UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998 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 (I.R.S. Employer
incorporation or organization) Identification No.)
2450 First Avenue, P.O. Box 2968
Huntington, West Virginia 25728
(Address of principal executives offices)
(Zip Code)
(304) 528-2791
(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 13or 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 _X_ No ___.
9,556,160 shares of common stock of the Registrant were outstanding at April 30,
1998.
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Champion Industries, Inc.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets......................................2
Consolidated Income Statements...................................4
Consolidated Statements of Cash Flows............................5
Notes to Consolidated Financial Statements.......................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................9
Part II. Other Information
Item 2. Changes in Securities.....................................16
Item 4. Submission of Matters to a Vote of Security Holders.......16
Item 6. Exhibits and Reports on Form 8-K..........................16
Signatures.................................................................17
Exhibit Index..............................................................18
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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ASSETS April 30, October 31,
1998 1997
------------------------------------
Current assets:
Cash and cash equivalents $ 13,042,598 $ 912,290
Accounts receivable, net of allowance of $1,298,000 and $1,140,000 18,151,571 19,075,180
Inventories 13,041,364 11,576,651
Property held for sale -- 300,000
Other current assets 479,081 283,642
Deferred income tax assets 981,619 981,619
------------- -----------
Total current assets 45,696,233 33,129,382
Property and equipment, at cost:
Land 984,889 784,889
Buildings and improvements 5,298,230 4,144,472
Machinery and equipment 24,412,354 22,852,103
Equipment under capital leases 5,563,294 5,720,594
Furniture and fixtures 1,708,720 1,684,275
Vehicles 2,136,690 1,914,362
------------ ------------
40,104,177 37,100,695
Less accumulated depreciation (15,379,447) (13,825,053)
------------ ------------
24,724,730 23,275,642
Cash surrender value of officer's life insurance 972,692 921,213
Goodwill, net of accumulated amortization 3,097,518 2,558,356
Other assets 378,377 461,120
------------ ------------
4,448,587 3,940,689
------------ ------------
Total assets $ 74,869,550 $ 60,345,713
============ ============
</TABLE>
See notes to consolidated financial statements.
2
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CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(Unaudited)
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LIABILITIES AND SHAREHOLDERS' EQUITY APRIL 30, OCTOBER 31,
1998 1997
------------------------------------
Current liabilities:
Notes payable $ -- $ 2,425,000
Accounts payable 2,606,528 3,657,365
Accrued payroll 1,770,201 2,052,130
Taxes accrued and withheld 682,615 571,477
Accrued income taxes 1,308,034 450,027
Accrued expenses 1,275,819 793,848
Current portion of long-term debt:
Notes payable 2,702,520 2,842,844
Capital lease obligations 1,653,247 1,401,519
----------- -----------
Total current liabilities 11,998,964 14,194,210
Long-term debt, net of current portion:
Notes payable 11,294,365 11,328,588
Capital lease obligations 3,763,434 3,827,368
Deferred income tax liability 3,779,731 3,589,889
Other liabilities 773,838 555,886
----------- -----------
Total liabilities 31,610,332 33,495,941
Shareholders' equity:
Common stock, $1 par value, 20,000,000 shares authorized;
9,556,160 and 8,384,930 shares issued and outstanding 9,556,160 8,384,930
Additional paid-in capital 21,712,759 7,450,328
Retained earnings 11,990,299 11,014,514
----------- -----------
Total shareholders' equity 43,259,218 26,849,772
----------- -----------
Total liabilities and shareholders' equity $74,869,550 $60,345,713
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
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CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
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THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
1998 1997 1998 1997
-------------------------------------------------------------------------
Revenues:
Printing $ 24,292,336 $ 24,086,990 $ 48,248,299 $ 40,224,356
Office products and office furniture 6,889,070 5,173,271 12,567,585 10,151,741
-------------------------------------------------------------------------
Total revenues 31,181,406 29,260,261 60,815,884 50,376,097
Cost of sales:
Printing 16,755,577 16,021,131 34,264,048 27,964,560
Office products and office furniture 4,670,561 3,230,329 8,429,698 6,562,627
-------------------------------------------------------------------------
Total cost of sales 21,426,138 19,251,460 42,693,746 34,527,187
-------------------------------------------------------------------------
Gross profit 9,755,268 10,008,801 18,122,138 15,848,910
Selling, general and administrative
expenses 7,665,052 8,033,592 14,327,804 12,467,409
-------------------------------------------------------------------------
Income from operations 2,090,216 1,975,209 3,794,334 3,381,501
Other income (expense):
Interest income 41,769 5,815 41,926 13,212
Interest expense (436,075) (451,646) (863,490) (689,716)
Other 50,784 115,325 160,992 474,171
-------------------------------------------------------------------------
(343,522) (330,506) (660,572) (202,333)
-------------------------------------------------------------------------
Income before income taxes 1,746,694 1,644,703 3,133,762 3,179,168
Income taxes (725,831) (673,538) (1,315,522) (1,339,004)
-------------------------------------------------------------------------
Net income $ 1,020,863 $ 971,165 $ 1,818,240 $ 1,840,164
=========================================================================
Earnings per share
Basic $0.12 $0.12 $0.21 $0.22
=========================================================================
Diluted 0.12 0.12 0.21 0.22
=========================================================================
Weighted average shares outstanding:
Basic 8,819,000 8,382,000 8,599,000 8,382,000
=========================================================================
Diluted 8,856,000 8,442,000 8,643,000 8,441,000
=========================================================================
Dividends per share: $0.05 $0.05 $0.10 $0.10
=========================================================================
</TABLE>
See notes to consolidated financial statements.
4
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CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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SIX MONTHS ENDED APRIL 30,
1998 1997
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,818,240 $ 1,840,164
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation, amortization and accretion 1,755,649 2,046,428
Gain on sales of assets (7,396) --
Deferred gain on sale of assets -- (330,443)
Other 42,270 108,521
Changes in assets and liabilities:
Accounts receivable 1,901,477 (1,628,663)
Inventories (1,143,351) (621,702)
Other current assets (174,471) (316,154)
Accounts payable (1,191,019) 190,344
Accrued payroll (305,102) 1,107,195
Taxes accrued and withheld 61,321 (1,692)
Accrued income taxes 858,007 (739,851)
Accrued expenses (608,122) (2,087,378)
---------------------------------------
Net cash provided by (used in) operations 3,007,503 (433,231)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,640,548) (1,187,858)
Proceeds from sale of property 339,000 --
Business acquisitions, net of cash received 985,123 305,000
Other assets 47,545 180,684
---------------------------------------
Net cash used in investing activities (268,880) (702,174)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings of notes payable (2,425,000) 700,000
Proceeds from term debt and leases 1,781,507 1,614,355
Principal payments on long-term debt (3,306,028) (608,390)
Proceeds from stock offering, net of issuance expenses 14,134,544 --
Proceeds from exercise of stock options 49,117 --
Dividends paid (842,455) (733,109)
---------------------------------------
Net cash provided by financing activities 9,391,685 972,856
---------------------------------------
Net increase (decrease) in cash 12,130,308 (162,549)
Cash and cash equivalents, beginning of period 912,290 2,460,879
---------------------------------------
Cash and cash equivalents, end of period $ 13,042,598 $ 2,298,330
=======================================
</TABLE>
See notes to consolidated financial statements.
5
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CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND BUSINESS OPERATIONS
The foregoing financial information has been prepared in accordance with
generally accepted accounting principles and rules and regulations of the
Securities and Exchange Commission for interim financial reporting. The
preparation of the financial statements in accordance with generally accepted
accounting principles 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 generally
accepted accounting principles. These interim financial statements should be
read in conjunction with the consolidated financial statements for the year
ended October 31, 1997, and related notes thereto contained in the Champion
Industries, Inc.'s Form 10-K dated January 29, 1998. The accompanying interim
financial information is unaudited.
The accompanying consolidated financial statements of the Company include the
accounts of The Chapman Printing Company, Inc., Stationers, Inc., Bourque
Printing, Inc., Dallas Printing Company, Inc., Carolina Cut Sheets, Inc., U.S.
Tag & Ticket Company, Inc., Donihe Graphics, Inc., The Merten Company, Smith &
Butterfield Co., Inc., Interform Corporation, and Rose City Press.
2. 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,
1998 1997
-------------- --------------
Printing:
Raw materials $ 3,335,630 $ 3,030,425
Work in process 3,156,043 2,867,270
Finished goods 3,089,125 2,806,475
Office products and office furniture 3,460,566 2,872,481
------------- --------------
$ 13,041,364 $ 11,576,651
============= ==============
3. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement No.
128, Earnings per Share, which requires the reporting of basic and diluted
earnings per share. The Company adopted Statement 128 in 1998 as required. Basic
earnings per share excludes any dilutive effects of stock options and is
computed by dividing net income by the
6
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CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), continued
weighted average shares of common stock outstanding for the period. 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 effect of
dilutive stock options increased weighted average shares outstanding by 37,000
and 60,000 for the three months ended April 30, 1998 and 1997, and 44,000 and
59,000 for the six months ended April 30, 1998 and 1997.
4. SHAREHOLDERS' EQUITY
In April 1998, the Company completed a secondary offering of 1,091,993 common
shares. The shares were sold at $14.50 per share before underwriting discounts
and commissions of $1.015 per share. The net proceeds (net of underwriting
discounts, commissions and offering expenses) to the Company from this secondary
offering approximated $14.1 million. The net proceeds from the offering will be
used by the Company for debt reduction, working capital and general corporate
purposes, including the continuation of the Company's acquisition program.
The Company declared a dividend of five cents per share to be paid on June 26,
1998, to stockholders of record on June 5, 1998.
5. ACQUISITIONS
On December 31, 1996, the Company acquired all the issued and outstanding common
shares of Interform Corporation ("Interform"), a business forms printer located
in Bridgeville, Pennsylvania, for $2.5 million. Champion utilized the proceeds
of a loan from a bank to provide the cash consideration and to refinance the
existing long-term debt of Interform. The transaction was accounted for under
the purchase method. As of September 30, 1996, Interform had total assets of
$14.9 million and total liabilities of $9.6 million.
The following summarizes the unaudited consolidated pro forma results of
operations for the six months ended April 30, 1997, assuming the Interform
acquisition had been consummated at the beginning of the period.
SIX MONTHS ENDED
APRIL 30, 1997
----------------
Revenues $55,701,000
Net income $ 1,734,000
Diluted earnings per share $ 0.21
Weighted average shares outstanding (Diluted) 8,441,000
On February 2, 1998, the Company acquired all of the issued and outstanding
common stock of Rose City Press of Charleston, West Virginia, an office products
company, in exchange for 75,722 shares of its common stock with a market value
at the time of acquisition of $1,250,000. The transaction was accounted for
under the purchase method. Pro forma financial information related to this
acquisition has not been presented because such information would not be
material to the Company's consolidated financial statements reported herein.
7
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CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), continued
5. ACQUISITIONS (continued)
On May 18, 1998, the Company acquired all of the issued and outstanding common
shares of Capitol Business Equipment, Inc. ("Capitol"), doing business as
Capitol Business Interiors of Charleston, West Virginia, in exchange for 72,202
shares of its common stock with a market value at the time of acquisition of
$1,000,000.
On May 29, 1998, the Company acquired all of the issued and outstanding common
stock of Thompson's of Morgantown, Inc. and Thompson's of Barbour County, Inc.
(collectively referred to as "Thompson"), both companies doing business as
Thompson's Office Furniture and Supplies of Morgantown and Philippi, West
Virginia, in exchange for 45,473 shares of its common stock with a market value
at the time of acquisition of $600,000.
The information contained in these consolidated financial statements does not
include the Capitol and Thompson transactions since these acquisitions were
completed after April 30, 1998, the date of these consolidated financial
statements. The Capitol and Thompson transactions are expected to be accounted
for under the pooling of interests method. However, prior period financial
statements will not be restated due to the immaterial effect on Champion's
financial statements.
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," and Statement No. 131, "Disclosures About Segments of an Enterprise and
Related Information." The Company does not expect the adoption of these
statements to have a material impact on the consolidated financial statements.
8
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CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a commercial printer, business forms manufacturer and office
products and office furniture supplier in regional markets east of the
Mississippi. The Company has grown through acquisitions and internal growth. As
a result of this growth, the Company has realized economies of scale and
operational efficiencies.
The Company's largest acquisition since its initial public offering in early
1993 was the purchase of Interform Corporation ("Interform") on December 31,
1996. The addition of Interform's business forms sales has increased the
printing component of the revenue mix. Through sales to independent
distributors, and through its own distributor, Consolidated Graphic
Communications, Interform also provides the Company's printing divisions access
to the large northeastern markets of Pennsylvania, New Jersey, and New York.
The Company intends to continue its strategy of aggressively increasing its
market share in areas it currently serves and expanding intonew markets through
acquisitions. The Company believes the printing and office products industries
are highly fragmented and that it is well positioned to acquire desirable
businesses in existing market areas, contiguous geographical regions, and new
geographical markets.
The Company's revenues consist primarily of sales of commercial printing,
business forms, tags, other printed products, office supplies, office furniture,
data products, and office design services. The Company recognizes revenue when
products are shipped or services are rendered to the customer. The Company's
revenues are subject to quarterly fluctuations caused by variations in demand
for its products.
The Company's cost of sales primarily consist of raw materials, including paper,
ink, pre-press and purchased office supplies, furniture and data products, and
manufacturing costs including direct labor, indirect labor, and overhead.
Significant factors affecting cost of sales include the cost of paper in both
printing and office supplies, labor costs and other raw materials.
The Company's operating costs consist of selling, general and administrative
expenses. These costs include salaries and wages for sales, customer service,
accounting, administrative, and executive personnel, employee benefits, sales
commissions, rent, utilities, and equipment maintenance.
9
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CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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.
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THREE MONTHS ENDED SIX MONTHS ENDED
1998 1997 1998 1997
-------------------------------------------------------------
Revenues:
Printing 77.9% 82.3% 79.3% 79.9%
Office products and office furniture 22.1 17.7 20.7 20.1
-------------------------------------------------------------
Total revenues 100.0 100.0 100.0 100.0
Cost of sales:
Printing 53.7 54.8 56.3 55.5
Office products and office furniture 15.0 11.0 13.9 13.0
-------------------------------------------------------------
Total cost of sales 68.7 65.8 70.2 68.5
-------------------------------------------------------------
Gross profit 31.3 34.2 29.8 31.5
Selling, general and administrative
expenses 24.6 27.5 23.6 24.8
-------------------------------------------------------------
Income from operations 6.7 6.7 6.2 6.7
Interest income 0.1 0.0 0.1 0.0
Interest (expense) (1.4) (1.5) (1.4) (1.4)
Other income .2 .4 .3 1.0
-------------------------------------------------------------
Income before taxes 5.6 5.6 5.2 6.3
Income tax expense (2.3) (2.3) (2.2) (2.7)
-------------------------------------------------------------
Net income 3.3% 3.3% 3.0% 3.6%
=============================================================
</TABLE>
THREE MONTHS ENDED APRIL 30, 1998 COMPARED TO THREE MONTHS ENDED APRIL 30, 1997
Revenues
Total revenues increased 6.6% in the second quarter 1998 to $31.2 million from
$29.3 in the second quarter 1997. Printing revenue increased 0.9% in the second
quarter 1998 to $24.3 million from $24.1 million in the second quarter 1997.
Office products and office furniture revenue increased 33.2 % in the second
quarter 1998 to $6.9 million from $5.2 million in the second quarter 1997. The
growth in office products and office furniture revenue was primarily due to the
acquisition of Rose City Press of Charleston, West Virginia in February 1998
(impact on revenues of approximately $1 million), and continued efforts to
cross-sell our broader product lines in the markets we serve. In addition, the
Company's office products and office furniture division (Stationers) recently
introduced an electronic catalog called "Champ." This tool allows Stationers to
compete more effectively by giving our customers another choice of how they can
shop and order products. In the very near future, this catalog
10
<PAGE>
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
will also reside on the Company's website, which is under development, making it
even easier to order office products and office furniture.
Cost of Sales
Total cost of sales increased 11.3% in the second quarter 1998 to $21.4 million
from $19.3 million in the second quarter 1997. Printing cost of sales increased
4.6% in the second quarter 1998 to $16.8 million from $16.0 million in the
second quarter 1997, due primarily to maintaining or increasing production
capacity at certain printing divisions in anticipation of revenue growth, which
did not materialize. Management has taken the appropriate actions to streamline
these operations. Office products and office furniture cost of sales increased
44.6% in the second quarter 1998 to $4.7 million from $3.2 million in the second
quarter 1997, primarily due to the above noted Rose City acquisition and
internally generated sales volume.
Operating Expenses
In the second quarter of 1998, selling, general and administrative expenses
decreased as a percentage of sales to 24.6% from 27.5% reported in the second
quarter 1997 due to the Company's continuing effort to leverage operating
expenses against a growing revenue base.
Income from Operations and Other Income and Expenses
Income from operations increased 5.8% in the second quarter 1998 to $2.1 million
from $2.0 million in the second quarter 1997. This increase is primarily the
result of the Company controlling selling, general and administrative expenses.
Interest income is up $36,000 as a result of investing the net proceeds from the
Company's April 1998 common stock offering in a money market account. Interest
expense on a comparative basis decreased $16,000 as a result of normal debt
repayments and the use of a portion of the stock proceeds to pay-off all
short-term notes payable and some of the higher cost long-term debt assumed in
acquisitions.
Income Taxes
The Company's effective income tax rate was 41.6% for the second quarter 1998,
up slightly from 41.0% in the second quarter 1997.
Net Income
Net income for the second quarter 1998 increased 5.1% to $1.02 million from $.97
million in the second quarter 1997. Basic and diluted earnings per share for the
three months ended April 30, 1998 and 1997, were $0.12.
SIX MONTHS ENDED APRIL 30, 1998 COMPARED TO SIX MONTHS ENDED APRIL 30, 1997
Revenues
Total revenues increased 20.7% in the first half 1998 to $60.8 million from
$50.4 million in the first quarter 1997. Printing revenue increased 19.9% in the
first half 1998 to $48.2 million from $40.2 million
11
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CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
in the first half 1997. This growth in printing revenue is primarily due to the
acquisition of Interform Corporation that occurred on December 31, 1996.
Interform has been included in the Company's results of operations since the
acquisition date. Accordingly, the results of operations for the six months
ended April 30, 1997, included only four months of Interform activity. Interform
contributed $5.2 million to the increase in revenue. The remaining growth in
printing revenue is due to increased sales efforts coupled with increased
printing capabilities at various locations. Office products and office furniture
revenue increased 23.8% in the first half 1998 to $12.6 million from $10.2
million in the first half 1997. The revenue increases in office products and
office furniture were achieved through the Rose City acquisition and additional
efforts to cross-sell product lines.
Cost of Sales
Total cost of sales increased 23.7% in the first half 1998 to $42.7 million from
$34.5 million in the first half 1997. Printing cost of sales increased 22.5% in
the first half 1998 to $34.3 million from $28.0 million in the first half 1997,
primarily due to the increase in sales volume. Printing cost of sales increased
as a percent of printing revenue from 69.5% in the first half 1997, to 71.0% in
the first half 1998, as a result of the sales strategy to capture new customers
in certain geographical areas by lowering margins. Management anticipates that,
long-term, these relationships will result in higher profit margins. Office
products and office furniture cost of sales increased 28.5% in the first half
1998 to $8.4 million from $6.6 million in the first half 1997, due primarily to
the acquisition of Rose City and internally generated sales volume. Office
products and office furniture cost of sales as a percent of office products and
office furniture revenue increased from 64.6% in the first half 1997 to 67.1% in
the first half 1998, primarily as a result of the lower margins contributed by
Rose City.
Operating Expenses
Selling, general and administrative expenses as a percentage of sales decreased
in first half 1998 to 23.6% from 24.8% in the first half 1997 due to the
Company's continued effort to leverage the operating expenses against a growing
revenue base.
Income from Operations and Other Income and Expenses
Income from operations increased 12.2% in the first half 1998 to $3.8 million
from $3.4 million in the first half 1997. Interest income was up $29,000 as a
result of investing the net proceeds from the stock offering in a money market
account during the month of April 1998. Interest expense on a comparative basis
increased $174,000 or 25.2% as a result of the additional debt required to fund
operations and acquire equipment during the first half 1998. As noted earlier in
this discussion, a portion of the proceeds from the stock offering was used to
repay debt in April 1998. Other income decreased $300,000 in the first half 1998
compared to the same period in 1997 as a result of the recognition of a
nonrecurring deferred gain of $330,000 in the first half of 1997.
Income Taxes
The Company's effective income tax rate of 42% in 1998 and 1997 approximated the
combined federal and state, net of federal income tax benefit, statutory income
tax rate.
12
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CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Net Income
Net income for the first half 1998 decreased 1.2% to $1.82 million from $1.84
million in the first half 1997. After adjusting for the nonrecurring gain in the
first half of 1997, net core earnings increased by $166,000 or 10.1% from
$1,652,000 in the first half 1997 to $1,818,000 for the same period in 1998.
Basic and diluted earnings per share for the six months ended April 30, 1998,
were $0.21 compared to $0.22 for the same period in 1997.
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 annual sales
and net income in the second and fourth quarters than in the first and third
quarters. The second quarter generally reflects increased orders for printing of
corporate annual reports and proxy statements. A post-Labor Day increase in
demand for printing services and office products coincides with the Company's
fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations for the six months ended April 30, 1998, was
$3.0 million compared to net cash used in operations during the same period in
1997 of $400,000. This improvement in net cash from operations is due primarily
to a decrease in accounts receivable, timing of income tax payments, and
increase in accrued expenses, partially offset by an increase in inventories and
a decrease in accounts payable and accrued payroll.
Net cash used in investing activities for the six months ended April 30, 1998,
was $300,000 compared to $700,000 during the same period in 1997. The decrease
in net cash used in investing activities during the first half 1998 compared to
1997 is primarily the result of proceeds from sale of property and cash received
in business acquisitions, partially offset by additional equipment purchases.
Net cash provided by financing activities for the six months ended April 30,
1998, was $9.4 million compared to $1.0 million during the same period in 1997.
The increase in net cash provided by financing came from the proceeds from the
stock offering, net of issuance expenses, partially offset by the repayment of
notes payable and long-term debt.
Working capital on April 30, 1998, was $33.7 million, an increase of $14.8
million from October 31, 1997. The increase in working capital is primarily from
the proceeds of the stock offering. The proceeds from the stock offering are
invested in a money market account with an unaffiliated national financial
institution. It is management's intention to maintain these funds in a highly
liquid money market account for use for debt reduction, working capital and
general purposes, including the continuation of the Company's acquisition
program.
13
<PAGE>
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The Company has short-term credit facilities with banks permitting aggregate
borrowings of $3.8 million. The entire credit facilities were available at April
30, 1998.
The Company expects that the combination of funds available from working
capital, borrowings available under the Company's credit facilities (including
leases as required) 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.
YEAR 2000 ASSESSMENT
Management has initiated a Company-wide program to assess the need to modify or
replace portions of its information systems enabling the proper processing of
transactions relating to the Year 2000 and beyond. The Company primarily
utilizes purchased software and management believes that there are adequate
sources of Year 2000 compliant software available from vendors that will meet
its needs. Management continues to evaluate appropriate courses of corrective
action, including the cost/benefit of modifying existing software versus
purchasing new software and hardware. However, until a complete cost/benefit
analysis of the various alternatives available to the Company is completed, an
estimate of the total cost of its Year 2000 project cannot be made at this time.
Management does not expect the Year 2000 project to materially impact results of
operations based on the current status of the analysis.
The Year 2000 project is expected to be completed by mid-1999. Management
believes that with modifications to existing software and/or conversions to new
software, the Year 2000 problem will not pose significant operational problems
to the Company. However, if such modifications and/or conversions are not made,
or are not completed timely, this issue could have a material impact on the
Company's operations. The Company has initiated discussions with its significant
suppliers, large customers, and financial institutions to ensure that those
parties have appropriate plans to remediate their computer systems. While
management believes its planning efforts are adequate to address its Year 2000
concerns, there can be no guarantee that the systems of other companies on which
the Company's systems and operations rely will be converted on a timely basis
and will not have a material effect on the Company.
14
<PAGE>
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q, including without limitation
statements including the word "believes," "anticipates," "intends," "expects" or
words of similar import, constitute "forward-looking statements" within the
meaning of section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements of the Company expressed or
implied by such forward-looking statements. Such factors include, among others,
general economic conditions, changes in business strategy or development plans,
and other factors referenced in this Form 10-Q. Given these uncertainties,
readers are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the results of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On February 2, 1998, the Company acquired all the issued and outstanding common
shares of Rose City Press, a West Virginia corporation of Charleston, West
Virginia, in exchange for 75,722 shares of the Company's common stock valued at
$1,250,000. The Company issued the shares without registration under the
Securities Act of 1933 based on exemption from registration pursuant to Section
4(2) of said Act and Rule 505 promulgated thereunder, there being nine Rose City
Press shareholders/purchasers, and all other provisions of said Rule being
satisfied.
On May 18, 1998, the Company acquired all the issued and outstanding common
shares of Capitol Business Equipment, Inc., a West Virginia corporation, of
Charleston, West Virginia, in exchange for 72,202 shares of the Company's Common
Stock valued at $1,000,000. The Company issued the shares without registration
under the Securities Act of 1933 based on exemption from registration pursuant
to Section 4(2) of said Act and Rule 505 promulgated thereunder, there being one
Capitol Business Equipment, Inc. shareholder/purchaser, and all other provisions
of said Rule being satisfied.
On May 29, 1998, the Company acquired all the issued and outstanding common
shares of Thompson's of Morgantown, Inc. and Thompson's of Barbour County, Inc.,
both West Virginia corporations, of Morgantown, West Virginia, in exchange for
45,473 shares of the Company's common stock valued at $600,000. The Company
issued the shares without registration under the Securities Act of 1933 based on
exemption from registration pursuant to Section 4(2) of said Act and Rule 505
promulgated thereunder, there being a total of three shareholders of both
corporations, and all other provisions of said Rule being satisfied.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders held March 16, 1998, the following matters
were voted upon:
a. Fixing the number of directors at eight (8) and election of the
following nominees as directors, with votes "for" and "withheld," as
well as broker non-votes, as follows:
DIRECTOR VOTES "FOR" VOTES "WITHHELD" BROKER NON-VOTES
Robert H. Beymer 7,797,809 8,211 - 0 -
Philip E. Cline 7,799,754 6,266 - 0 -
Harley F. Mooney, Jr. 7,791,469 14,551 - 0 -
Todd L. Parchman 7,799,664 6,356 - 0 -
A. Michael Perry 7,798,243 7,777 - 0 -
Marshall T. Reynolds 7,799,754 6,266 - 0 -
Neal W. Scaggs 7,799,754 6,266 - 0 -
Glenn W. Wilcox, Sr. 7,799,754 6,266 - 0 -
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The exhibits listed on the Exhibit Index on page 18 of this Form 10-Q
are filed herewith.
b) The following reports on Form 8-K were filed during the quarter for
which this report is filed:
None.
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 12, 1998 /s/ Marshall T. Reynolds
--------------------------------------------
Marshall T. Reynolds
President and Chief Executive Officer
Date: June 12, 1998 /s/ David B. McClure
--------------------------------------------
David B. McClure
Vice President and Chief Financial Officer
17
<PAGE>
CHAMPION IN
DUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT PAGE TITLE
27 electronic Financial Data Schedule
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains amended summary financial information in columns 3
and 4 for the periods ended April 30, 1997 due to the reclassification of
certain amounts to conform to current year interim presentation. These
reclassifications had no effect on net income or shareholder equity.
</LEGEND>
<S> <C> <C> <C> <C>
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<INTEREST-EXPENSE> 436075 863490 451646 689716
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