<PAGE>
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 July 31, 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 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 X . No .
----- ------
9,673,835 shares of common stock of the Registrant were outstanding at July 31,
1998.
<PAGE>
Champion Industries, Inc.
<TABLE>
<CAPTION>
INDEX
Page No.
<S> <C>
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 ...........................................10
Part II. Other Information
Item 5. Other Information....................................................17
Item 6. Exhibits and Reports on Form 8-K.....................................17
Signatures............................................................................17
Exhibit Index.........................................................................18
</TABLE>
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS July 31, October 31,
1998 1997
----------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $12,746,175 $ 912,290
Accounts receivable, net of allowance of $1,393,000 and $1,140,000 17,827,638 19,075,180
Inventories 13,245,258 11,576,651
Property held for sale -- 300,000
Other current assets 474,677 283,642
Deferred income tax assets 981,619 981,619
----------- -------------
Total current assets 45,275,367 33,129,382
Property and equipment, at cost:
Land 984,889 784,889
Buildings and improvements 5,472,368 4,144,472
Machinery and equipment 28,519,929 22,852,103
Equipment under capital leases 2,137,400 5,720,594
Furniture and fixtures 1,995,609 1,684,275
Vehicles 2,362,421 1,914,362
----------- -------------
41,472,616 37,100,695
Less accumulated depreciation (16,570,645) (13,825,053)
----------- -------------
24,901,971 23,275,642
Cash surrender value of officer's life insurance 978,093 921,213
Goodwill, net of accumulated amortization 3,061,812 2,558,356
Other assets 375,705 461,120
----------- -------------
4,415,610 3,940,689
----------- -------------
Total assets $74,592,948 $60,345,713
----------- -------------
----------- -------------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets, continued
(Unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY July 31, October 31,
1998 1997
----------- -----------
<S> <C> <C>
Current liabilities:
Notes payable $ 350,000 $ 2,425,000
Accounts payable 2,769,559 3,657,365
Accrued payroll 1,666,224 2,052,130
Taxes accrued and withheld 562,303 571,477
Accrued income taxes 937,115 450,027
Accrued expenses 880,277 793,848
Current portion of long-term debt:
Notes payable 3,544,658 2,842,844
Capital lease obligations 369,091 1,401,519
----------- -----------
Total current liabilities 11,079,227 14,194,210
Long-term debt, net of current portion:
Notes payable 13,513,420 11,328,588
Capital lease obligations 1,114,730 3,827,368
Deferred income tax liability 3,800,331 3,589,889
Other liabilities 780,788 555,886
----------- -----------
Total liabilities 30,288,496 33,495,941
Shareholders' equity:
Common stock, $1 par value, 20,000,000 shares authorized;
9,673,835 and 8,384,930 shares issued and outstanding 9,673,835 8,384,930
Additional paid-in capital 22,103,375 7,450,328
Retained earnings 12,527,242 11,014,514
----------- -----------
Total shareholders' equity 44,304,452 26,849,772
----------- -----------
Total liabilities and shareholders' equity $74,592,948 $60,345,713
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Champion Industries, Inc. and Subsidiaries
Consolidated Income Statements
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
1998 1997 1998 1997
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Printing $22,912,434 $22,359,548 $70,315,530 $62,151,457
Office products and office furniture 7,852,973 5,094,831 20,420,558 15,246,572
------------------ ------------------ ---------------- ---------------
Total revenues 30,765,407 27,454,379 90,736,088 77,398,029
Cost of sales:
Printing 16,236,711 15,116,288 49,655,556 42,648,401
Office products and office furniture 5,360,134 3,401,858 13,789,832 9,964,486
------------------ ------------------ ---------------- ---------------
Total cost of sales 21,596,845 18,518,146 63,445,388 52,612,887
------------------ ------------------ ---------------- ---------------
Gross profit 9,168,562 8,936,233 27,290,700 24,785,142
Selling, general and administrative expenses 7,222,726 7,262,929 21,550,530 19,730,338
------------------ ------------------ ---------------- ---------------
Income from operations 1,945,836 1,673,304 5,740,170 5,054,804
Other income (expense):
Interest income 107,148 7,476 149,074 20,688
Interest expense (372,062) (451,997) (1,235,551) (1,141,713)
Other 35,033 109,339 196,024 583,511
------------------ ------------------ ---------------- ---------------
(229,881) (335,182) (890,453) (537,514)
------------------ ------------------ ---------------- ---------------
Income before income taxes 1,715,955 1,338,122 4,849,717 4,517,290
Income taxes (695,323) (557,481) (2,010,845) (1,896,341)
------------------ ------------------ ---------------- ---------------
Net income $ 1,020,632 $ 780,641 $ 2,838,872 $ 2,620,949
------------------ ------------------ ---------------- ---------------
------------------ ------------------ ---------------- ---------------
Earnings per share
Basic $0.11 $0.09 $0.32 $0.31
------------------ ------------------ ---------------- ---------------
------------------ ------------------ ---------------- ---------------
Diluted 0.11 0.09 0.32 0.31
------------------ ------------------ ---------------- ---------------
------------------ ------------------ ---------------- ---------------
Weighted average shares outstanding:
Basic 9,647,000 8,384,000 8,952,000 8,383,000
------------------ ------------------ ---------------- ---------------
------------------ ------------------ ---------------- ---------------
Diluted 9,674,000 8,437,000 8,990,000 8,439,000
------------------ ------------------ ---------------- ---------------
------------------ ------------------ ---------------- ---------------
-------------------------------------------------------------------------------
Dividends per share: $0.05 $0.05 $0.15 $0.15
------------------ ------------------ ---------------- ---------------
------------------ ------------------ ---------------- ---------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,838,872 $ 2,620,949
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation, amortization and accretion 2,627,447 2,839,732
Gain on sales of assets (50,027) --
Deferred gain on sale of assets -- (330,443)
Other 49,220 --
Changes in assets and liabilities:
Accounts receivable 3,034,827 (1,570,354)
Inventories (974,375) (1,321,236)
Other current assets (160,399) (296,875)
Accounts payable (1,445,131) (344,098)
Accrued payroll (503,481) 1,619,339
Taxes accrued and withheld (94,424) (240,388)
Accrued income taxes 526,264 (439,042)
Accrued expenses (1,004,890) (2,606,280)
------------ ------------
Net cash provided by (used in) operations 4,843,903 (68,696)
Cash flows from investing activities:
Purchases of property and equipment (2,467,140) (1,696,959)
Proceeds from sales of property 427,645 --
Business acquisitions, net of cash received 1,159,356 305,000
Other assets 89,385 182,142
------------ ------------
Net cash used in investing activities (790,754) (1,209,817)
Cash flows from financing activities:
Net (payments) borrowings of notes payable (2,408,757) 1,100,000
Proceeds from long-term debt 1,781,507 1,614,355
Principal payments on long-term debt (4,449,531) (871,301)
Proceeds from stock offering, net of issuance expenses 14,134,544 --
Proceeds from exercise of stock options 49,117 13,750
Dividends paid (1,326,144) (1,152,233)
------------ ------------
Net cash provided by financing activities 7,780,736 704,571
------------ ------------
Net increase (decrease) in cash 11,833,885 (573,942)
Cash and cash equivalents, beginning of period 912,290 2,460,879
------------ ------------
Cash and cash equivalents, end of period $ 12,746,175 $ 1,886,937
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
July 31, 1998
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, Rose City Press, Capitol Business
Equipment, Inc. d.b.a. Capitol Business Interiors, and Thompson's of Morgantown,
Inc.
2. 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 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 27,000 and 53,000 for the three months ended July
31, 1998 and 1997, and 38,000 and 56,000 for the nine months ended July 31, 1998
and 1997.
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.
6
<PAGE>
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), continued
3. Inventories (continued)
Inventories consisted of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1998 1997
---------------- ------------------
<S> <C> <C>
Printing:
Raw materials $ 3,277,992 $ 3,030,425
Work in process 3,101,508 2,867,270
Finished goods 3,035,746 2,806,475
Office products and office furniture 3,830,012 2,872,481
---------------- ------------------
$13,245,258 $11,576,651
---------------- ------------------
---------------- ------------------
</TABLE>
4. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1998 1997
----------- -----------
<S> <C> <C>
Unsecured term note payable $10,215,932 $11,600,431
Installment notes payable to banks 6,615,012 2,122,215
Unsecured installment notes payable to banks 227,134 448,786
Capital lease obligations 1,483,821 5,228,887
----------- -----------
18,541,899 19,400,319
Less current portion 3,913,749 4,244,363
----------- -----------
Long-term debt, net of current portion $14,628,150 $15,155,956
----------- -----------
----------- -----------
</TABLE>
The unsecured term note agreement contains restrictive financial covenants
requiring the Company to maintain certain financial ratios.
5. 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 September
25, 1998, to stockholders of record on September 4, 1998.
7
<PAGE>
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), continued
6. 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 nine months ended July 31, 1997, assuming the Interform
acquisition had been consummated at the beginning of the period.
<TABLE>
<CAPTION>
Nine Months Ended
July 31, 1997
--------------------------
<S> <C>
Revenues $ 82,723,000
Net income $ 2,515,000
Diluted earnings per share $ 0.30
Weighted average shares outstanding (Diluted) 8,439,000
</TABLE>
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.
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 Capitol and Thompson transactions were accounted for under the pooling of
interests method. However, prior period financial statements were not restated
due to the immaterial effect on Champion's consolidated financial statements.
Accordingly, Capitol's and Thompson's operations are included in these
consolidated financial statements since their acquisition date.
Pro forma financial information related to these acquisitions has not been
presented because such information would not be material to the Company's
consolidated financial statements reported herein.
8
<PAGE>
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), continued
7. 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.
9
<PAGE>
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 into new 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.
10
<PAGE>
Champion Industries, Inc. and Subsidiaries
Item 2. 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.
<TABLE>
<CAPTION>
Percentage of Total Revenues
Three Months Ended Nine Months Ended
July 31, July 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Printing 74.5% 81.4% 77.5% 80.3%
Office products and office furniture 25.5 18.6 22.5 19.7
---------- ---------- ---------- ----------
Total revenues 100.0 100.0 100.0 100.0
Cost of sales:
Printing 52.8 55.1 54.7 55.1
Office products and office furniture 17.4 12.4 15.2 12.9
---------- ---------- ---------- ----------
Total cost of sales 70.2 67.5 69.9 68.0
---------- ---------- ---------- ----------
Gross profit 29.8 32.5 30.1 32.0
Selling, general and administrative expenses
23.5 26.4 23.8 25.5
---------- ---------- ---------- ----------
Income from operations 6.3 6.1 6.3 6.5
Interest income .4 - .2 -
Interest expense (1.2) (1.6) (1.4) (1.5)
Other income .1 .4 .2 .8
---------- ---------- ---------- ----------
Income before taxes 5.6 4.9 5.3 5.8
Income tax expense 2.3 2.1 2.2 2.4
---------- ---------- ---------- ----------
Net income 3.3% 2.8% 3.1% 3.4%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Three Months Ended July 31, 1998 Compared to Three Months Ended July 31, 1997
Revenues
Total revenues increased 12.1% in the third quarter 1998 to $30.8 million
from $27.5 million in the third quarter 1997. Printing revenue increased 2.5%
in the third quarter 1998 to $22.9 million from $22.4 million in the third
quarter 1997. Office products and office furniture revenue increased 54.1% in
the third quarter 1998 to $7.9 million from $5.1 million in the third 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 (revenue impact of approximately $1.2 million),
Capitol Business Interiors of Charleston, West Virginia in May 1998 (revenue
impact of approximately $1.3 million), and Thompson's of Morgantown in May
1998 (revenue impact of approximately $0.2 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)
introduced an electronic catalog called "Champ" in early 1998. This tool
allows Stationers to compete more effectively by giving our customers another
11
<PAGE>
Champion Industries, Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Continued)
choice of how they can shop and order products. Within the next few months, this
catalog will also reside on the Company's website, which is under development
and should be on-line by early fall, making it even easier to order office
products and office furniture.
Cost of Sales
Total cost of sales increased 16.6% in the third quarter 1998 to $21.6 million
from $18.5 million in the third quarter 1997. Printing cost of sales increased
7.4% in the third quarter 1998 to $16.2 million from $15.1 million in the third
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 and/or enhance the sales force to grow revenues. Office products and
office furniture cost of sales increased 57.6% in the third quarter 1998 to $5.4
million from $3.4 million in the third quarter 1997, primarily due to the above
noted acquisitions and internally generated sales volume.
Operating Expenses
In the third quarter of 1998, selling, general and administrative expenses
decreased as a percentage of sales to 23.5% from 26.5% reported in the third
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 16.3% in the third quarter 1998 to $1.9 million
from $1.7 million in the third quarter 1997. This increase is primarily the
result of the Company controlling selling, general and administrative expenses.
Interest income is up $100,000 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 $80,000 as a result of normal
debt repayments and the use of a portion of the net stock proceeds to pay-off
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 40.5% for the third quarter 1998,
down slightly from 41.7% in the third quarter 1997.
Net Income
Net income for the third quarter 1998 increased 30.7% to $1.02 million from $.78
million in the third quarter 1997. Basic and diluted earnings per share for the
three months ended July 31, 1998 and 1997, were $0.11 and $0.09.
12
<PAGE>
Champion Industries, Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Continued)
Nine Months Ended July 31, 1998 Compared to Nine Months Ended July 31, 1997
Revenues
Total revenues increased 17.2% in the nine months ended July 31, 1998 to $90.7
million from $77.4 million in the same period of 1997. Printing revenue
increased 13.1% in the first three quarters of 1998 to $70.3 million from $62.2
million in the same period of 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 nine months
ended July 31, 1997, included only seven 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 33.9% in the nine months ended July 31, 1998 to $20.4 million
from $15.2 million in 1997. The revenue increases in office products and office
furniture were achieved primarily through the above noted acquisitions.
Cost of Sales
Total cost of sales increased 20.6% in 1998 to $63.4 million from $52.6 million
in 1997. Printing cost of sales increased 16.4% in 1998 to $49.7 million from
$42.6 million in 1997, primarily due to the increase in sales volume. Printing
cost of sales increased as a percent of printing revenue from 68.6% in 1997, to
70.6% in 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 38.4% in 1998 to $13.8
million from $10.0 million in 1997, due primarily to the acquisitions noted
above 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 65.4% in 1997 to 67.5% in 1998, primarily as a result of
the lower margins contributed by the acquisitions.
Operating Expenses
Selling, general and administrative expenses as a percentage of sales decreased
in 1998 to 23.8% from 25.5% in 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 13.6% in the nine months ended July 31, 1998 to
$5.7 million from $5.1 million in 1997. Interest income was up $128,000 as a
result of investing the net proceeds from the stock offering in a money market
account since April 1998. Interest expense on a comparative basis increased
$94,000 or 8.2% as a result of the additional debt required to fund operations
and acquire equipment during the first three quarters of 1998. Other income
decreased $387,000 in 1998 compared to the same period in 1997 primarily as a
result of the recognition of a nonrecurring deferred gain of $330,000 in 1997.
13
<PAGE>
Champion Industries, Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Continued)
Income Taxes
The Company's effective income tax rate approximated 42% in 1998 and 1997 which
represents the combined federal and state, net of federal income tax benefit,
statutory income tax rate.
Net Income
Net income for the nine months ended July 31, 1998 increased 8.3% to $2.84
million from $2.62 million in the comparative period of 1997. After adjusting
for the nonrecurring gain in 1997, net core earnings increased by $406,000 or
16.7% from $2,433,000 in 1997 to $2,839,000 in 1998. Basic and diluted earnings
per share for the nine months ended July 31, 1998, were $0.32 compared to $0.31
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 third 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 nine months ended July 31, 1998, was
$4.8 million compared to net cash used in operations during the same period in
1997 of $69,000. The 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 nine months ended July 31, 1998,
was $800,000 compared to $1,200,000 during the same period in 1997. The decrease
in net cash used in investing activities is primarily the result of proceeds
from sales of property and cash received in business acquisitions, partially
offset by additional equipment purchases.
Net cash provided by financing activities for the nine months ended July 31,
1998, was $7.8 million compared to $0.8 million during the same period in 1997.
The increase in net cash provided by financing activities 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 July 31, 1998, was $34.2 million, an increase of $15.3
million from October 31, 1997. The increase in working capital is primarily from
the net proceeds of the stock offering. The
14
<PAGE>
Champion Industries, Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Continued)
remaining 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.
The Company has short-term credit facilities with banks permitting aggregate
borrowings of $3.8 million. Approximately $3.4 million of the credit facilities
were available at July 31, 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 its information system
needs to effectively manage the Company and ensure processing of transactions
relating to the Year 2000 and beyond. Currently, the Company primarily utilizes
purchased software, some of which is not Year 2000 compliant and will need to be
updated prior to January 1, 2000. Management is in the final stages of
evaluating the acquisition of an enterprise-wide software package, including the
required hardware, that is Year 2000 compliant and will provide enhanced
operating information. This new system will be implemented company-wide and
encompass sales, production, and financial reporting. It is anticipated that
this new system will cost approximately $800,000 and it will be amortized
against income over a period of five years. It is the opinion of management that
the cost of converting to a new information system and the annual amortization
thereof will not materially impact results of operations or financial condition.
The conversion to a new system is expected to begin in October 1998 and be
completed by December 31, 1999. Management will be working very closely with the
software vendor of choice and consultants, if required, to ensure timely
conversion. However, if such conversions are not completed timely, the Year 2000
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
15
<PAGE>
Champion Industries, Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Continued)
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.
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.
16
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
The following information is included in response to amendments to Securities
and Exchange Commission Rule 14a-4, and relates to the annual meeting of
shareholders to be held on March 15, 1999:
If a shareholder has not sought inclusion of a proposal in the Company's
proxy statement and does not notify the Company in writing of a proposal to
be raised at the annual meeting, received by the Company on or before
January 4, 1999, the proxies appointed by the Board of Directors are
entitled to exercise their discretionary voting authority conferred by the
proxy if such proposal is raised at the annual meeting without any
discussion of such proposal in the proxy statement.
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: September 11, 1998 /s/ Marshall T. Reynolds
-------------------------------------------
Marshall T. Reynolds
President and Chief Executive Officer
Date: September 11, 1998 /s/ David B. McClure
-------------------------------------------
David B. McClure
Vice President and Chief Financial Officer
17
<PAGE>
Champion Industries, Inc. and Subsidiaries
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Page Title
<S> <C> <C>
27 electronic Financial Data Schedule
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS 3-MOS 9-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1998 OCT-31-1997 OCT-31-1997
<PERIOD-START> MAY-01-1998 NOV-01-1997 MAY-01-1997 NOV-01-1997
<PERIOD-END> JUL-31-1998 JUL-31-1998 JUL-31-1997 JUL-31-1997
<CASH> 12746175 12746175 912290 912290
<SECURITIES> 0 0 0 0
<RECEIVABLES> 19220638 19220638 20215180 20215180
<ALLOWANCES> 1393000 1393000 1140000 1140000
<INVENTORY> 13245258 13245258 11576651 11576651
<CURRENT-ASSETS> 45275367 45275367 33129382 33129382
<PP&E> 41472616 41472616 37100695 37100695
<DEPRECIATION> 16570645 16570645 13825053 13825053
<TOTAL-ASSETS> 74592948 74592948 60345713 60345713
<CURRENT-LIABILITIES> 11079227 11079227 14194210 14194210
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 9673835 9673835 8384930 8384930
<OTHER-SE> 34630617 34630617 18464842 18464842
<TOTAL-LIABILITY-AND-EQUITY> 74592948 74592948 60345713 60346713
<SALES> 30765407 90736088 27454379 77398029
<TOTAL-REVENUES> 30765407 90736088 27454379 77398029
<CGS> 21596845 63445388 18518146 52612887
<TOTAL-COSTS> 21596845 63445388 18518146 52612877
<OTHER-EXPENSES> 7222726 21550530 7262929 19730338
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 372062 1235551 451997 1141713
<INCOME-PRETAX> 1715955 4849717 1338122 4517290
<INCOME-TAX> 695323 2010845 557481 1896341
<INCOME-CONTINUING> 1715955 4849717 1338122 4517290
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 1020632 2838872 780641 2620949
<EPS-PRIMARY> 0.11 0.32 0.09 0.31
<EPS-DILUTED> 0.11 0.32 0.09 0.31
</TABLE>
