|
|
|
33,990
|
|
|
|
359,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
|
|
56,124,161
|
|
|
|
3,860,314
|
|
|
|
81,075,496
|
|
|
|
141,059,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,226,837
|
|
|
|
1,230,485
|
|
|
|
35,397,042
|
|
|
|
38,854,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Quarter
1
|
|
Printing
|
|
|
Office
Products & Furniture
|
|
|
Newspaper
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
28,999,524
|
|
|
$
|
11,229,940
|
|
|
$
|
-
|
|
|
$
|
40,229,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination
of intersegment revenue
|
|
|
(3,137,157
|
)
|
|
|
(2,152,974
|
)
|
|
|
-
|
|
|
|
(5,290,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
revenues
|
|
$
|
25,862,367
|
|
|
$
|
9,076,966
|
|
|
$
|
-
|
|
|
$
|
34,939,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1
,739,649
|
|
|
|
481,047
|
|
|
|
-
|
|
|
|
2,220,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
& amortization
|
|
|
904,263
|
|
|
|
51,134
|
|
|
|
-
|
|
|
|
955,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
1,131,915
|
|
|
|
29,303
|
|
|
|
-
|
|
|
|
1,161,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
|
|
54,752,575
|
|
|
|
10,375,416
|
|
|
|
-
|
|
|
|
65,127,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,226,837
|
|
|
|
1,184,674
|
|
|
|
-
|
|
|
|
3,411,511
|
|
Champion Industries,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements (Unaudited) (continued)
A
reconciliation of total segment revenues and of total segment operating income
to income before income taxes, for the three months ended January 31, 2008 and
2007, is as follows:
|
|
Three Months
Ended January 31,
|
|
|
|
2008
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
Total
segment revenues
|
|
$
|
45,601,682
|
|
$
|
40,229,464
|
|
Elimination
of intersegment revenue
|
|
|
(5,307,909
|
)
|
|
(5,290,131
|
)
|
|
|
|
|
|
|
|
|
Consolidated
revenue
|
|
$
|
40,293,773
|
|
$
|
34,939,333
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
Total
segment operating income
|
|
$
|
3,203,837
|
|
$
|
2,220,696
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
25,237
|
|
|
5,230
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,749,182
|
)
|
|
(133,903
|
)
|
|
|
|
|
|
|
|
|
Other
(expense) income
|
|
|
13,214
|
|
|
4,023
|
|
|
|
|
|
|
|
|
|
Consolidated
income before income taxes
|
|
$
|
1,493,106
|
|
$
|
2,096,046
|
|
|
|
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
Total
segment identifiable assets
|
|
$
|
141,059,971
|
|
$
|
65,127,991
|
|
Elimination
of intersegment assets
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
consolidated assets
|
|
$
|
141,059,971
|
|
$
|
65,127,991
|
|
11. Derivative
Instruments and Hedging Activities
The
Company manages exposure to changes in market interest rates. The Company's use
of derivative instruments is limited to highly effective fixed and floating
interest rate swap agreements used to manage well-defined interest rate risk
exposures. The Company monitors its positions and the credit ratings of its
counterparties and does not anticipate non-performance by the
counterparties. Interest rate swap agreements are not entered into for
trading purposes.
At
September 28, 2007, the Company was party to an interest rate swap agreement
which terminates on October 29, 2010. The swap agreement is with a major
financial institution and aggregates $25 million in notional principal
amount. This swap agreement effectively converted $25 million of variable
interest rate debt to fixed rate debt. The swap agreement requires the Company
to make fixed interest payments based on an average effective rate of 4.78% and
receive variable interest payments from its counterparties based on one-month
LIBOR (actual rate of 3.27% at January 31, 2008). The remaining term of
this swap agreement is approximately 33 months. In fiscal 2008, the Company
recorded a net change in the fair value of the fixed interest rate swap
agreement in the amount of $649,000, net of income tax as other comprehensive
loss. The cumulative other comprehensive loss, net of income
tax, recorded by the Company was $660,000 at January 31, 2008. The
net additional interest payments made or received under this swap agreement are
recognized in interest expense.
Champion Industries,
Inc. and Subsidiaries
Item 2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Results of
Operations
The
following table sets forth, for the periods indicated, information derived from
the Consolidated Income Statements as a percentage of total
revenues.
|
|
Three
Months Ended January 31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
$
|
25,180
|
|
|
|
62.5
|
%
|
|
$
|
25,862
|
|
|
|
74.0
|
%
|
Office
products and office furniture
|
|
|
10,078
|
|
|
|
25.0
|
|
|
|
9,077
|
|
|
|
26.0
|
|
Newspaper
|
|
|
5,036
|
|
|
|
12.5
|
|
|
|
-
|
|
|
|
-
|
|
Total
revenues
|
|
|
40,294
|
|
|
|
100.0
|
|
|
|
34,939
|
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales & newspaper operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
|
17,801
|
|
|
|
44.2
|
|
|
|
18,238
|
|
|
|
52.2
|
|
Office
products and office furniture
|
|
|
7,325
|
|
|
|
18.2
|
|
|
|
6,350
|
|
|
|
18.2
|
|
Newspaper cost of sales and operating costs
|
|
|
2,271
|
|
|
|
5.6
|
|
|
|
-
|
|
|
|
-
|
|
Total
cost of sales & newspaper operating costs
|
|
|
27,397
|
|
|
|
68.0
|
|
|
|
24,588
|
|
|
|
70.4
|
|
Gross
profit
|
|
|
12,897
|
|
|
|
32.0
|
|
|
|
10,351
|
|
|
|
29.6
|
|
Selling,
general and administrative expenses
|
|
|
9,693
|
|
|
|
24.0
|
|
|
|
8,130
|
|
|
|
23.2
|
|
Income
from operations
|
|
|
3,204
|
|
|
|
8.0
|
|
|
|
2,221
|
|
|
|
6.4
|
|
Interest income
|
|
|
25
|
|
|
|
0.0
|
|
|
|
5
|
|
|
|
0.0
|
|
Interest expense
|
|
|
(1,749
|
)
|
|
|
(4.3
|
)
|
|
|
(134
|
)
|
|
|
(0.4
|
)
|
Other income
|
|
|
13
|
|
|
|
0.0
|
|
|
|
4
|
|
|
|
0.0
|
|
Income
before taxes
|
|
|
1,493
|
|
|
|
3.7
|
|
|
|
2,096
|
|
|
|
6.0
|
|
Income taxes
|
|
|
(215
|
)
|
|
|
(0.5
|
)
|
|
|
(828
|
)
|
|
|
(2.4
|
)
|
Net
income
|
|
$
|
1,278
|
|
|
|
3.2
|
%
|
|
$
|
1,268
|
|
|
|
3.6
|
%
|
Champion Industries,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and Results of
Operations (continued)
Three Months Ended
January 31, 2008 Compared to Three Months Ended January 31,
2007
Revenues
Total
revenues increased 15.3% in the first quarter of 2008 compared to the same
period in 2007 from $34.9 million to $40.3 million. Printing revenue decreased
2.6% in the first quarter of 2008 to $25.2 million from $25.9 million in the
first quarter of 2007. Office products and office furniture revenue increased
11.0% in the first quarter of 2008 to $10.1 million from $9.1 million in the
first quarter of 2007. The decrease in printing sales was due to sluggish sales
in several of our commercial plants that operate primarily in the sheetfed
arena. The increase in office products and office furniture sales was
primarily due to higher furniture sales associated with contract furniture
projects. The Company recorded newspaper revenues associated with the
acquisition of The Herald-Dispatch of approximately $5.0 million consisting of
advertising revenue of approximately $3.9 million and $1.1 million in
circulation revenues. The on-line revenues for the three months ended January
31, 2008 approximated $340,000 and are recorded as a component of advertising
revenue.
Cost of Sales and
Newspaper Operating Costs
Total
cost of sales increased 11.4% in the first quarter of 2008 to $27.4 million from
$24.6 million in the first quarter of 2007. Printing cost of sales in the first
quarter of 2008 decreased $437,000 over the prior year primarily due to lower
printing sales on relatively flat gross margin percent. Office products and
office furniture cost of sales increased in 2008 from 2007 levels and increased
as a percent of sales from 70.0% in 2007 to 72.7
% in
2008. The increase in office products and office furniture cost of sales as
a percent of sales is primarily reflective of an increase in furniture cost of
sales as a percent of furniture sales. Newspaper cost of sales as a percent of
newspaper sales were 45.1% for the three months ended January 31,
2008.
Operating
Expenses
In the
first quarter of 2008, selling, general and administrative expenses increased on
a gross dollar basis to $9.7 million from $8.1 million in 2007, an increase of
$1.6 million or 19.2%. As a percentage of sales, the expenses increased on
a quarter to quarter basis in 2008 to 24.0% from 23.2% in 2007 of total sales.
The
increase in selling, general and administrative expenses is primarily the result
of the acquisition of The Herald-Dispatch.
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 first quarter of 2008 to $3.2 million from
$2.2 million in the first quarter of 2007. This increase is the result
of the acquisition of The Herald-Dispatch.
Other expense (net), increased
approximately $1.6 million from 2007 to 2008 primarily due to increases
in interest expense resulting from higher average borrowings
associated with the financing to purchase The Herald-Dispatch.
Income
Taxes
The
Company’s effective income tax rate was 14.4% for the first
quarter
of 2008 and 39.5% for the first quarter of 2007. The decrease in income taxes as
a percentage of income before taxes is primarily related to 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 first
quarter
of 2008 was $1,278,000 compared to net income of $1,268,000 in the
first
quarter
of 2007. Basic and diluted earnings per share for the three months ended January
31, 2008 and 2007 were $0.13 and $0.13.
Inflation and
Economic Conditions
Management
believes that the effect of inflation on the Company’s operations has not been
material and will continue to be immaterial for the foreseeable future. The
Company does not have long-term sales
and
purchase contracts; therefore, to the extent permitted by competition, it has
the ability to pass through to the customer most cost increases resulting from
inflation, if any.
Seasonality
Historically,
the Company has experienced a greater portion of its profitability in the second
and fourth quarters than in the first and third quarters. The second quarter
generally reflects increased orders for printing of corporate annual reports and
proxy statements. A post-Labor Day increase in demand for printing services and
office products coincides with the Company’s fourth quarter.
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 three months ended January 31, 2008,
was $1.5 million compared to net cash provided by operations of $1.0 million
during the same period in 2007. This change in net cash from operations is due
primarily to higher depreciation and amortization expense primarily as a result
of the acquisition of The Herald-Dispatch.
Net cash
used in investing activities for the three months ended January 31, 2008 was
$1.9 million compared to $2.5 million during the same period in 2007. The net
cash used in investing activities during the first three months of 2008
primarily relates to the payment of the working capital adjustment associated
with the acquisition of The Herald-Dispatch and the purchase of equipment and
vehicles. The net cash used in investing activities during the first three
months of 2007 primarily relates to the payment of the contingent purchase price
for the Syscan acquisition, capital expenditures for the build out of the
facility occupied by Champion Output Solutions and the purchase of equipment and
vehicles.
Champion Industries,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and Results of
Operations (continued)
Net cash
used in financing activities for the three months ended January 31, 2008 was
$4.9 million compared to $45,000 during the same period in 2007. This
increase is primarily due to payments on the line of credit and scheduled
principal payments on indebtedness.
The
Company’s off balance sheet arrangements at January 31, 2008 relate to the
Syscan acquisition and are associated with a put option permitting 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 January 31, 2008 was $22.8 million, a decrease of $2.5
million from October 31, 2007. Management believes that working capital and
operating ratios remain at acceptable levels.
The
Company expects that the combination of funds available from working capital,
borrowings available under the Company’s credit facilities and anticipated cash
flows from operations will provide sufficient capital resources for the
foreseeable future. In the event the Company seeks to accelerate internal growth
or make acquisitions beyond these sources, additional financing would be
necessary.
Environmental
Regulation
The
Company is subject to the environmental laws and regulations of the United
States, and the states in which it operates, concerning emissions into the air,
discharges into the waterways and the generation,
handling
and disposal of waste materials. The Company’s past expenditures relating to
environmental compliance have not had a material effect on the Company. These
laws and regulations are constantly evolving, and it is impossible to predict
accurately the effect they may have upon the capital expenditures, earnings, and
competitive position of the Company in the future. Based upon information
currently available, management believes that expenditures relating to
environmental compliance will not have a material impact on the financial
position of the Company.
Special Note
Regarding Forward-Looking Statements
Certain
statements contained in this Form 10-Q, including without limitation statements
including the word “believes,” “anticipates,” “intends,” “expects” or words of
similar import, constitute “forward-looking statements” within the meaning of
section 27A of the Securities Act of 1933, as amended (the “Securities Act”),
and section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements of the Company expressed or implied
by such forward-looking statements.
Such
factors include, among others, general economic 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 3a.
Quantitative and Qualitative Disclosure About Market Risk
The
Company does not have any significant exposure relating to market
risk.
ITEM 4. Controls and
Procedures
Company
management, including the Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15c as of
the end of the period covered by this quarterly report. Based on that
evaluation, the Chief Executive Officer, Chief Operating Officer and Chief
Financial Officer concluded that the disclosure controls and procedures are
effective in ensuring that all material information required to be filed in this
quarterly report has been made known to them in a timely fashion. There were no
changes in internal controls over financial reporting during the last fiscal
quarter that have materially affected or are reasonably likely to materially
affect the Company’s internal controls over financial reporting.