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 January 31, 2003 | Commission File No. 0-21084 |
Champion Industries, Inc.
(Exact name of Registrant as specified in its charter)
| West Virginia (State or other jurisdiction of incorporation or organization) |
55-0717455 (I.R.S. Employer Identification No.) |
2450-90 1st Avenue
P.O. Box 2968
Huntington, WV 25728
(Address of principal executive offices)
(Zip Code)
(304) 528-2700
(Registrant’s telephone number,
including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o.
9,713,913 shares of common stock of the Registrant were outstanding at January 31, 2003.
Champion Industries, Inc.
INDEX
| Page No. | ||||||
Part I. Financial Information |
||||||
Item 1. Financial Statements |
||||||
Consolidated Balance Sheets |
3 | |||||
Consolidated Statements of Operations |
5 | |||||
Consolidated Statements of Cash Flows |
6 | |||||
Notes to Consolidated Financial Statements |
7 | |||||
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations |
14 | |||||
Item 3a. Quantitative and Qualitative Disclosure About Market Risk |
17 | |||||
Item 4. Controls and Procedures |
17 | |||||
Part II. Other Information |
||||||
Item 6. Exhibits and Reports on Form 8-K |
18 | |||||
Signatures |
19 | |||||
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
| ASSETS | January 31, | October 31, | |||||||||
| 2003 | 2002 | ||||||||||
Current assets: |
|||||||||||
Cash and cash equivalents |
$ | 2,951,405 | $ | 4,507,139 | |||||||
Accounts receivable, net of allowance of $1,309,000 and $1,397,000 |
17,431,047 | 18,546,989 | |||||||||
Inventories |
11,511,567 | 11,427,581 | |||||||||
Income tax refund |
— | — | |||||||||
Other current assets |
2,209,541 | 1,745,563 | |||||||||
Deferred income tax assets |
1,027,059 | 1,027,059 | |||||||||
Total current assets |
35,130,619 | 37,254,331 | |||||||||
Property and equipment, at cost: |
|||||||||||
Land |
1,028,372 | 1,028,372 | |||||||||
Buildings and improvements |
6,156,753 | 6,120,122 | |||||||||
Machinery and equipment |
36,663,861 | 36,362,178 | |||||||||
Equipment under capital leases |
983,407 | 983,407 | |||||||||
Furniture and fixtures |
2,882,492 | 2,872,212 | |||||||||
Vehicles |
3,176,141 | 3,082,258 | |||||||||
| 50,891,026 | 50,448,549 | ||||||||||
Less accumulated depreciation |
(32,358,555 | ) | (31,442,360 | ) | |||||||
| 18,532,471 | 19,006,189 | ||||||||||
Cash surrender value of officers’ life insurance |
924,534 | 947,955 | |||||||||
Goodwill |
1,725,941 | 1,725,941 | |||||||||
Other assets |
548,803 | 573,087 | |||||||||
| 3,199,278 | 3,246,983 | ||||||||||
Total assets |
$ | 56,862,368 | $ | 59,507,503 | |||||||
See notes to consolidated financial statements.
3
Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
(Unaudited)
| LIABILITIES AND SHAREHOLDERS’ EQUITY | January 31, | October 31, | |||||||||
| 2003 | 2002 | ||||||||||
Current liabilities: |
|||||||||||
Accounts payable |
$ | 2,829,707 | $ | 3,258,095 | |||||||
Accrued payroll |
1,375,770 | 2,004,046 | |||||||||
Taxes accrued and withheld |
1,167,373 | 1,416,900 | |||||||||
Accrued income taxes |
344,938 | 873,136 | |||||||||
Accrued expenses |
788,303 | 819,234 | |||||||||
Current portion of long-term debt: |
|||||||||||
Notes payable |
2,657,571 | 2,615,422 | |||||||||
Capital lease obligations |
198,678 | 195,035 | |||||||||
Total current liabilities |
9,362,340 | 11,181,868 | |||||||||
Long-term debt, net of current portion: |
|||||||||||
Notes payable, term |
904,063 | 1,445,837 | |||||||||
Capital lease obligations |
307,970 | 359,027 | |||||||||
Other liabilities |
428,441 | 429,842 | |||||||||
Deferred income tax liability |
3,225,119 | 3,225,119 | |||||||||
Total liabilities |
14,227,933 | 16,641,693 | |||||||||
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 |
10,678,475 | 10,909,850 | |||||||||
Total shareholders’ equity |
42,634,435 | 42,865,810 | |||||||||
Total liabilities and shareholders’ equity |
$ | 56,862,368 | $ | 59,507,503 | |||||||
See notes to consolidated financial statements.
4
Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
| Three Months Ended | ||||||||||
| January 31, | ||||||||||
| 2003 | 2002 | |||||||||
Revenues: |
||||||||||
Printing |
$ | 22,606,647 | $ | 22,857,609 | ||||||
Office products and office furniture |
6,012,294 | 6,932,933 | ||||||||
Total revenues |
28,618,941 | 29,790,542 | ||||||||
Cost of sales: |
||||||||||
Printing |
16,533,926 | 16,527,470 | ||||||||
Office products and office furniture |
4,167,266 | 4,959,980 | ||||||||
Total cost of sales |
20,701,192 | 21,487,450 | ||||||||
Gross profit |
7,917,749 | 8,303,092 | ||||||||
Selling, general and administrative expenses |
7,455,685 | 7,784,287 | ||||||||
Income from operations |
462,064 | 518,805 | ||||||||
Other income (expense): |
||||||||||
Interest income |
1,452 | 6,513 | ||||||||
Interest expense |
(52,024 | ) | (112,454 | ) | ||||||
Other |
25,524 | 30,120 | ||||||||
| (25,048 | ) | (75,821 | ) | |||||||
Income before income taxes |
437,016 | 442,984 | ||||||||
Income tax expense |
(182,700 | ) | (185,354 | ) | ||||||
Net income |
$ | 254,316 | $ | 257,630 | ||||||
Earnings per share |
||||||||||
Basic |
$ | 0.03 | $ | 0.03 | ||||||
Diluted |
$ | 0.03 | $ | 0.03 | ||||||
Weighted average shares outstanding: |
||||||||||
Basic |
9,714,000 | 9,714,000 | ||||||||
Diluted |
9,730,000 | 9,725,000 | ||||||||
Dividends per share |
$ | 0.05 | $ | 0.05 | ||||||
See notes to consolidated financial statements.
5
Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended | ||||||||||
| January 31, | ||||||||||
| 2003 | 2002 | |||||||||
Cash flows from operating activities: |
||||||||||
Net income |
$ | 254,316 | $ | 257,630 | ||||||
Adjustments to reconcile net income to cash
provided by operating activities: |
||||||||||
Depreciation and amortization |
1,006,795 | 1,048,161 | ||||||||
Gain on sale of assets |
(1,677 | ) | (5,055 | ) | ||||||
Increase in deferred compensation |
3,575 | 4,468 | ||||||||
Bad debt expense |
66,700 | 187,415 | ||||||||
Changes in assets and liabilities: |
||||||||||
Accounts receivable |
1,049,242 | 1,592,944 | ||||||||
Inventories |
(83,986 | ) | 283,443 | |||||||
Other current assets |
(463,978 | ) | (1,311,963 | ) | ||||||
Accounts payable |
(428,386 | ) | (1,393,295 | ) | ||||||
Accrued payroll |
(628,276 | ) | (521,681 | ) | ||||||
Taxes accrued and withheld |
(249,527 | ) | 87,062 | |||||||
Income taxes |
(528,198 | ) | 156,382 | |||||||
Accrued expenses |
(30,931 | ) | (65,886 | ) | ||||||
Other liabilities |
(4,976 | ) | (5,727 | ) | ||||||
Net cash (used in) provided by operating activities |
(39,307 | ) | 313,898 | |||||||
Cash flows from investing activities: |
||||||||||
Purchases of property and equipment |
(472,462 | ) | (762,352 | ) | ||||||
Proceeds from sales of property |
37,527 | 20,764 | ||||||||
Decrease in cash surrender value life insurance |
24,284 | 11,311 | ||||||||
Other assets |
23,421 | (6,269 | ) | |||||||
Net cash used in investing activities |
(387,230 | ) | (736,546 | ) | ||||||
Cash flows from financing activities: |
||||||||||
Proceeds from term debt and leases |
122,500 | — | ||||||||
Principal payments on long-term debt |
(766,004 | ) | (940,543 | ) | ||||||
Dividends paid |
(485,693 | ) | (485,694 | ) | ||||||
Net cash used in financing activities |
(1,129,197 | ) | (1,426,237 | ) | ||||||
Net increase (decrease) in cash |
(1,555,734 | ) | (1,848,885 | ) | ||||||
Cash and cash equivalents, beginning of period |
4,507,139 | 5,764,716 | ||||||||
Cash and cash equivalents, end of period |
$ | 2,951,405 | $ | 3,915,831 | ||||||
See notes to consolidated financial statements.
6
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 accounting principles generally accepted in the United States (“GAAP”) and rules and regulations of the Securities and Exchange Commission for interim financial reporting. The preparation of the financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. In the opinion of management, the financial information reflects all adjustments (consisting of items of a normal recurring nature) necessary for a fair presentation of financial position, results of operations and cash flows in conformity with GAAP. These interim financial statements should be read in conjunction with the consolidated financial statements for the year ended October 31, 2002, and related notes thereto contained in Champion Industries, Inc.’s Form 10-K dated January 25, 2003. The accompanying interim financial information is unaudited. The balance sheet information as of October 31, 2002 was derived from our audited financial statements.
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 dilutive effect of stock options was 16,000 and 11,000 shares for the three months ended January 31, 2003 and 2002.
3. Inventories
Inventories are principally stated at the lower of first-in, first-out cost or market. Manufactured finished goods and work in process inventories include material, direct labor and overhead based on standard costs, which approximate actual costs. The Company utilizes an estimated gross profit method for determining cost of sales in interim periods.
Inventories consisted of the following:
| January 31, | October 31, | ||||||||
| 2003 | 2002 | ||||||||
Printing: |
|||||||||
Raw materials |
$ | 2,500,587 | $ | 2,421,973 | |||||
Work in process |
1,854,085 | 1,795,796 | |||||||
Finished goods |
4,070,487 | 3,942,518 | |||||||
Office products and office furniture |
3,086,408 | 3,267,294 | |||||||
| $ | 11,511,567 | $ | 11,427,581 | ||||||
7
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
4. Long-Term Debt
Long-term debt consisted of the following:
| January 31, | October 31, | |||||||
| 2003 | 2002 | |||||||
Unsecured term note payable |
$ | 2,232,306 | $ | 2,678,733 | ||||
Installment notes payable to banks |
1,329,328 | 1,382,526 | ||||||
Capital lease obligations |
506,648 | 554,062 | ||||||
| 4,068,282 | 4,615,321 | |||||||
Less current portion |
2,856,249 | 2,810,457 | ||||||
Long-term debt, net of current portion |
$ | 1,212,033 | $ | 1,804,864 | ||||
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 interest rates at LIBOR plus 1% to 1.5%. This line of credit expires in March 2005 and contains certain restrictive financial covenants. There were no borrowings outstanding under this facility at January 31, 2003.
The Company has an unsecured revolving line of credit with a bank for borrowings to a maximum of $1,000,000 with interest payable monthly at the Wall Street Journal prime rate. The line of credit expires in April 2004 and contains certain financial covenants. There were no borrowings outstanding under this facility at January 31, 2003.
The Company’s non-cash activities for the three months ended January 31, 2003 and 2002 included vehicle purchases of approximately $96,000 and $165,000 which were financed by a bank.
5. Shareholders’ Equity
The Company paid a dividend of five cents per share on December 28, 2002 to stockholders of record on December 4, 2002. Also, the Company declared a dividend of five cents per share to be paid on March 24, 2003 to stockholders of record on March 7, 2003.
6. Related Party Transaction
In the first quarter of 2002, the Company made a deposit to purchase a fractional ownership in an aircraft from an entity controlled by its Chief Executive Officer for approximately $1.2 million of which $875,000 had been paid as of January 31, 2003.
The Company had previously anticipated the transaction to be completed during the fourth quarter of 2002. The Company’s Board of Directors further evaluated the transaction, and prior to its completion determined that it would be in the Company’s best interests to rescind the transaction. Therefore, the transaction has been terminated and a full refund of the deposit has been made.
8
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
7. Commitments and Contingencies
The Company entered into a Sale and Purchase Agreement in February 2003 to purchase a building in Baton Rouge, Louisiana for an aggregate purchase price of $1.8 million. The Company anticipates the transaction to close in the second quarter of 2003 subject to normal and customary due diligence and closing requirements.
On February 16, 2002, a jury verdict was rendered against the Company in a civil action brought against the Company in state court in Jackson, Mississippi.
The plaintiffs in this civil action asserted that the Company and its Dallas Printing Company, Inc. subsidiary had engaged in unfair competition and other wrongful acts in hiring certain of its employees. The jury awarded the plaintiffs $1,745,000 in actual damages and $750,000 in punitive damages.
On March 1, 2002, the plaintiffs in the civil action filed a motion for attorney’s fees and costs in the amount of $889,401. On July 16, 2002, the court entered an order granting plaintiff $645,119 in attorney fees and expenses, and ordered that interest on the amount of the jury award accrue from February 22, 2002.
On July 17, 2002, the Company filed a notice of appeal from the jury verdict. The appeal involves both the jury award and the attorney’s fee and expense award. If the Company is not successful on appeal, Mississippi law provides that it is liable for an additional 15% of the total award.
The Company has been advised that it has no insurance coverage for this award. The Company under Mississippi law has a guaranteed right to appeal. The Company has been advised by counsel that it has multiple grounds for an appeal and a reasonable basis for believing that an appeal would be successful in eliminating the jury award. However, there can be no assurance that the jury award will be overturned upon appeal. If the verdict is not overturned, the impact on the operating results of the Company could be material.
8. New Accounting Pronouncements and Significant Accounting Policy Updates
In July 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (Statement No. 146), which supercedes EITF No. 94-3, “Liability Recognition for Certain Employment Termination Benefits and Other Costs to Exit an Activity.” Statement 146 requires companies to record liabilities for costs associated with exit or disposal activities to be recognized only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard will not have a significant impact on the Company’s financial statements.
Accounting for Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure”. Statement 148 amends FASB Statement No. 123,
9
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
Accounting for Stock-Based Compensation, to provide alternative methods of transition to Statement 123’s fair value method of accounting for stock-based employee compensation.
The Company has elected to follow the intrinsic value method in accounting for its employee stock options. Accordingly, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2003 and 2002, respectively: risk-free interest rates of 3.97% and 3.91%; dividend yields of 7.22% and 8.03%; volatility factors of the expected market price of the Company’s common stock of 46.4% and 45.4%; and a weighted-average expected life of the option of 4 years.
The following pro forma information has been determined as if the Company had accounted for its employee stock options under the fair value method. For purposes of pro forma disclosures, the estimated fair value of the options is expensed in the year granted since the options vest immediately. The Company’s pro forma information for the quarters ended January 31 are as follows:
| Quarter Ended January 31 | ||||||||
| 2003 | 2002 | |||||||
Net Income, as reported |
$ | 254,316 | $ | 257,630 | ||||
Deduct: Total stock-based employee
compensation expense determined under fair
value method for all awards, net of related
tax effects |
47,200 | 38,704 | ||||||
Pro Forma net income |
$ | 207,116 | $ | 218,926 | ||||
Earnings per share: |
||||||||
Basic, as reported |
$ | 0.03 | $ | 0.03 | ||||
Basic, pro forma |
0.02 | 0.02 | ||||||
Diluted, as reported |
$ | 0.03 | $ | 0.03 | ||||
Diluted, pro forma |
0.02 | 0.02 | ||||||
9. Restructuring Charge, Asset Impairment Charge and Other Charges
In the third quarter of 2001, the Company recorded charges related to a restructuring and profitability enhancement plan. This plan was implemented to effectuate certain key initiatives including plant and office consolidations, headcount reductions, asset impairment issues and a general response to a deteriorating economic environment. The third quarter of 2001 pre-tax charge resulting from these actions was $6.1 million ($4.3 million after-tax or $0.44 per share on a basic and diluted basis.) The charge related to approximately $3.1 million from asset impairments including goodwill, facility and equipment write-downs. The Company recorded charges for restructuring and other special charges of $3.0 million comprised primarily of severance payments, charge-offs related to duplicative facility leases, increases in
10
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
allowance for doubtful accounts and inventory obsolescence and valuation reserves, costs related to the impairment of the Company’s information systems hardware and software, charges related to termination and related fees of a pension plan of an acquired Company, and other charges and expenses related to plant consolidations and restructuring.
As a result of the Company’s restructuring plan, approximately 35 employees were terminated from the Company primarily as a result of plant and office consolidations at the Company’s Carolina Cut Sheets operation, Chapman Printing Lexington location and the Garrison Brewer division of Stationers. In addition, the Company anticipates the elimination of additional positions resulting from retirements and normal attrition within the next twelve to eighteen months. As of October 31, 2001 35 employees were notified of their termination and one retired position was eliminated.
The cash and non-cash elements of the Company’s restructuring charge, asset impairment charge, and other unusual charges approximated $1.5 million in cash and $4.6 million non-cash. The printing segment charges approximated $3.5 million and the office products and furniture segment charges approximated $2.6 million. Details of the approximated charges and the status of the related obligations are as follows as of January 31, 2003:
| Utilized | ||||||||||||||||
| Ended balance | ||||||||||||||||
| Original accrual | Cash | Noncash | January 31, 2003 | |||||||||||||
Write-down of
goodwill,
facilities and
equipment |
$ | 3,060,000 | $ | 168,000 | $ | 2,892,000 | $ | — | ||||||||
Employee severance
and termination
benefits |
55,000 | 25,000 | — | 30,000 | ||||||||||||
Inventory
obsolescence and
valuation reserves |
978,000 | — | 978,000 | — | ||||||||||||
Restructuring and
other charges |
1,998,000 | 834,000 | 768,000 | 396,000 | ||||||||||||
Total |
$ | 6,091,000 | $ | 1,027,000 | $ | 4,638,000 | $ | 426,000 | ||||||||
10. Industry Segment Information
The Company operates principally in two industry segments organized on the basis of product lines: the production, printing and sale, principally to commercial customers, of printed materials (including brochures, pamphlets, reports, tags, continuous and other forms), and the sale of office products and office furniture including interior design services.
11
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
The table below presents information about reported segments for the three months ended January 31: