<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 April 30, 1999 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.)
Route 2
Kyle Industrial Park
Industrial Lane
P. O. Box 2968
Huntington, West Virginia 25728
(Address of principal executives 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 X No .
--- ---
9,713,913 shares of common stock of the Registrant were outstanding at
April 30, 1999.
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CHAMPION INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <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 .......................................................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
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS APRIL 30, OCTOBER 31,
1999 1998
------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,374,822 $ 9,773,193
Accounts receivable, net of allowance of $1,414,000 and $1,329,000 19,794,357 21,234,593
Inventories 13,590,993 12,760,204
Other current assets 992,753 478,306
Deferred income tax assets 935,004 935,004
------------------------------------
Total current assets 42,687,929 45,181,300
Property and equipment, at cost:
Land 984,889 984,889
Buildings and improvements 6,002,703 5,564,062
Machinery and equipment 31,360,148 29,195,512
Equipment under capital leases 1,600,000 2,137,400
Furniture and fixtures 2,079,502 1,943,399
Vehicles 2,550,318 2,438,462
------------------------------------
44,577,560 42,263,724
Less accumulated depreciation (19,009,202) (17,335,378)
------------------------------------
25,568,358 24,928,346
Cash surrender value of officers' life insurance 945,969 935,169
Goodwill, net of accumulated amortization 2,948,504 3,026,106
Other assets 386,786 434,407
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4,281,259 4,395,682
------------------------------------
Total assets $72,537,546 $74,505,328
------------------------------------
------------------------------------
</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 APRIL 30, OCTOBER 31,
1999 1998
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $2,443,770 $3,175,743
Accrued payroll 1,683,896 1,541,586
Taxes accrued and withheld 682,980 597,886
Accrued income taxes 292,579 175,202
Accrued expenses 515,606 716,582
Current portion of long-term debt:
Notes payable 3,529,978 3,477,473
Capital lease obligations 326,682 388,954
------------------------------------
Total current liabilities 9,475,491 10,073,426
Long-term debt, net of current portion:
Notes payable 10,743,683 12,966,038
Capital lease obligations 849,578 1,026,517
Deferred income tax liability 4,341,150 4,341,150
Other liabilities 797,807 788,462
------------------------------------
Total liabilities 26,207,709 29,195,593
Shareholders' equity:
Common stock, $1 par value, 20,000,000 shares authorized;
9,713,913 shares issued and outstanding 9,713,913 9,713,913
Additional paid-in capital 22,242,047 22,242,047
Retained earnings 14,373,877 13,353,775
------------------------------------
Total shareholders' equity 46,329,837 45,309,735
------------------------------------
Total liabilities and shareholders' equity $72,537,546 $74,505,328
------------------------------------
------------------------------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Revenues:
Printing $24,016,130 $24,292,336 $45,927,863 $48,248,299
Office products and office furniture 6,858,145 6,889,070 14,176,878 12,567,585
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Total revenues 30,874,275 31,181,406 60,104,741 60,815,884
Cost of sales:
Printing 16,598,910 16,755,577 32,305,283 34,264,048
Office products and office furniture 4,467,978 4,670,561 9,370,786 8,429,698
---------------------------------------------------------------------------
Total cost of sales 21,066,888 21,426,138 41,676,069 42,693,746
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Gross profit 9,807,387 9,755,268 18,428,672 18,122,138
Selling, general and administrative expenses
7,698,332 7,665,052 14,590,831 14,327,804
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Income from operations 2,109,055 2,090,216 3,837,841 3,794,334
Other income (expense):
Interest income 32,828 41,769 90,996 41,926
Interest expense (306,610) (436,075) (674,493) (863,490)
Other 39,352 50,784 66,687 160,992
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(234,430) (343,522) (516,810) (660,572)
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Income before income taxes 1,874,625 1,746,694 3,321,031 3,133,762
Income taxes (738,299) (725,831) (1,329,538) (1,315,522)
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Net income $ 1,136,326 $ 1,020,863 $1,991,493 $ 1,818,240
---------------------------------------------------------------------------
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Earnings per share
Basic $0.12 $0.12 $0.21 $0.21
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Diluted 0.12 0.12 0.21 0.21
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Weighted average shares outstanding:
---------------------------------------------------------------------------
Basic 9,714,000 8,819,000 9,714,000 8,599,000
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Diluted 9,714,000 8,856,000 9,714,000 8,643,000
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Dividends per share $0.05 $0.05 $0.10 $0.10
---------------------------------------------------------------------------
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</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL 30,
1999 1998
---------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,991,493 $ 1,818,240
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 1,892,738 1,755,649
Loss (gain) on sales of assets 2,148 (7,396)
Other (10,800) 42,270
Changes in assets and liabilities:
Accounts receivable 1,440,236 1,901,477
Inventories (830,789) (1,143,351)
Other current assets (514,447) (174,471)
Accounts payable (731,973) (1,191,019)
Accrued payroll 142,311 (305,102)
Taxes accrued and withheld 85,094 61,321
Accrued income taxes 117,377 858,007
Accrued expenses (200,976) (608,122)
---------------------------------------
Net cash provided by operations 3,382,412 3,007,503
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,244,996) (1,640,548)
Proceeds from sales of property 64,804 339,000
Business acquisitions, net of cash received -- 985,123
Other assets 43,578 47,545
---------------------------------------
Net cash used in investing activities (2,136,614) (268,880)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on notes payable -- (2,425,000)
Proceeds from term debt and leases 45,615 1,781,507
Principal payments on long-term debt (2,718,393) (3,306,028)
Proceeds from stock offering, net of issuance expenses -- 14,134,544
Proceeds from exercise of stock options -- 49,117
Dividends paid (971,391) (842,455)
---------------------------------------
Net cash (used in) provided by financing activities (3,644,169) 9,391,685
---------------------------------------
Net (decrease) increase in cash (2,398,371) 12,130,308
Cash and cash equivalents, beginning of period 9,773,193 912,290
---------------------------------------
Cash and cash equivalents, end of period $7,374,822 $13,042,598
---------------------------------------
---------------------------------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 1999
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, 1998, and related notes thereto contained in the Champion
Industries, Inc.'s Form 10-K dated January 29, 1999. 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
Basic earnings per share is computed by dividing net income by the weighted
average shares of common stock outstanding for the period and excludes any
dilutive effects of stock options. Diluted earnings per share is computed by
dividing net income by the weighted average shares of common stock outstanding
for the period plus the shares that would be outstanding assuming the exercise
of dilutive stock options. The effect of dilutive stock options increased
weighted average shares outstanding by 37,000 for the three months ended April
30, 1998, and 44,000 for the six months ended April 30, 1998. Stock options
outstanding for the three months and six months ended April 30, 1999, were
anti-dilutive.
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>
April 30, October 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
Printing:
Raw materials $ 3,406,454 $ 3,117,249
Work in process 2,307,950 2,112,007
Finished goods 3,957,420 3,621,439
Office products and office furniture 3,919,169 3,909,509
-------------------- --------------------
$13,590,993 $12,760,204
-------------------- --------------------
-------------------- --------------------
</TABLE>
4. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
APRIL 30, October 31,
1999 1998
-------------------- -------------------
<S> <C> <C>
Unsecured term note payable $11,605,887 $13,593,658
Installment notes payable to banks 1,995,716 2,141,994
Unsecured installment notes payable to banks 3,283 13,133
Mortgage note payable to a bank 668,775 694,726
Capital lease obligations 1,176,260 1,415,471
-----------------------------------------
15,449,921 17,858,982
Less current portion 3,856,660 3,866,427
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Long-term debt, net of current portion $11,593,261 $13,992,555
-----------------------------------------
-----------------------------------------
</TABLE>
The Company has an unsecured revolving line of credit with a bank for borrowings
to a maximum of $10,000,000 with interest payable monthly at an interest rate
approximating the prime rate. This line of credit expires in April 2002 and
contains certain restrictive financial covenants. There were no borrowings
outstanding under this facility at April 30, 1999.
5. SHAREHOLDERS' EQUITY
In April 1998, the Company completed an 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
7
<PAGE>
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
offering approximated $14.1 million. The net proceeds from the offering have
been and will continue to be used by the Company for debt reduction, working
capital and general corporate purposes.
The Company declared a dividend of five cents per share to be paid on June 28,
1999, to stockholders of record on June 10, 1999.
6. ACQUISITIONS
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
materially different than that reported herein.
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 materially different than that
reported herein.
8
<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 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 consolidated financial statements, results of
operations, and cash flows could be materially impacted depending on the timing
and magnitude of acquisitions.
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
<PAGE>
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.
<TABLE>
<CAPTION>
Percentage of Total Revenues
Three Months Ended Six Months Ended
APRIL 30, APRIL 30,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Revenues:
Printing 77.8% 77.9% 76.4% 79.3%
Office products and office furniture 22.2 22.1 23.6 20.7
-------------------------------------------------------------------------
Total revenues 100.0 100.0 100.0 100.0
Cost of sales:
Printing 53.8 53.7 53.7 56.3
Office products and office furniture 14.5 15.0 15.6 13.9
-------------------------------------------------------------------------
Total cost of sales 68.3 68.7 69.3 70.2
-------------------------------------------------------------------------
Gross profit 31.7 31.3 30.7 29.8
Selling, general and administrative expenses
24.9 24.6 24.3 23.6
-------------------------------------------------------------------------
Income from operations 6.8 6.7 6.4 6.2
Interest income 0.1 0.1 0.1 0.1
Interest (expense) (1.0) (1.4) (1.1) (1.4)
Other income 0.1 0.2 0.1 0.3
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Income before taxes 6.0 5.6 5.5 5.2
Income tax expense (2.3) (2.3) (2.2) (2.2)
-------------------------------------------------------------------------
Net income 3.7% 3.3% 3.3% 3.0%
-------------------------------------------------------------------------
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</TABLE>
THREE MONTHS ENDED APRIL 30, 1999 COMPARED TO THREE MONTHS ENDED APRIL 30, 1998
REVENUES
Total revenues declined 1.0% in the second quarter of 1999 compared to the same
period in 1998 from $31.2 million to $30.9 million. Printing revenue decreased
1.1% in the second quarter 1999 to $24.0 million from $24.3 million in the
second quarter of 1998. Office products and office furniture revenue remained
relatively constant at $6.9 million in the second quarter of 1999 compared to
1998. The acquisitions of Capitol and Thompson in May 1998 contributed
approximately $1.32 million in office products and office furniture revenue in
the second quarter of 1999 compared to 1998. Revenue in the core office products
and office furniture divisions declined $1.35 million from 1998 to 1999 due to a
soft West Virginia market and the timing of certain large office furniture sales
which are now anticipated to occur in the third and fourth quarters of 1999.
10
<PAGE>
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
COST OF SALES
Total cost of sales decreased 1.7% in the second quarter of 1999 to $21.1
million from $21.4 million in the second quarter of 1998. Printing cost of sales
decreased 0.9% in the second quarter of 1999 to $16.6 million from $16.8 million
in the second quarter of 1998, due primarily to the decline in printing sales
noted above. Office products and office furniture cost of sales decreased 4.3%
in the second quarter of 1999 to $4.5 million from $4.7 million in the second
quarter of 1998. The reduction in office products and office furniture cost of
sales is directly attributable to the lower sales discussed above.
OPERATING EXPENSES
In the second quarter of 1999, selling, general and administrative expenses
increased slightly as a percentage of sales to 24.9% from 24.6% reported in the
second quarter of 1998 primarily due to the decline in revenues. Total selling,
general and administrative expenses remained constant at $7.7 million for the
three months ended April 30, 1999 and 1998.
INCOME FROM OPERATIONS AND OTHER INCOME AND EXPENSES
Income from operations increased 0.9% in the second quarter of 1999 to $2.11
million from $2.09 million in the second quarter of 1998. This increase is
primarily the result of the improved margins experienced in the office products
and office furniture division during the second quarter of 1999. Interest income
declined $9,000 as a result of lower investable funds. These funds have been
used to accelerate debt payments, acquire equipment and fund other operational
needs. Interest expense on a comparative basis decreased $130,000 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 39.4% for the second quarter of
1999, down from 41.6% in the second quarter 1998 as a result of tax attributes
associated with acquired businesses. 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 1999 increased 11.3% to $1.14 million from
$1.02 million in the second quarter of 1998 due to the improved operating
margins discussed above. Basic and diluted earnings per share for the three
months ended April 30, 1999 and 1998, were $0.12.
SIX MONTHS ENDED APRIL 30, 1999 COMPARED TO SIX MONTHS ENDED APRIL 30, 1998
REVENUES
Total revenues declined 1.2% in the first six months of 1999 compared to the
same period in 1998 to $60.1 million from $60.8 million. Printing revenue
decreased 4.8% in the six month period ended April
11
<PAGE>
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
30, 1999 to $45.9 million from $48.2 million in the same period of 1998. Office
products and office furniture revenue increased 12.8% from the six month period
ended April 30, 1999 compared to the same period in 1998. This growth was
primarily from the Capitol and Thompson acquisitions, which contributed
approximately $3 million in revenue to the first six months of 1999 versus the
same period in 1998. Core office products and office furniture revenue declined
$1.4 million during the same period. This decline occurred primarily in the
second quarter of 1999 as discussed above.
COST OF SALES
Total cost of sales decreased 2.4% in the six months ended April 30, 1999 to
$41.7 million from $42.7 million in the six months ended April 30, 1998.
Printing cost of sales decreased 5.7% in the six months ended April 30, 1999 to
$32.3 million from $34.3 million in the six months ended April 30, 1998, due
primarily to the decline in printing sales noted above. Office products and
office furniture cost of sales increased 11.2% in the six months ended April 30,
1999 to $9.4 million from $8.4 million in the six months ended April 30, 1998.
The increase in office products and office furniture cost of sales is primarily
attributable to the acquisitions of Capitol and Thompson.
OPERATING EXPENSES
During the six months ended April 30, 1999 compared to the same period in 1998,
selling, general and administrative expenses increased slightly as a percentage
of sales to 24.3% from 23.6% primarily due to the decline in revenues.
INCOME FROM OPERATIONS AND OTHER INCOME AND EXPENSES
Income from operations increased 1.1% in the six month period ended April 30,
1999 to $3.84 million from $3.79 million in the same period of 1998. This
increase is primarily the result of the improved margins experienced in both
operating segments. Interest income increased $49,000 as a result of investing
the remaining proceeds from the Company's April 1998 common stock offering in a
money market account. Interest expense on a comparative basis decreased $189,000
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. Other income decreased from $161,000 in
the first six months of 1999 to $67,000 in the same period of 1998 due primarily
to a one-time gain from the disposal of assets in the first six months of 1998.
INCOME TAXES
The Company's effective income tax rate was 40.0% for the six months ended April
30, 1999, down from 42.0% in the same period of 1998 as a result of tax
attributes associated with acquired businesses. The effective income tax rate
approximates the combined federal and state, net of federal benefit, statutory
income tax rate.
12
<PAGE>
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 six months of 1999 increased 9.5% to $1.99 million from
$1.82 million in the same period of 1998 due to the improved operating margins
discussed above. Basic and diluted earnings per share for the six months ended
April 30, 1999 and 1998, were $0.21.
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, 1999, was
$3.4 million compared to $3.0 million during the same period in 1998. This
improvement in net cash from operations is due primarily to the increase in net
income and depreciation and amortization.
Net cash used in investing activities for the six months ended April 30, 1999,
was $2.1 million compared to $300,000 during the same period in 1998. The
increase in net cash used in investing activities during the first half of 1999
compared to 1998 is primarily the result of additional equipment purchases and
the decrease in proceeds from sales of property and acquisition activity.
Net cash used in financing activities for the six months ended April 30, 1999,
was $3.7 million compared to cash provided by financing activities of $9.4
million during the same period in 1998. This change is primarily due to the
proceeds from the stock offering included in the cash flows provided by
financing activities during the six months ended April 30, 1998.
Working capital on April 30, 1999, was $33.2 million, a decrease of $1.9 million
from October 31, 1998. The decrease in working capital was primarily from the
use of available funds to reduce higher cost long-term debt assumed in
acquisitions and acquire property and equipment. Management believes that
working capital and operating ratios remain at acceptable levels.
The Company expects that the combination of funds available from working
capital, borrowings available under the Company's credit facility and
anticipated cash flows from operations, will provide
13
<PAGE>
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
INFORMATION SYSTEMS AND YEAR 2000 ASSESSMENT UPDATE
Management has made the decision to purchase and implement a new information
system for the printing divisions to maintain their competitiveness, enhance
operating and administrative efficiencies, and enable the proper processing of
transactions relating to the Year 2000 and beyond. This new system is an
enterprise-wide system encompassing sales, purchasing, production, and financial
reporting. Implementation began in April 1999 and will take approximately two
years. There are four printing systems currently in use that are not Year 2000
compliant. These systems will be converted first and are expected to be
operational by September 30, 1999. In the event that these non-compliant systems
cannot be converted to the new system by December 31, 1999, the current systems
can be converted to the Company's core printing software, which is Year 2000
compliant, within a short timeframe of one to two months at minimal cost. It is
anticipated that the new system will cost approximately $800,000 ($500,000
related to software and training and $300,000 of hardware costs). Approximately
$600,000 of these estimated costs will be capitalized and amortized against
income over a period of five years. It is the opinion of management that the
cost of converting the printing divisions to a new information system and the
annual amortization thereof will not materially impact results of operations or
financial condition. There are a number of risks in implementing a new system,
including the complexity of the conversion process and the new systems
themselves, the converting of business data from the old system to the new
system, and the need for comprehensive employee training on the new information
systems. There can be no assurance that this process will not have a material
adverse effect on the Company's business and operating results.
Based on its assessment of the information currently available, management has
determined that the office products and office furniture division information
system is Year 2000 compliant. Once the new information system is implemented in
all of the printing divisions, a program will be initiated to assess the
benefits of having all operating segments under one financial management
information system.
In addition, management has reviewed and is continuing to review its business
risks associated with non-critical systems. Based on the information currently
available, most of these systems are Year 2000
14
<PAGE>
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
compliant. The systems that are not compliant will be replaced. The new systems
are expected to be operational by July 31, 1999. The related costs to replace
these systems are not expected to be material to the operating results or
financial position of the Company.
The Company is also in the process of obtaining assurances from its significant
suppliers, large customers, financial institutions, and others that those
parties are Year 2000 compliant or have appropriate plans to remediate Year 2000
issues. The Company has received correspondence from most major third parties
and it appears they are taking reasonable steps to remedy Year 2000 issues. The
Company continues to assess the extent to which its operations are vulnerable
should those organizations fail to properly remediate their computer systems.
While management believes its 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 an adverse effect on the Company's business, operating results
or financial position.
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
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders held March 15, 1999, 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:
<TABLE>
<CAPTION>
DIRECTOR VOTES "FOR" VOTES "WITHHELD" BROKER NON-VOTES
<S> <C> <C> <C>
Robert H. Beymer 8,908,160 136,825 -0-
Philip E. Cline 8,912,355 132,630 -0-
Harley F. Mooney, Jr. 8,904,695 140,290 -0-
Todd L. Parchman 8,912,980 132,005 -0-
A. Michael Perry 8,911,535 133,450 -0-
Marshall T. Reynolds 8,908,340 136,645 -0-
Neal W. Scaggs 8,912,249 132,736 -0-
Glenn W. Wilcox, Sr. 8,912,980 132,005 -0-
</TABLE>
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.
16
<PAGE>
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 11, 1999 /s/ Marshall T. Reynolds
-----------------------------------------------
Marshall T. Reynolds
President and Chief Executive Officer
Date: June 11, 1999 /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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> APR-30-1999
<CASH> 7374822
<SECURITIES> 0
<RECEIVABLES> 21208357
<ALLOWANCES> 1414000
<INVENTORY> 13590933
<CURRENT-ASSETS> 42687929
<PP&E> 44577560
<DEPRECIATION> 19009202
<TOTAL-ASSETS> 72537546
<CURRENT-LIABILITIES> 9475491
<BONDS> 0
0
0
<COMMON> 9713913
<OTHER-SE> 36615924
<TOTAL-LIABILITY-AND-EQUITY> 72537546
<SALES> 60104741
<TOTAL-REVENUES> 60104741
<CGS> 41676069
<TOTAL-COSTS> 41676069
<OTHER-EXPENSES> 14590831
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 674493
<INCOME-PRETAX> 3321031
<INCOME-TAX> 1329538
<INCOME-CONTINUING> 1991493
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1991493
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.21
</TABLE>
