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, 2010
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 _____.
Indi
cate 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, 2010
|
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 Operations (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
|
16
|
Item 3a. Quantitative and Qualitative
Disclosure About Market Risk
|
22
|
Item 4T.
Controls
and Procedures
|
22
|
Part
II.
Other
Information
|
|
Item 1A. Risk
Factors
|
23
|
Item 6.
Exhibits
|
23
|
Signatures
|
24
|
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
Champion
Industries, Inc. and Subsidiaries
Consolidated
Balance Sheets
ASSETS
|
|
April
30,
|
|
|
|
October
31,
|
|
|
|
2010
(Unaudited)
|
|
|
|
2009
(Audited)
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
-
|
|
|
$
|
1,159,282
|
|
Accounts receivable, net of allowance of $1,437,000 and
$1,353,000
|
|
17,880,390
|
|
|
|
18,424,310
|
|
Inventories
|
|
10,193,261
|
|
|
|
11,161,977
|
|
Income tax refund
|
|
1,974,678
|
|
|
|
1,911,400
|
|
Other current assets
|
|
1,309,117
|
|
|
|
925,120
|
|
Deferred income tax assets
|
|
1,060,509
|
|
|
|
1,000,847
|
|
Total current
assets
|
|
32,417,955
|
|
|
|
34,582,936
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost:
|
|
|
|
|
|
|
|
Land
|
|
2,016,148
|
|
|
|
2,016,148
|
|
Buildings and
improvements
|
|
11,823,196
|
|
|
|
11,806,238
|
|
Machinery and
equipment
|
|
57,304,123
|
|
|
|
57,481,742
|
|
Furniture and
fixtures
|
|
4,134,979
|
|
|
|
4,129,537
|
|
Vehicles
|
|
3,141,722
|
|
|
|
3,145,772
|
|
|
|
78,420,168
|
|
|
|
78,579,437
|
|
Less accumulated
depreciation
|
|
(54,623,569
|
|
|
|
(53,170,108
|
)
|
|
|
23,796,599
|
|
|
|
25,409,329
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
15,332,283
|
|
Deferred financing costs
|
|
1,309,464
|
|
|
|
1,199,199
|
|
Other intangibles,
net of accumulated amortization
|
|
5,420,285
|
|
|
|
5,645,078
|
|
Trademark
& masthead
|
|
10,001,812
|
|
|
|
10,001,812
|
|
Deferred tax asset, net of current
portion
|
|
8,526,272
|
|
|
|
8,799,518
|
|
Other assets
|
|
343,308
|
|
|
|
51,738
|
|
|
|
40,933,424
|
|
|
|
41,029,628
|
|
Total
assets
|
$
|
97,147,978
|
|
|
$
|
101,021,893
|
|
See notes
to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Consolidated
Balance Sheets (continued)
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
April
30,
|
|
October
31,
|
|
|
2010
(Unaudited)
|
|
2009
(Audited)
|
|
Current
liabilities:
|
|
|
|
|
|
|
Notes
payable, line of credit
|
$
|
-
|
|
$
|
8,725,496
|
|
Negative book cash balances
|
|
1,298,725
|
|
|
-
|
|
Accounts
payable
|
|
4,768,715
|
|
|
4,637,199
|
|
Accrued payroll and
commissions
|
|
2,085,166
|
|
|
2,392,971
|
|
Taxes accrued and
withheld
|
|
1,620,605
|
|
|
1,391,718
|
|
Accrued
expenses
|
|
2,148,271
|
|
|
2,027,266
|
|
Other current liabilities
|
|
442,560
|
|
|
962,893
|
|
Current portion of long-term
debt:
|
|
|
|
|
|
|
Notes payable
|
|
5,389,767
|
|
|
57,024,424
|
|
Total current
liabilities
|
|
17,753,809
|
|
|
77,161,967
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion:
|
|
|
|
|
|
|
Notes
payable, line of credit
|
|
10,105,496
|
|
|
-
|
|
Notes payable, term
|
|
46,085,557
|
|
|
918,436
|
|
Other
liabilities
|
|
6,450
|
|
|
7,350
|
|
Total liabilities
|
|
73,951,312
|
|
|
78,087,753
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
Common stock, $1 par value, 20,000,000 shares
authorized;
9,987,913 shares issued and
outstanding
|
|
9,987,913
|
|
|
9,987,913
|
|
Additional paid-in
capital
|
|
22,768,610
|
|
|
22,768,610
|
|
Retained
deficit
|
|
(9,701,608
|
|
|
(9,822,383)
|
|
Other
comprehensive income
|
|
141,751
|
|
|
-
|
|
Total shareholders’
equity
|
|
23,196,666
|
|
|
22,934,140
|
|
Total liabilities and shareholders’
equity
|
$
|
97,147,978
|
|
$
|
101,021,893
|
|
See notes
to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Consolidated
Statements of Operations
(Unaudited)
|
|
Three
Months Ended
April
30,
|
Six
Months Ended
April
30,
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
$
|
21,716,395
|
|
$
|
|
|
$
|
41,465,866
|
|
$
|
46,313,132
|
|
Office products and office
furniture
|
|
|
|
|
|
|
|
|
16,614,293
|
|
|
18,343,247
|
|
Newspaper
|
|
|
3,670,371
|
|
|
3,861,516
|
|
|
8,046,432
|
|
|
8,374,306
|
|
Total
revenues
|
|
|
|
|
|
36,139,672
|
|
|
66,126,591
|
|
|
73,030,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales & newspaper operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
|
15,494,951
|
|
|
17,143,914
|
|
|
30,216,325
|
|
|
35,118,707
|
|
Office products and office
furniture
|
|
|
5,817,480
|
|
|
6,424,851
|
|
|
11,748,501
|
|
|
13,121,501
|
|
Newspaper cost of sales & operating
costs
|
|
|
2,022,702
|
|
|
2,132,349
|
|
|
4,151,308
|
|
|
4,572,651
|
|
Total cost of sales & newspaper
operating costs
|
|
|
23,335,133
|
|
|
25,701,114
|
|
|
46,116,134
|
|
|
52,812,859
|
|
Gross
profit
|
|
|
10,404,212
|
|
|
10,438,558
|
|
|
20,010,457
|
|
|
20,217,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
8,466,761
|
|
|
8,813,674
|
|
|
17,183,406
|
|
|
18,590,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,937,451
|
|
|
1,624,884
|
|
|
2,827,051
|
|
|
1,627,039
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
-
|
|
|
47
|
|
|
-
|
|
|
2,771
|
|
Interest expense
|
|
|
(1,362,639
|
)
|
|
(1,169,984
|
)
|
|
(2,932,450
|
|
|
(2,269,317
|
|
Other
|
|
|
7,085
|
|
|
10,653
|
|
|
311,666
|
|
|
34,766
|
|
|
|
|
(1,355,554
|
)
|
|
(1,159,284
|
)
|
|
(2,620,784
|
|
|
(2,231,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before income taxes
|
|
|
581,897
|
|
|
465,600
|
|
|
206,267
|
|
|
(604,741)
|
|
Income tax (expense) benefit
|
|
|
(248,436
|
|
|
(170,185
|
|
|
(85,492
|
|
|
265,787
|
|
Net
income (loss)
|
|
$
|
333,461
|
|
$
|
295,415
|
|
$
|
120,775
|
|
$
|
(338,954
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.01
|
|
$
|
(0.03
)
|
|
Diluted
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.01
|
|
$
|
(0.03
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,988,000
|
|
|
9,988,000
|
|
|
9,988,000
|
|
|
9,988,000
|
|
Diluted
|
|
|
9,988,000
|
|
|
9,988,000
|
|
|
9,988,000
|
|
|
9,988,000
|
|
Dividends
per share
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
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
|
|
Deficit
|
|
Income
|
|
Total
|
|
Balance, October 31,
2009
|
|
9,987,913
|
|
$
|
9,987,913
|
|
$
|
22,768,610
|
|
$
|
(9,822,383
|
)
|
$
|
-
|
|
$
|
22,934,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2010
|
|
-
|
|
|
-
|
|
|
-
|
|
|
120,775
|
|
|
-
|
|
|
|
|
Other
comprehensive income (net of tax)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
141,751
|
|
|
141,751
|
|
Total
comprehensive income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
120,775
|
|
|
141,751
|
|
|
262,526
|
|
Balance,
April 30, 2010
|
|
9,987,913
|
|
$
|
9,987,913
|
|
$
|
22,768,610
|
|
$
|
(9,701,608
|
)
|
$
|
141,751
|
|
$
|
23,196,666
|
|
See notes
to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Six
Months Ended April 30,
|
|
|
|
|
|
(Restated)
|
|
|
|
2010
|
|
2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
120,775
|
|
$
|
|
|
Adjustments
to reconcile net income (loss) to
cash
provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
2,188,029
|
|
|
|
|
Gain on sale of
assets
|
|
|
10,686
|
|
|
|
)
|
Deferred income
taxes
|
|
|
119,082
|
|
|
|
|
Deferred financing
costs or compensation
|
|
|
161,550
|
|
|
154,735
|
|
Bad debt
expense
|
|
|
201,298
|
|
|
|
|
Gain on hedging
agreements
|
|
|
(284,079
|
)
|
|
-
|
|
Changes in assets
and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
342,622
|
|
|
|
|
Inventories
|
|
|
968,716
|
|
|
|
|
Other current
assets
|
|
|
(383,997
|
|
|
|
)
|
Accounts
payable
|
|
|
131,517
|
|
|
|
)
|
Accrued
payroll
|
|
|
(307,805
|
|
|
|
)
|
Taxes accrued and
withheld
|
|
|
228,887
|
|
|
|
|
Income
taxes
|
|
|
(63,280
|
|
|
|
|
Accrued
expenses
|
|
|
121,005
|
|
|
|
|
Other
liabilities
|
|
|
(900
|
)
|
|
|
)
|
Net cash provided by operating activities
|
|
|
3,554,106
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(179,393
|
|
|
|
)
|
Proceeds
from sales of property
|
|
|
20,192
|
|
|
|
|
Change in
other assets
|
|
|
(297,570
|
|
|
|
|
Net cash used in investing activities
|
|
|
(456,771
|
|
|
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Borrowings
on line of credit
|
|
|
20,440,000
|
|
|
600,000
|
|
Payments
on line of credit
|
|
|
(19,060,000
|
|
|
|
|
Increase
(decrease) in negative book cash balances
|
|
|
|
|
|
(459,355)
|
|
Principal
payments on long-term debt
|
|
|
|
|
|
|
)
|
Payments
on debt amendment costs
|
|
|
(271,815
|
)
|
|
-
|
|
Dividends
paid
|
|
|
-
|
|
|
|
)
|
Net cash used in financing activities
|
|
|
(4,256,617
|
)
|
|
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(1,159,282
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
1,159,282
|
|
|
|
|
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, 2010
1.
Basis of Presentation and Business Operations and Recent Accounting
Pronouncements
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, 2009, and related notes thereto
contained in Champion Industries, Inc.’s Form 10-K dated January 27, 2010. 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, 2009
was derived from our audited financial statements.
The Company identified approximately $0.3 million or $0.03 per share
on a basic and diluted basis of non-cash deferred tax related adjustment for
each of the first and second quarters of 2009. This adjustment was initially
recorded in the fourth quarter of 2009 for the full year and therefore the
interim periods for 2009 have been restated accordingly to reflect such
adjustment. Accordingly, the Consolidated Financial Statements for the three and
six months ended April 30, 2009 have been restated to increase deferred income
tax expense and to increase deferred income tax liability. This adjustment is
related to the goodwill, trade name and masthead associated with the acquisition
of The Herald-Dispatch. This deferred tax liability will remain on the balance
sheet until such time as the associated intangible assets are impaired, sold, or
otherwise disposed of. Certain prior-year amounts have been reclassified to
conform to the current year financial statement presentation.
In February 2010, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) No. 2010-11, which amends the
Subsequent Events Topic of the Accounting Standards Codification (ASC) to
eliminate the requirement for public companies to disclose the date through
which subsequent events have been evaluated. The Company will continue to
evaluate subsequent events through the date of issuance of the financial
statements, however, consistent with the guidance, this date will no longer be
disclosed. ASU 2010-11 does not have any impact on the Company's results of
operations, financial condition or liquidity.
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. There was no dilutive effect of stock options effect for the
three and six months ended April 30, 2010 and April 30, 2009.
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,
|
|
|
|
2010
|
|
2009
|
|
Printing
and newspaper:
|
|
|
|
|
|
Raw
materials
|
|
$
|
2,847,382
|
|
$
|
2,854,938
|
|
Work in
process
|
|
|
1,371,423
|
|
|
1,405,320
|
|
Finished
goods
|
|
|
3,400,416
|
|
|
3,765,244
|
|
Office
products and office furniture
|
|
|
2,574,040
|
|
|
3,136,475
|
|
|
|
$
|
10,193,261
|
|
$
|
11,161,977
|
|
4.
Long-Term Debt
Long-term
debt consisted of the following:
|
|
April
30,
|
|
October
31,
|
|
|
|
2010
|
|
2009
|
|
Installment
notes payable to banks & shareholder
|
|
$
|
4,292,882
|
|
$
|
1,310,418
|
|
Term
loan facility with a bank
|
|
|
47,182,442
|
|
|
56,632,442
|
|
|
|
|
51,475,324
|
|
|
57,942,860
|
|
Less
current portion
|
|
|
|
|
|
57,024,424
|
|
Long-term
debt, net of current portion
|
|
$
|
|
|
$
|
918,436
|
|
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
On March
31, 2010, the Company, Fifth Third Bank, as a Lender, L/C Issuer and
Administrative Agent for Lenders (the "Administrative Agent") and the other
Lenders party to Champion's Credit Agreement dated September 14, 2007 (the
"Credit Agreement") entered into a Second Amendment and Waiver to Credit
Agreement ("the "Second Amendment"). All conditions precedent to the
effectiveness of the Second Amendment were satisfied on April 6,
2010.
In the
Second Amendment the Administrative Agent and Lenders waived any default or
event of default arising from Champion's previously disclosed violations of
provisions of the Credit Agreement. The Second Amendment amended various
provisions of the Credit Agreement, including but not limited to:
-
a $17,000,000 revolving credit
facility with a sublimit of up to $3,000,000 for letters of credit and
$3,000,000 for swing line loans. Outstanding borrowings, thereunder, may not
exceed the sum of (1) up to 85% of eligible receivables plus (b) up to the
lesser of $6,000,000 or 50% of eligible inventory.
-
at Champions option, interest at
a LIBOR Rate, so long as no default exists.
-
post-default increase in
interest rate of 2%.
-
amendment of various financial
covenants.
-
fixed charge coverage ratio is
required to be 1.0:1.0 through January 31, 2011; 1.1:1.0 through January 31,
2012 and 1.20:1.00 thereafter.
-
leverage ratio shall not be
greater the 6.5:1.00 at April 30, 2010 with 0.5:1.00 stepdowns quarterly
through April 30, 2011 and 0.25:1.00 quarterly stepdowns through April 30,
2012.
-
minimum EBITDA pursuant to a
quarterly build up commencing with the three months ended April 30, 2010 of
$2,700,000, the six months ended July 31, 2010 of $5,400,000, the nine months
ended October 31, 2010 of $8,900,000 and the twelve months ended January 31,
2011 of $11,800,000, thereafter varying quarterly stepups culminating in
twelve months trailing EBITDA of $14,300,000 at October 31, 2012.
-
maximum capital expenditures are
limited to $2,000,000 per fiscal year for the years ended October 31,
2010 and 2011 and $2,500,000 thereafter.
-
enhanced reporting by Champion
to Administrative Agent, including monthly reports and conference calls,
quarterly reports by Champions independent auditors of restructuring charges
and organizational expense reductions.
-
application of Champion's income
tax refunds applied to reduce indebtedness under the Credit
Agreement.
As required by the Second Amendment, the Company, Marshall
T. Reynolds and the Administrative Agent entered into a Contribution Agreement
and Cash Collateral Security Agreement dated March 31, 2010 (the "Contribution
Agreement") pursuant to which Mr. Reynolds deposited $2,500,000 as cash
collateral with the Administrative Agent, which the Administrative Agent may
withdraw upon an event of default under the Credit Agreement.
Mr. Reynolds has granted the Administrative Agent a first
priority security interest in the cash collateral.
Amounts drawn down by the Administrative Agent will be
applied to repayment of Champion's obligations under the Credit Agreement. The
Contribution Agreement expires upon the earliest of (i) full drawdown of the
$2,500,000 deposited, (ii) repayment in full of all obligations under the Credit
Agreement and termination of all commitments thereunder and (iii) the
Administrative Agent's determination that Champion has achieved a fixed charge
coverage ratio of at least 1.2 to 1.0 as of the last day of two consecutive
fiscal quarters of Champion.
In connection with the Contribution Agreement, Champion has
executed and delivered to Mr. Reynolds a Subordinated Promissory Note in amount
of $2,500,000, payment of principal and interest on which is prohibited prior to
January 31, 2011, and thereafter only with the Administrative Agent's consent.
The Subordinated Promissory Note bears interest at the Wall Street Journal prime
rate (currently 3.25%), matures September 14, 2014 and is unsecured.
Pursuant to the terms of the
Second Agreement, the Company's borrowing base certificate as submitted to the
Administrative Agent reflected minimum excess availability of $7.4 million as of
April 30, 2010. The minimum excess availability is subject to a $1.0 million
reserve.
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. This line of credit expires in July 2010 is subject to a floor of
4.25% and contains certain financial covenants. There were no borrowings
outstanding under this facility at April 30, 2010 and October 31,
2009.
There
were no non-cash financing and investing activities for the three and six
months ended April 30, 2009 and equipment and vehicle purchases of $93,000 and
$196,000 for the three and six months ended April 30, 2010.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
5.
Commitments and Contingencies
As of
April 30, 2010, the Company had contractual obligations in the form of leases
and debt as follows:
|
|
Payments
Due by Fiscal Year
|
Contractual
Obligations
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable
operating leases
|
|
$
|
682,638
|
|
$
|
1,096,190
|
|
$
|
932,343
|
|
$
|
845,884
|
|
$
|
271,640
|
|
$
|
3,828,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
line of credit
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
10,105,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
debt
|
|
|
2,709,650
|
|
|
5,358,068
|
|
|
5,218,711
|
|
|
35,118,880
|
|
|
3,070,015
|
|
|
51,475,324
|
|
|
|
|
|
|
|
6,454,258
|
|
|
16,256,550
|
|
|
35,964,764
|
|
|
3,341,655
|
|
|
65,409,515
|
|
The
Company incurred costs in 2010 related to facility consolidations, employee
termination costs and other restructuring related activities of $139,000 and
$161,000 for the three and six months ended April 30, 2010. These costs were
incurred, in part, as a response to the Company's efforts to overcome the impact
of the global economic crisis. The Company believes that additional costs will
be incurred in future quarters to address the impact of the economic
crisis.
6.
Share-Based Compensation
FASB ASC
718 (ASC 718) requires companies to expense the value of employee stock options
and similar awards. 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 ASC 718.
The
Company did not issue any employee stock options for the three and six months
ended April 30, 2010 and 2009.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited) (continued)
7. 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
publication
of The Herald-Dispatch daily newspaper in Huntington, WV with a total daily and
Sunday circulation of approximately 25,000 and 30,000,
respectively
.
Our financial reporting systems present various data which is used to
operate and measure our operating performance, including internal statements of
operations which are prepared on a basis inconsistent with GAAP. Therefore, the
segment reporting may not necessarily be consistent with GAAP reporting.
Furthermore, because of our integrated business structure, operating costs
included in one segment may benefit other segments. As a result of this
structure these segments are not specifically designed to measure operating
income or loss directly related to the products or services included in each
segment.
The identifiable assets are reflective of non-GAAP assets reported on
the Company's internal balance sheets and are typically adjusted for negative
book cash balances, taxes, and other items excluded for segment reporting. The
total assets reported on the Company's balance sheets as of April 30, 2010 and
2009 are $97,147,978 and $135,608,808. The identifiable assets
reported below represent $85,348,303 and $133,209,957 at April 30, 2010 and
2009. Amounts for prior periods have been recast to conform to the current
management view.
The table
below presents information about reported segments for the three and six months
ended April 30:
2010
Quarter 2
|
|
Printing
|
|
Office
Products & Furniture
|
|
Newspaper
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
24,535,723
|
|
$
|
9,954,527
|
|
$
|
3,670,371
|
|
$
|
38,160,621
|
|
Elimination
of intersegment revenue
|
|
|
(2,819,328
|
)
|
|
(1,601,948
|
)
|
|
-
|
|
|
(4,421,276
|
)
|
Consolidated
revenues
|
|
$
|
21,716,395
|
|
$
|
8,352,579
|
|
$
|
3,670,371
|
|
$
|
33,739,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
646,608
|
|
|
582,585
|
|
|
708,258
|
|
|
1,937,451
|
|
Depreciation
& amortization
|
|
|
766,334
|
|
|
31,103
|
|
|
172,951
|
|
|
970,388
|
|
Capital
expenditures
|
|
|
141,388
|
|
|
5,442
|
|
|
18,088
|
|
|
164,918
|
|
Identifiable
assets
|
|
|
42,351,465
|
|
|
7,135,218
|
|
|
35,861,620
|
|
|
85,348,303
|
|
Goodwill
|
|
|
2,226,837
|
|
|
1,230,485
|
|
|
11,874,961
|
|
|
15,332,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
Quarter 2
|
|
Printing
|
|
Office
Products & Furniture
|
|
Newspaper
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
25,871,730
|
|
$
|
10,777,243
|
|
$
|
3,861,516
|
|
$
|
40,510,489
|
|
Elimination
of intersegment revenue
|
|
|
(2,699,419
|
)
|
|
(1,671,398
|
)
|
|
-
|
|
|
(4,370,817
|
)
|
Consolidated
revenues
|
|
$
|
23,172,311
|
|
$
|
9,105,845
|
|
$
|
3,861,516
|
|
$
|
36,139,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
45,622,789
|
|
|
8,929,626
|
|
|
78,657,542
|
|
|
133,209,957
|
|
Goodwill
|
|
|
2,226,837
|
|
|
1,230,485
|
|
|
35,437,456
|
|
|
38,894,778
|
|
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
2010
Year to Date
|
|
Printing
|
|
Office
Products
&
Furniture
|
|
Newspaper
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
46,931,754
|
|
$
|
19,846,919
|
|
$
|
8,046,432
|
|
$
|
74,825,105
|
|
Elimination
of intersegment revenue
|
|
|
(5,465,888
|
)
|
|
(3,232,626
|
)
|
|
-
|
|
|
(8,698,514
|
)
|
Consolidated
revenues
|
|
$
|
41,465,866
|
|
$
|
16,614,293
|
|
$
|
8,046,432
|
|
$
|
66,126,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
152,045
|
|
|
951,837
|
|
|
1,723,169
|
|
|
2,827,051
|
|
Depreciation
& amortization
|
|
|
1,552,524
|
|
|
68,936
|
|
|
566,569
|
|
|
2,188,029
|
|
Capital
expenditures
|
|
|
322,467
|
|
|
9,488
|
|
|
43,429
|
|
|
375,384
|
|
Identifiable
assets
|
|
|
42,351,465
|
|
|
7,135,218
|
|
|
35,861,620
|
|
|
85,348,303
|
|
Goodwill
|
|
|
2,226,837
|
|
|
1,230,485
|
|
|
11,874,961
|
|
|
15,332,283
|
|
2009
Year to Date
|
|
Printing
|
|
Office
Products
&
Furniture
|
|
Newspaper
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
51,684,048
|
|
$
|
21,788,166
|
|
$
|
8,374,306
|
|
$
|
81,846,520
|
|
Elimination
of intersegment revenue
|
|
|
(5,370,916
|
)
|
|
(3,444,919
|
)
|
|
-
|
|
|
(8,815,835
|
)
|
Consolidated
revenues
|
|
$
|
46,313,132
|
|
$
|
18,343,247
|
|
$
|
8,374,306
|
|
$
|
73,030,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(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
|
|
|
45,622,789
|
|
|
8,929,626
|
|
|
78,657,542
|
|
|
133,209,957
|
|
Goodwill
|
|
|
2,226,837
|
|
|
1,230,485
|
|
|
35,437,456
|
|
|
38,894,778
|
|
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, 2010 and 2009, is as follows:
|
|
Three
months
|
Six
months
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment revenues
|
|
$
|
38,160,621
|
|
$
|
40,510,489
|
|
$
|
74,825,105
|
|
$
|
81,846,520
|
|
Elimination
of intersegment revenue
|
|
|
(4,421,276
|
)
|
|
(4,370,817
|
)
|
|
(8,698,514
|
)
|
|
(8,815,835
|
)
|
Consolidated
revenue
|
|
$
|
33,739,345
|
|
$
|
36,139,672
|
|
$
|
66,126,591
|
|
$
|
73,030,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating income
|
|
$
|
1,937,451
|
|
$
|
1,624,884
|
|
$
|
2,827,051
|
|
$
|
1,627,039
|
|
Interest
income
|
|
|
-
|
|
|
47
|
|
|
-
|
|
|
2,771
|
|
Interest
expense
|
|
|
(1,362,639
|
)
|
|
(1,169,984
|
)
|
|
(2,932,450
|
)
|
|
(2,269,317
|
)
|
Other
income
|
|
|
7,085
|
|
|
10,653
|
|
|
311,666
|
|
|
34,766
|
|
Consolidated
income (loss) before income taxes
|
|
$
|
581,897
|
|
$
|
465,600
|
|
$
|
206,267
|
|
$
|
(604,741)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment identifiable assets
|
|
$
|
85,348,303
|
|
$
|
133,209,957
|
|
$
|
85,348,303
|
|
$
|
133,209,957
|
|
Assets
not allocated to a segment
|
|
|
11,799,675
|
|
|
2,398,851
|
|
|
11,799,675
|
|
|
2,398,851
|
|
Total
consolidated assets
|
|
$
|
97,147,978
|
|
$
|
135,608,808
|
|
$
|
97,147,978
|
|
$
|
135,608,808
|
|
8.
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
representing approximately $20.2 million and $21.1 million of outstanding
notional principal at April 30, 2010 and October 31, 2009. 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 0.27% at April 30, 2010). The remaining term of this swap agreement is
approximately 6 months. In the three and six months ended April 30, 2009, the
Company recorded a net change in the fair value of the fixed interest rate swap
agreement in the amount of $50,000 and $(216,000) net of income tax as
other comprehensive gain (loss). Due to the termination of LIBOR borrowing
eligibility from the Administrative Agent, the Company recorded a loss in in the
fourth quarter of 2009 from ineffectiveness in its hedging arrangement.
Therefore, in the three months ended January 31, 2010 the Company recorded as a
component of other income $284,000 related to its hedging arrangement, or
$170,000 net of income tax. Effective with the Second Amendment the Company's
eligibility for LIBOR borrowings was reinstated. Therefore, for the three months
ended April 30, 2010, the Company recorded a net change in the fair value of the
fixed interest rate swap agreement in the amount of $142,000, net of income tax,
as other comprehensive income.
The fair
value of this derivative instrument is discussed further in Footnote 9, Fair
Value of Financial Instruments.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
9.
Fair Value of
Financial Instrument
FASB ASC 820 (ASC 820) 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. The Company
adopted ASC 820 for financial assets and liabilities only on November 1,
2008. 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 ASC 820 for financial assets and liabilities did not
have a material impact on the Company's results of operation, financial
condition or liquidity. The full adoption of ASC 820 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.
FASB ASC 825 (ASC 825) 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. ASC 825 does not affect any existing
accounting literature that requires certain assets and liabilities to be carried
at fair value. The Company elected not to apply the provisions of ASC 825;
therefore, the adoption of ASC 825 did not affect our consolidated financial
condition, 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. ASC 820 establishes a fair value hierarchy for
those instruments measured at fair value that distinguish 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, 2010 and
2009:
|
|
Fair
Value Measurements as of
|
|
|
|
April
30, 2010
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap
|
|
$
|
-
|
|
|
$
|
442,560
|
|
|
$
|
-
|
|
|
$
|
442,560
|
|
|
|
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
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.
The Company identified approximately $0.3 million or $0.03 per share
on a basic and diluted basis of non-cash deferred tax related adjustments for
each of the first and second quarters of 2009. This adjustment was initially
recorded in the fourth quarter of 2009 for the full year and therefore the
interim periods for 2009 have been restated accordingly to reflect such
adjustment. Accordingly, the Consolidated Financial Statements for the three and
six months ended April 30, 2009 have been restated to increase deferred income
tax expense and to increase deferred income tax liability. This adjustment is
related to the goodwill, trade name and masthead associated with the acquisition
of The Herald-Dispatch. This deferred tax liability will remain on the balance
sheet until such time as the associated intangible assets are impaired, sold, or
otherwise disposed of. Certain prior-year amounts have been reclassified to
conform to the current year financial statement presentation.
|
|
Percentage
of Total Revenues
|
|
|
Three
Months Ended
April
30,
|
Six
Months Ended
April
30,
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenues
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
|
64.4
|
%
|
|
64.1
|
%
|
|
62.7
|
%
|
|
63.4
|
%
|
Office products and office furniture
|
|
|
24.8
|
|
|
25.2
|
|
|
25.1
|
|
|
25.1
|
|
Newspaper
|
|
|
|
|
|
10.7
|
|
|
12.2
|
|
|
11.5
|
|
Total
revenues
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and newspaper operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
|
|
|
|
47.4
|
|
|
45.7
|
|
|
48.0
|
|
Office
products and office furniture
|
|
|
17.3
|
|
|
17.8
|
|
|
17.7
|
|
|
18.0
|
|
Newspaper
cost of sales and operating costs
|
|
|
6.0
|
|
|
5.9
|
|
|
6.3
|
|
|
6.3
|
|
Total cost of sales and newspaper operating
costs
|
|
|
|
|
|
71.1
|
|
|
69.7
|
|
|
72.3
|
|
Gross profit
|
|
|
|
|
|
28.9
|
|
|
30.3
|
|
|
27.7
|
|
S Selling,
general and administrative expenses
|
|
|
25.1
|
|
|
24.4
|
|
|
26.0
|
|
|
25.5
|
|
Income
from operations
|
|
|
5.7
|
|
|
4.5
|
|
|
4.3
|
|
|
2.2
|
|
Interest income
|
|
|
0.0
|
|
|
0.0
|
|
|
0.0
|
|
|
0.0
|
|
Interest expense
|
|
|
(4.0
|
)
|
|
(3.2
|
)
|
|
(4.4
|
)
|
|
(3.1
|
)
|
Other
income
|
|
|
0.0
|
|
|
0.0
|
|
|
0.4
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes
|
|
|
1.7
|
|
|
1.3
|
|
|
0.3
|
|
|
(0.9)
|
|
Income tax benefit (expense)
|
|
|
(0.7
|
|
|
(0.5
|
)
|
|
(0.1
|
)
|
|
0.4
|
|
Net
income (loss)
|
|
|
1.0
|
%
|
|
0.8
|
%
|
|
0.2
|
%
|
|
(0.5)
|
%
|
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued)
Three
Months Ended April 30, 2010 Compared to Three Months Ended April 30, 2009
(Restated)
Revenues
Total
revenues decreased 6.6% in the second quarter of 2010 compared to the same
period in 2009, to $33.7 million from $36.1 million. Printing revenue decreased
6.3% in the second quarter of 2010, to $21.7 million from $23.2
million in the second quarter of 2009. Office products and office
furniture revenue decreased 8.3% in the second quarter of 2010, to
$8.4 million from $9.1 million in the second quarter of
2009. The decrease in printing sales was primarily associated with the
continued impact of the global economic crisis. Office products and office
furniture sales were weaker in the second quarter of 2010 when
compared to the second quarter of 2009. The Company recorded newspaper
revenues associated with The Herald-Dispatch of approximately
$3.7 million, consisting of advertising revenue of approximately $2.8
million and $0.9 million in circulation revenues, for the three months
ended April 30, 2010. 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
on-line revenues for the three months ended April 30, 2010 and April 30, 2009
approximated
$299,000 and
$230,000
and are recorded as a component of advertising
revenue. The reduction in newspaper revenues is primarily associated with a
decrease in advertising revenues attributable to decreased advertising demand
due, in part, to the global economic crisis.
Cost
of Sales
Total
cost of sales decreased 9.2% in the second quarter of 2010, to $23.3
million from $25.7 million in the second quarter of 2009. Printing
cost of sales in the second quarter of 2010 decreased $1.6 million over the
prior year and decreased as a percentage of printing sales from 74.0% in 2009 to
71.4% in 2010. The printing gross margin dollar increase is attributed
to lower materials costs as a percentage of printing sales partially offset by
lower overall printing sales. Office products and office furniture cost of
sales decreased in 2010 from 2009 levels due to lower sales and lower
cost of goods sold as a percentage of office products and office furniture sales
of 70.6% in 2009 to 69.6% in 2010, thus representing
improved 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 55.1% and 55.2% for the three months ended April
30, 2010 and 2009.
Operating
Expenses
In the
second quarter of 2010, selling, general and administrative expenses decreased
on a gross dollar basis to $8.5 million from $ 8.8 million in 2009, a
decrease of $347,000 or 3.9%. As a percentage of total sales, the selling,
general and administrative expenses increased on a quarter to quarter basis in
2010 to 25.1% from 24.4% in 2009.
The
decrease in selling, general and administrative expenses is primarily the result
of personnel cost related reductions associated in part with cost reduction
initiatives, lower bad debt expense and lower amortization expense. The decrease
in SG&A was partially offset by various costs associated with the Company's
successful defense of a legal action approximating $270,000.
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued)
Income
from Operations and Other Income and Expenses
Income
from operations increased in the second quarter of 2010, to
$1.9 million from $1.6 million in the second quarter of
2009. This increase is the result of lower selling, general, and administrative
expenses and relatively flat gross margin dollar contributions. The improvement
in income from operations was offset in part by the expenses associated with the
successful defense of a legal action approximating $270,000 in the second
quarter of 2010 and restructuring related costs, primarily associated with
equipment relocation related costs to effectuate and streamline plant
productivity, severance and operational realignment costs approximating $139,000
in the second quarter of 2010. Other expense (net), increased approximately
$196,000 from 2009 to 2010, primarily due to increases in interest expense
resulting from higher rates associated with the Administrative Agent
instituting the default rate and eliminating the LIBOR borrowing expense option
for most of the second quarter of 2010 and various deferred financing interest
related expenses associated with this debt.
The
Company’s effective income tax expense rate was an expense of 42.7% for the
second quarter of 2010 and an expense of 36.6% for the second
quarter of 2009. 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 2010 was $333,000 compared to $295,000 in the
second quarter of 2009. Basic and diluted earnings per share for the three
months ended April 30, 2010 and 2009 were $0.03 and $0.03.
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued
Six
Months Ended April 30, 2010 Compared to Six Months Ended April 30, 2009
(Restated)
Revenues
Total
revenues decreased 9.5% in the first six months of 2010 compared to the same
period in 2009, to $66.1 million from $73.0 million. Printing revenue
decreased 10.5% in the six month period ended April 30, 2010 to
$41.5 million from $46.3 million in the same period in 2009.
Office products and office furniture revenue decreased 9.4% in the six month
period ended April 30, 2010, to $16.6 million from $18.3 million in
the same period in 2009. 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 to lower office product and office furniture sales. The
Company recorded newspaper revenues associated with The Herald-Dispatch of
approximately $8.0 million consisting of advertising revenues of approximately
$6.1 million and $1.9 million in circulation revenues for the six
months ended April 30, 2010. 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 on-line revenues for the six months ended April 30, 2010 and
2009 approximated $0.6 and $0.5 million and are recorded as a
component of advertising revenue. The reduction in newspaper revenues is
primarily associated with a decrease in advertising revenues associated, in
part, with decreased advertising demand due to the global economic crisis.
Total
cost of sales decreased 12.7% in the six months ended April 30, 2010 to
$46.1 million from $52.8 million in the six months ended
April 30, 2009. Printing cost of sales decreased 14.0% in the six months ended
April 30, 2010 to $30.2 million from $35.1 million in the
six months ended April 30, 2009. The decrease in printing cost of sales was
primarily due to the decrease in printing sales coupled with improved
gross margin percent. Office products and office furniture cost of sales
decreased 10.5% in the six months ended April 30, 2010 to $11.7 million from
$13.1 million for the six months ended April 30, 2009. Newspaper cost of sales
and operating costs as a percent of newspaper sales were 51.6% and 54.6%
for the six months ended April 30, 2010 and 2009.
Operating
Expenses
During
the six months ended April 30, 2010 compared to the same period in 2009,
selling, general and administrative expenses increased as a percentage of sales
to 26.0% from 25.5%. Total selling, general and administrative expenses (S,G
& A) decreased $1.4 million. 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 personnel cost related reductions
associated in part with cost reduction initiatives, lower bad debt expense and
lower amortization expense. The decrease in SG&A was partially offset by
various costs associated with the Company's successful defense of a legal action
approximating
$330,000.
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 73.8% in the six month period ended April 30, 2010 to
$2.8 million from $1.6 million in the same period of 2009.
This increase is the result of lower selling, general and administrative
expenses partially offset by revenue reductions and lower gross margin
contribution at the Company's office products and office furniture
segment. The improvement in income from operations was further offset, in
part, by expenses associated with the successful defense of a legal action
approximating $330,000 for the six months ended April 30, 2010 and restructuring
related costs primarily associated with equipment relocation related costs to
effectuate and streamline plant productivity, severance and operational
realignment costs approximating $161,000 in the six months ended April 30, 2010.
Other expense (net), increased approximately $389,000 from 2009 to 2010
primarily due to increases in interest expense, resulting from higher rates
associated with the Administrative Agent instituting, the default rate and
eliminating the LIBOR borrowing expense option for most of the first six
months of 2010 and various deferred financing interest related expenses
associated with this debt. This increase was partially offset by an
increase in other income resulting from a hedging arrangement recorded in the
first quarter of 2010.
Income
Taxes
The
Company’s effective income tax (expense) benefit rate was an
expense of (41.4)% for the six months ended April 30, 2010, and a
benefit of 44.0% in the same period of 2009. 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 (Loss)
Net
income for the six months ended April 30, 2010 was $121,000 compared to a loss
of $(339,000) for the same period in 2009. Net income for the first six
months of 2010 increased over 2009 levels due to the reasons discussed
above. Basic and diluted earnings (loss) per share for the six months ended
April 30, 2010 was $0.01 compared to 2009 at $(0.03).
Inflation
and Economic Conditions
Management believes that
the effect of inflation on the Company’s operations has not been material and
will continue to be immaterial for the foreseeable future. The Company does not
have long-term sales and purchase contracts; therefore, to the extent permitted
by competition, it has the ability to pass through to the customer most cost
increases resulting from inflation, if any
.
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 the 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, 2010 was
$3.6 million compared to net cash provided by operations of
$6.5 million during the same period in 2009. 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, 2010 was
$457,000 compared to $1.5 million during the same period in 2009. The
net cash used in investing activities during the first six months of 2010 and
2009 primarily relate to the purchase of equipment and vehicles.
Net cash
used in financing activities for the six months ended April 30, 2010 was $4.3
million compared to $5.1 million during the same period
in 2009. This change was primarily due to an increase in negative book cash
balances.
Working capital on April
30, 2010 was $14.7 million and at October 31, 2009 was
$(42.6) million. The working capital deficit at October 31, 2009 was
associated with the
classification as a
current liability of $60.5 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 entered into
a Second Amendment and Waiver to Credit Agreement in the second
quarter of 2010; therefore the debt is reflected in the Company's financial
statements based on contractual maturity.
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 2010 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, 2009.
Item
6. Exhibits
(10.1)
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Second
Amendment and Waiver to Credit Agreement dated March 31, 2010 among
Champion Industries, Inc. and Fifth Third Bank, as Lender, L/C Issuer and
Administrative Agent for Lenders, filed as Exhibit 10.1 to Current Report
on Form 8-K filed on April 6, 2010, is incorporated herein by
reference.
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(10.2)
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Contribution
Agreement and Cash Collateral Security Agreement dated March 31, 2010
among Marshall Reynolds, Champion Industries, Inc. and Fifth Third Bank,
as Administrative Agent for Lenders, filed as Exhibit 10.2 to Current
Report on Form 8-K filed on April 6, 2010, is incorporated herein by
reference.
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(10.3)
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Subordinated
Promissory Note dated March 31, 2010 from Champion Industries, Inc. to
Marshall Reynolds, filed as Exhibit 10.3 to Current Report on Form 8-K
filed on April 6, 2010, is incorporated herein by
reference.
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(31.1)
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Principal
Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley act of 2002 - Marshall T. Reynolds
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Exhibit
31.1 Page Exhibit 31.1-p1
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(31.2)
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Principal
Financial Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley act of 2002 - Todd R. Fry
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Exhibit
31.2 Page Exhibit 31.2-p1
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(31.3)
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Principal
Operating Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley act of 2002 - Toney K. Adkins
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Exhibit
31.3 Page Exhibit 31.3-p1
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(32)
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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
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Exhibit
32 Page Exhibit 32-p1
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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
10, 2010
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/s/
Marshall T. Reynolds
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Marshall
T. Reynolds
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Chief
Executive Officer
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Date: June
10, 2010
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/s/
Toney K. Adkins
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Toney
K. Adkins
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President
and Chief Operating Officer
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Date: June
10, 2010
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/s/
Todd R. Fry
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Todd
R. Fry
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Senior
Vice President and Chief Financial
Officer
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