<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission File No. 0-21084
ended January 31, 1999
-------------------
CHAMPION INDUSTRIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
West Virginia 55-0717455
(State or other jurisdiction of (IRS 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
January 31, 1999.
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CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
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 the Consolidated Financial Statements....................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.............................................15
Signatures...............................................................................15
</TABLE>
1
<PAGE>
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1999 1998
--------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,289,513 $ 9,773,193
Accounts receivable, net of allowance of $1,239,000 and $1,329,000 19,626,799 21,234,593
Inventories 13,523,943 12,760,204
Other current assets 751,351 478,306
Deferred income tax assets 935,004 935,004
--------------------------------------
Total current assets 44,126,610 45,181,300
Property and equipment, at cost:
Land 984,889 984,889
Buildings and improvements 5,696,745 5,564,062
Machinery and equipment 30,169,118 29,195,512
Equipment under capital leases 1,600,000 2,137,400
Furniture and fixtures 2,062,402 1,943,399
Vehicles 2,503,686 2,438,462
--------------------------------------
43,016,840 42,263,724
Less accumulated depreciation (18,171,514) (17,335,378)
--------------------------------------
24,845,326 24,928,346
Cash surrender value of officers' life insurance 988,893 935,169
Goodwill, net of accumulated amortization 2,987,305 3,026,106
Other assets 368,639 434,407
--------------------------------------
4,344,837 4,395,682
--------------------------------------
Total assets $73,316,773 $74,505,328
--------------------------------------
--------------------------------------
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE>
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1999 1998
--------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,028,395 $ 3,175,743
Accrued payroll 1,578,414 1,541,586
Taxes accrued and withheld 473,549 597,886
Accrued income taxes 508,052 175,202
Accrued expenses 683,194 716,582
Current portion of long-term debt:
Notes payable 3,537,460 3,477,473
Capital lease obligations 326,682 388,954
--------------------------------------
Total current liabilities 10,135,746 10,073,426
Long-term debt, net of current portion:
Notes payable 11,443,770 12,966,038
Capital lease obligations 923,717 1,026,517
Deferred income tax liability 4,341,150 4,341,150
Other liabilities 793,182 788,462
--------------------------------------
Total liabilities 27,637,565 29,195,593
Commitments and contingencies
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 13,723,248 13,353,775
--------------------------------------
Total shareholders' equity 45,679,208 45,309,735
--------------------------------------
--------------------------------------
Total liabilities and shareholders' equity $73,316,773 $74,505,328
--------------------------------------
--------------------------------------
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Income Statements
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
1999 1998
--------------------------------------
<S> <C> <C>
Revenues:
Printing $21,911,733 $23,955,963
Office products and office furniture 7,318,733 5,678,515
--------------------------------------
Total revenues 29,230,466 29,634,478
Cost of sales:
Printing 15,706,372 17,508,471
Office products and office furniture 4,902,808 3,759,136
--------------------------------------
Total cost of sales 20,609,180 21,267,607
--------------------------------------
Gross Profit 8,621,286 8,366,871
Selling, general and administrative expenses 6,892,499 6,662,752
--------------------------------------
Income from operations 1,728,787 1,704,119
Other income (expense):
Interest income 58,169 157
Interest expense (367,884) (427,415)
Other 27,335 110,208
--------------------------------------
(282,380) (317,050)
--------------------------------------
Income before income taxes 1,446,407 1,387,069
Income taxes (591,239) (589,691)
--------------------------------------
Net income $ 855,168 $ 797,378
--------------------------------------
--------------------------------------
Earnings per share:
Basic $0.09 $0.10
Diluted 0.09 0.09
Dividends per share 0.05 0.05
Weighted average shares outstanding:
Basic 9,714,000 8,386,000
Diluted 9,714,000 8,437,000
</TABLE>
See notes to unaudited consolidated financial statements.
4
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CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
1999 1998
------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 855,168 $ 797,377
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 957,579 786,597
Loss (gain) on sale of property 1,106 (39,000)
Other 4,719 13,161
Changes in assets and liabilities:
Accounts receivable 1,607,794 440,199
Inventories (763,739) (150,889)
Other current assets (273,044) (217,629)
Accounts payable (147,348) (1,233,467)
Accrued payroll 36,828 (320,832)
Taxes accrued and withheld (124,337) (24,090)
Accrued income taxes 332,850 28,191
Accrued expenses (33,388) 25,538
------------------------------------
Net cash provided by operating activities 2,454,188 105,156
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (878,237) (596,101)
Proceeds from sales of assets 197,388 339,000
Increase in cash surrender value of officer's life insurance (53,724) (51,211)
Decrease in other assets 52,380 57,084
------------------------------------
Net cash used in investing activities (682,193) (251,228)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on notes payable -- 475,000
Proceeds from long-term debt and capital leases 23,160 104,000
Principal payments on long-term debt and capital leases (1,793,140) (1,052,093)
Proceeds from exercise of stock options -- 49,115
Dividends paid (485,695) (419,247)
------------------------------------
Net cash used in financing activities (2,255,675) (843,225)
------------------------------------
Net decrease in cash (483,680) (989,297)
Cash and cash equivalents, beginning of period 9,773,193 912,290
------------------------------------
Cash and cash equivalents, end of period $9,289,513 $ (77,007)
------------------------------------
------------------------------------
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
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, 1998, and related notes thereto contained in 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 51,000 for the three months ended January
31, 1998. Stock options outstanding for the three months ended January 31, 1999,
were anti-dilutive.
3. INVENTORIES
Inventories are 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) (CON'T)
3. INVENTORIES (CONTINUED)
Inventories consisted of the following:
<TABLE>
<CAPTION>
JANUARY 31, October 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
Printing:
Raw materials $ 3,376,375 $ 3,117,249
Work in process 2,287,570 2,112,007
Finished goods 3,922,476 3,621,439
Office products and office furniture 3,937,522 3,909,509
-------------------- --------------------
$13,523,943 $ 12,760,204
-------------------- --------------------
-------------------- --------------------
</TABLE>
4. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JANUARY 31, October 31,
1999 1998
-------------------- -------------------
<S> <C> <C>
Unsecured term note payable $12,200,028 $ 13,593,658
Installment notes payable to banks 2,092,646 2,141,994
Unsecured installment notes payable to banks 9,849 13,133
Mortgage note payable to a bank 678,707 694,726
Capital lease obligations 1,250,399 1,415,471
-----------------------------------------
16,231,629 17,858,982
Less current portion 3,864,142 3,866,427
-----------------------------------------
Long-term debt, net of current portion $12,367,487 $ 13,992,555
-----------------------------------------
-----------------------------------------
</TABLE>
The Company has unsecured revolving lines of credit with banks for borrowings to
a maximum of $12,000,000 with interest payable monthly at interest rates
approximating the prime rate. These lines of credit, $2,000,000 of which expires
in May 1999, and $10,000,000 in January 2002, contain certain restrictive
financial covenants. There were no borrowings outstanding under these facilities
at January 31, 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 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.
7
<PAGE>
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CON'T)
The Company declared a dividend of five cents per share to be paid on March 29,
1999, to stockholders of record on March 12, 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.
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.
7. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement No. 130 (SFAS
No. 130), "Reporting Comprehensive Income" and Statement No. 131 (SFAS No. 131),
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
130 establishes standards for reporting and displaying comprehensive income and
its components in a full set of general-purpose financial statements. SFAS No.
131 establishes standards for the way public companies report information about
operating segments in annual financial statements and interim financial reports
issued to shareholders. Management does not anticipate that the adoption of
these standards will have a significant effect on the Company's financial
statements and notes thereto.
8
<PAGE>
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 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>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated information derived
from the Company's Consolidated Income Statements, including certain information
presented as a percentage of total revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
1999 1998
-------------------------------------------------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Printing $21,912 75.0% $23,956 80.8%
Office products and office furniture 7,318 25.0 5,678 19.2
-------------------------------------------------------
Total revenues 29,230 100.0 29,634 100.0
Cost of sales:
Printing 15,706 53.7 17,508 59.1
Office products and office furniture 4,903 16.8 3,759 12.7
-------------------------------------------------------
Total cost of sales 20,609 70.5 21,267 71.8
-------------------------------------------------------
Gross Profit 8,621 29.5 8,367 28.2
Selling, general and administrative expense 6,892 23.6 6,663 22.5
-------------------------------------------------------
Income from operations 1,729 5.9 1,704 5.7
Other income (expense):
Interest income 58 0.2 0 0.0
Interest expense (368) (1.3) (427) (1.4)
Other income 27 0.1 110 0.4
-------------------------------------------------------
Income before income taxes 1,446 4.9 1,387 4.7
Income taxes (591) (2.0) (590) (2.0)
-------------------------------------------------------
Net income $ 855 2.9% $ 797 2.7%
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
THREE MONTHS ENDED JANUARY 31, 1999 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1998
REVENUES
Total revenues decreased 1.4% in the first quarter of 1999 to $29.2 million from
$29.6 million in the first quarter of 1998. Printing revenue decreased 8.5% in
the first quarter of 1999 to $21.9 million from $24.0 million in the first
quarter of 1998. The first quarter of each fiscal year is usually the softest
quarter due to the holiday seasons. The Company experienced a softer than normal
printing market during the first quarter of 1999 in most of the markets it
served. Management does not expect this situation to continue during the
remaining three quarters of 1999. Office products and office furniture revenue
increased 28.9% in the first quarter of 1999 to $7.3 million from $5.7 million
in the first quarter of 1998. The increase in office products and office
furniture revenue was primarily due to the 1998 acquisitions of Rose City Press
of Charleston, West Virginia in February 1998, Capitol Business Interiors of
Charleston, West Virginia in May 1998, and Thompson's of Morgantown in May 1998.
In addition, the Company's office products and office furniture division
(Stationers) introduced an
10
<PAGE>
electronic catalog called "Champ" in early 1998. This tool allows Stationers to
compete more effectively by offering our customers another choice of how they
can shop and order products. By April 1, 1999, the Company's office products and
office furniture catalog will reside on the Company's website, making it even
easier to order office products and office furniture. In addition, the Company
is in the process of including the ability to order forms printing on the
website. Management anticipates that the ability to order forms printing on the
Company's website will be available by the fourth quarter of 1999.
COST OF SALES
Total cost of sales decreased 3.1% in the first quarter of 1999 to $20.6 million
from $21.3 million in the first quarter of 1998. Printing cost of sales
decreased 10.3% in the first quarter of 1999 to $15.7 million from $17.5 million
in the first quarter of 1998, due primarily to lower sales volume and certain
divisions replacing lower margin work with higher margin products. Office
products and office furniture cost of sales increased 30.4% in the first quarter
of 1999 to $4.9 million from $3.8 million in the first quarter of 1998,
primarily due to the 1998 acquisitions noted above. The decrease in gross profit
for the office products and office furniture operating segment is primarily due
to the inclusion of Capitol Business Interiors in the 1999 results. Capitol
Business Interiors is a full service interior design firm that operates at a
slightly lower gross profit margin than the core office products and office
furniture companies.
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses increased as a percentage of
revenues in the first quarter of 1999 to 23.6% from 22.5% in the first quarter
of 1998 due to increased overhead costs associated with the 1998 acquisitions
noted above and the decrease in overall sales. Income from operations increased
1.5% in the first quarter of 1999 to $1.73 million from $1.70 million in the
first quarter of 1998. Income from operations as a percentage of revenues
increased slightly in 1999 compared to 1998 due to the improvement in gross
profit as discussed above.
OTHER INCOME/EXPENSE
Interest income increased $58,000 as a result of investing the remaining
proceeds from the Company's April 1998 common stock offering in a money market
account. Interest expense decreased $59,000 to $368,000 in the first quarter of
1999 from $427,000 in the first quarter of 1998 as a result of a decrease in
long term debt and overall interest rates. Other income decreased from $110,000
in the first quarter of 1998 to $27,000 in the first quarter of 1999 due
primarily to a one-time gain from the disposal of assets in the first quarter of
1998.
INCOME TAXES
Income taxes as a percentage of income before income taxes decreased slightly
from 42.5% in the first quarter of 1998 to 40.9% in the first quarter of 1999 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.
11
<PAGE>
NET INCOME
Net income for the first quarter of 1999 increased 7.3% to $855,000 from
$797,000 in the first quarter of 1998. Diluted earnings per share in the first
quarter of 1999 and 1998 were $0.09. Diluted earnings per share remained the
same as a result of the additional shares issued in the April 1998 stock
offering discussed below.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1999, the Company had $9.3 million of cash and cash
equivalents and working capital of $34 million which approximated the amounts
available at October 31, 1998. In April 1998, the Company completed an offering
of 1,091,993 common shares. The net proceeds (net of underwriting discounts,
commissions and offering expenses) to the Company from the April 1998 offering
approximated $14.1 million. Approximately $6.7 million of the net proceeds has
been used to reduce long-term debt through January 31, 1999. The remaining
proceeds from the April 1998 stock offering are invested in a money market
account with a national financial institution. It is management's intention to
maintain these funds in a highly liquid money market account to be used for
further debt reduction, working capital and general purposes, including the
continuation of the Company's acquisition program.
Management is in the process of implementing a corporate-wide cash management
program that should provide better access to daily cash flow. This program is
expected to be in place by the second quarter of fiscal year 1999. Once the
program is implemented, management believes it will be in a position to better
utilize available cash and cash equivalents and cash flows from operations to
further reduce long-term debt.
Net cash provided by operating activities for the three months ended January 31,
1999, was $2.5 million compared to $105,000 for the same period in 1998. This
increase in cash provided by operating activities resulted from the growth in
net income, improved collection of accounts receivable, and timing of payments
of income taxes, but was partially offset by the increase in inventories and
other current assets.
The Company continues to make significant investments in equipment. Capital
expenditures for the three months ended January 31, 1999, were $878,000 versus
the $596,000 expended in the first quarter of 1998. Management plans to continue
making such investments and expects total capital expenditures to approximate
$3.5 million in 1999.
Net cash used in financing activities for the three months ended January 31,
1999, was ($2.3) million compared to ($0.8) million during the same period in
1998. This increase in cash used in financing activities is primarily a result
of a decline in new borrowings and additional payments on long term debt of
approximately $700,000.
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 contracts; therefore, to the extent
permitted by competition, it has the ability to pass through to its customers
most cost increases resulting from inflation, if any.
12
<PAGE>
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.
INFORMATION SYSTEMS AND YEAR 2000 ASSESSMENT UPDATE
Management has in place a Company-wide program to assess the need to modify or
replace portions or all of its information systems to maintain its
competitiveness and enable the proper processing of transactions relating to the
Year 2000 and beyond. Management has made the decision to purchase and implement
a new information system for the printing divisions. This new system is an
enterprise-wide system encompassing sales, purchasing, production, and financial
reporting. Implementation is expected to begin in April 1999 and 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 are not converted by December 31, 1999, the systems can be
converted to the Company's core printing software, that is Year 2000 compliant,
within a short timeframe of one to two months. 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 is in the process of finalizing its assessment of
non-critical systems. Based on the information currently available, most of
these systems are Year 2000 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 some 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
13
<PAGE>
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 Management's Discussion and Analysis of
Financial Condition and Results of Operations, including without limitation
statements including the word "believes," "anticipates," "intends," "expects" or
words of similar import, constitute "forward-looking statements" within the
meaning of section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements of the Company expressed or
implied by such forward-looking statements. Such factors include, among others,
general economic and business conditions, changes in business strategy or
development plans, and other factors referenced in this report. 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.
14
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
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: March 12, 1999 /s/ Marshall T. Reynolds
-----------------------------------------
Marshall T. Reynolds
President and Chief Executive Officer
Date: March 12, 1999 /s/ David B. McClure
-----------------------------------------
David B. McClure
Vice President and Chief Financial Officer
15
