Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Fiscal Year Ended October 31, 2009
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
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
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
|
2450
First Avenue
P.O.
Box 2968
Huntington,
West Virginia
|
25728
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant's telephone number, including area code: (304)
528-2700
|
|
Securities registered pursuant to Section 12(b) of Act: Common
Stock, $1.00 par value
|
The NASDAQ Stock Market, LLC
(Name of each exchange on which registered)
|
Securities
registered pursuant to Section 12(g) of Act: None
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
oNo
x
|
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes
oNo
x
|
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
xNo
o
|
Indicate
by check mark whether the registrant (1) has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Indicate
by check mark if the disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
o
|
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definitions of “large accelerated
filer ", "accelerated filer", and "smaller reporting company" in Rule 12b-2
of the Exchange Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated filter o
|
Smaller reporting company x |
(Do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in rule
12b-2 of the Exchange Act).
Yes
oNo
x
|
As
of April 30, 2009, the aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant was $8,065,518 based on the
closing price as reported on the National Association of Securities Dealers
Automated Quotation System Global Market.
2
The
outstanding common stock of the Registrant at the close of business on January
4, 2010 consisted of 9,987,913 shares of Common Stock, $1.00 par
value.
Total
number of pages including cover page:
111. .
DOCUMENTS
INCORPORATED BY REFERENCE: Portions of the Registrant’s definitive proxy
statement expected to be dated February 12, 2010 with respect to its Annual
Meeting of Shareholders to be held on March 15, 2010 are incorporated by
reference into Part III, Items 10-14. Exhibit Index located in Part IV Item
15.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements contained in this Annual Report or in documents incorporated herein
by reference, 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 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 Annual Report, including without limitations under
the captions “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and “Business.” Given these uncertainties, prospective
investors 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.
PART
I
ITEM
1 - BUSINESS
HISTORY
Champion
Industries, Inc. (“Champion” or the “Company”) is a major commercial printer,
business forms manufacturer and office products and office furniture supplier in
regional markets east of the Mississippi River. The Company also publishes The
Herald-Dispatch daily newspaper in Huntington, WV with a total daily and Sunday
circulation of approximately 24,000 and 30,000 respectively. The
Company's sales offices and/or production facilities are located in Huntington,
Charleston, Parkersburg, Clarksburg, Wheeling and Morgantown, West Virginia;
Lexington Kentucky; Baton Rouge and New Orleans, Louisiana; Cincinnati, Ohio;
Kingsport, Tennessee; Evansville, Indiana; Bridgeville and Altoona,
Pennsylvania; and Asheville, North Carolina. The Company's sales force of
approximately 130 salespeople
sells printing services, business forms management services, office products,
office furniture and newspaper
advertising.
3
The
Company was chartered as a West Virginia corporation on July 1, 1992. Prior to
the public offering of the Company's Common Stock on January 28, 1993 (the
“Offering”), the Company's business was operated by The Harrah and Reynolds
Corporation (“Harrah and Reynolds”), doing business as Chapman Printing Company,
together with its wholly-owned subsidiaries, The Chapman Printing Company, Inc.
and Stationers, Inc. Incident to the Offering, Harrah and Reynolds and the
Company entered into an Exchange Agreement, pursuant to which, upon the closing
date of the Offering: (i) Harrah and Reynolds contributed to the Company
substantially all of the operating assets of its printing division, including
all inventory and equipment (but excluding any real estate and vehicles) and all
issued and outstanding capital stock of its subsidiaries, The Chapman Printing
Company, Inc. and Stationers, Inc.; (ii) the Company assumed certain of the
liabilities relating to the operations of the printing divisions of Harrah and
Reynolds and its subsidiaries, The Chapman Printing Company, Inc. and
Stationers, Inc., excluding debts associated with real estate, certain accounts
payable to affiliates and certain other liabilities; and (iii) Harrah and
Reynolds was issued 2,000,000 shares of Common Stock of the
Company.
The
Company and its predecessors have been headquartered in Huntington since 1922.
Full scale printing facilities, including web presses for manufacturing business
forms, and sales and customer service operations are located in Huntington. The
Company's Charleston division was established in 1974 through the acquisition of
the printing operations of Rose City Press. Sales and customer service
operations, as well as the pre-press departments, are located in Charleston. The
Parkersburg division opened in 1977 and was expanded by the acquisitions of Park
Press and McGlothlin Printing Company. In addition to sales and customer service
operations, this division houses a large full-color printing facility and a
state-of-the-art studio, with scanners, electronic color retouching equipment
and 4-, 5- and 6-color presses.
The
Lexington division commenced operations in 1983 upon the acquisition of the
Transylvania Company. This location includes a pre-press department,
computerized composition facilities, as well as sales and customer service
operations.
The
Company acquired Stationers, Inc. (“Stationers”), an office product, office
furniture and retail bookstore operation located in Huntington, in 1987 and
consolidated its own office products and office furniture operations with
Stationers. On August 30, 1991, Stationers, Inc. sold the assets, primarily
inventory and fixtures, of its retail bookstore operation. In July 1993,
Stationers expanded through acquisition and began operations in Marietta, Ohio,
under the name “Garrison Brewer.” The Company’s Garrison Brewer operation was
relocated across the Ohio river to the nearby Chapman Printing Parkersburg
location in 2002.
The
Bourque Printing division (“Bourque” or “Champion Graphic Communications -
Baton Rouge”) commenced operations in June 1993, upon the acquisition of Bourque
Printing, Inc. in Baton Rouge, Louisiana. This location includes a pre-press
department, computerized composition facilities, a pressroom with up to 6-color
presses and a bindery department, as well as sales and customer service
operations. Bourque was expanded through the acquisition of Strother
Forms/Printing in Baton Rouge in 1993, through the acquisition of the assets of
E. S. Upton Printing Company, Inc. (“Upton” or "Champion Graphic
Communications - New Orleans”) in New Orleans in 1996 and through the
acquisition of Transdata Systems, Inc. in Baton Rouge and New Orleans in 2001.
The Upton production operations were relocated to Baton Rouge in the fourth
quarter of 2005 as a result of Hurricane Katrina. However, the sales and
customer service staff continue to operate in New
Orleans.
4
The
Dallas Printing division (“Dallas” or “Champion Jackson”) commenced operations
in September 1993, upon the acquisition of Dallas Printing Company, Inc. in
Jackson, Mississippi. This location includes a pre-press department,
computerized composition facilities, as well as sales and customer service
operations. The operations of Dallas were moved to Baton Rouge, Louisiana in
August 2005 and consolidated into an existing facility.
On
November 2, 1993, a wholly-owned subsidiary of the Company chartered to effect
such acquisition purchased selected assets of Tri-Star Printing, Inc., a
Delaware corporation doing business as “Carolina Cut Sheets” in
the manufacture and sale of business forms in Timmonsville, South Carolina. The
Company's subsidiary has changed its name to “Carolina Cut Sheets, Inc.”
Carolina Cut Sheets manufactures single-part business forms for sale to dealers
and through the Company's other divisions. Carolina Cut Sheets was relocated to
Huntington, West Virginia in 2001.
On
February 25, 1994, Bourque acquired certain assets of Spectrum Press Inc.
(“Spectrum”), a commercial printer located in Baton Rouge, Louisiana.
On
June 1, 1994, the Company acquired certain assets of Premier Data Graphics, a
distributor of business forms and data supplies located in Clarksburg, West
Virginia.
On
August 30, 1994, Dallas acquired certain assets of Premier Printing Company,
Inc. (“Premier Printing”) of Jackson, Mississippi. This operation was moved to
Baton Rouge, Louisiana with the Dallas relocation.
On
June 1, 1995, in exchange for issuance of 52,383 shares of its common stock, the
Company acquired U.S. Tag & Ticket Company, Inc. (“U.S. Tag”), a Baltimore,
Maryland based manufacturer of tags used in the manufacturing, shipping, postal,
airline and cruise industries. The operations of U.S. Tag were moved to
Huntington, West Virginia in August 2003 and they were consolidated into an
existing facility.
On
November 13, 1995, the Company acquired Donihe Graphics, Inc. (“Donihe”), a
high-volume color printer based in Kingsport, Tennessee.
On
July 1, 1996, the Company acquired Smith & Butterfield Co., Inc. (“Smith
& Butterfield”), an office products company located in Evansville, Indiana
and Owensboro, Kentucky. Smith & Butterfield is operated as a division of
Stationers, Inc.
On
August 21, 1996, the Company purchased the assets of The Merten Company
(“Merten”), a commercial printer headquartered in Cincinnati, Ohio.
On
December
31, 1996, the Company acquired all outstanding capital stock of Interform
Corporation (“Interform”), a business form manufacturer in Bridgeville,
Pennsylvania.
On
May 21, 1997, the Company acquired all outstanding common shares of Blue Ridge
Printing Co., Inc. of Asheville, North Carolina (“Blue Ridge”). During the
second quarter of 2004, the Blue Ridge Knoxville plant was consolidated into the
Asheville plant.
5
On
February 2, 1998, the Company acquired all outstanding common shares of Rose
City Press (“Rose City”) of Charleston, West Virginia.
On
May 18, 1998, the Company acquired all outstanding common shares of Capitol
Business Equipment, Inc. (“Capitol”), doing business as Capitol Business
Interiors, of Charleston, West Virginia.
On
May 29, 1998, the Company acquired all outstanding common shares of Thompson’s
of Morgantown, Inc. and Thompson’s of Barbour County, Inc. (collectively,
“Thompson’s” or “Champion Morgantown”) of Morgantown, West Virginia.
Rose
City, Capitol and Thompson’s are operated as divisions of Stationers.
On
June 1, 1999, the Company acquired all of the issued and outstanding common
stock of Independent Printing Service, Inc. (“IPS”) of Evansville, Indiana. IPS
is operated as a division of Smith & Butterfield.
On
July 16, 1999, the Company’s Blue Ridge subsidiary acquired certain assets and
assumed certain liabilities of AIM Printing (“AIM”) of Knoxville, Tennessee.
On
November 30, 1999, the Company acquired all of the issued and outstanding common
stock of Diez Business Machines (“Diez”) of Gonzales, Louisiana. Diez was
operated as a subsidiary of Stationers until 2004 when it was relocated to the
Bourque facility in Baton Rouge, Louisiana.
On
November 6, 2000, the Company acquired certain assets of the Huntington, West
Virginia paper distribution division of the Cincinnati Cordage Paper Company
(“Cordage”). On April 30, 2001, the Company entered into a strategic alliance
with Xpedx resulting in the assumption by Xpedx of the Cordage customer list and
the sale of certain inventory items.
On
October 10, 2001, the Company acquired Transdata Systems, Inc. (“Transdata”)
of Baton Rouge and New Orleans, Louisiana. In 2004, Transdata was relocated to
existing facilities in New Orleans and Baton Rouge. In 2005, Transdata New
Orleans operations were relocated to Baton
Rouge.
On
June 18, 2003, the Company acquired certain assets of Contract Business
Interiors ("CBI") of Wheeling, West Virginia pursuant to acceptance by the U.S.
Bankruptcy Court for the Northern District of West Virginia. As a result of this
transaction, the Company also assumed certain customer deposit liabilities in
the ordinary course of business.
On
July 1, 2003, the Company acquired certain assets of Pittsburgh based Integrated
Marketing Solutions, the direct sales division and distributorship of Datatel
Resources Corporation.
On
May 13, 2004, the Company acquired certain assets of Cincinnati, Ohio Westerman
Print Company (“Westerman”). The assets of Westerman were moved to the Company’s
Merten operation in Cincinnati, Ohio.
6
On
September 7, 2004, the Company acquired all the issued and outstanding capital
stock of Syscan Corporation (“Syscan”), a West Virginia corporation, for a gross
cash price of $3,500,000 and a contingent purchase price, dependent upon
satisfaction of certain conditions, not to exceed the amount of
$1,500,000. At closing, after considering the cash received in the
transaction, the acquisition of a building and acquisition costs, the net assets
acquired totaled approximately $2,688,000. On December 14, 2006, the Company
satisfied the contingent purchase price for a payment of
$1,350,725.
On
September 14, 2007, the Company completed, pursuant to an asset purchase
agreement, the acquisition of The Herald-Dispatch daily newspaper in Huntington,
West Virginia through a newly formed subsidiary Champion Publishing, Inc. The
purchase price was $77.0 million and subject to a working capital payment of
$837,554 plus or minus any change in working capital from the index working
capital base of $1,675,107 at the closing date of September 14, 2007. The
working capital payment totaled approximately $1.6 million.
All
acquisitions have been accounted for using the purchase method of accounting
except for U.S. Tag, Blue Ridge, Capitol and Thompson’s, which utilized the
“pooling-of-interest” method of accounting.
BUSINESS
Champion
is engaged in the commercial printing and office products and furniture supply
business in regional markets east of the Mississippi River. The Company also publishes The Herald-Dispatch daily newspaper in
Huntington, WV with a total daily and Sunday circulation of approximately
24,000 and 30,000. The Company's sales force markets a full range of
printing services, business forms, office products and office furniture.
Management views these sales activities as complementary since frequent customer
sales calls required for one of its products or services provide opportunities
to cross-sell other products and services. The Company believes it benefits from
significant customer loyalty and customer referrals because it provides personal
service, quality products, convenience and selection with one-stop
shopping.
The
Company's printing services range from the simplest to the most complex jobs,
including business cards, books, tags, labels, brochures, posters, 4- to
6-color process printing and multi-part, continuous and snap-out business forms.
The Company's state-of-the-art equipment enables it to provide computerized
composition, art design, paste-up, stripping, film assembly and color scanner
separations. Included within our print segment are fulfillment services to our
customers which encompass warehousing, distribution, and reporting services. The
Company also offers complete bindery and letterpress services. The printing
operations contributed $89.0 million, $105.3 million, and $104.5 million or
63.0%, 63.5% and 70.4% of the Company's total revenues for the fiscal years
ended October 31, 2009, 2008 and 2007.
The
Company provides a full range of office products and office furniture primarily
in the budget and middle price ranges, and also offers office design services.
The Company publishes a catalog of high volume, frequently ordered items
purchased directly from manufacturers. These catalog sales account for the bulk
of sales volume and afford sales personnel flexibility in product selection and
pricing. Medium to large volume customers are offered levels of pricing
discounts. In addition, the Company offers a broad line of general office
products through major wholesalers' national catalogs. The Company has
implemented Internet e-commerce sites, which allow customers to order office
products, furniture and forms online. The e-commerce sites include the office
products and office furniture catalog, which is customized specifically for each
customer requesting Internet e-commerce access. These sites include www.stationers-wv.com
and www.cbiwv.com.
In addition, the Company offers customized on-line forms management solutions
through various sites including http://printwithchampion.com
and www.cgc1.com.
The Company believes that its e-commerce sites will allow customers to access
data concerning their company’s purchase habits so as to better control
expenditures for office products and business forms and eliminate large in-house
inventories. The Company is a member of a major office products purchasing
organization. Members benefit from volume discounts, which permit them to offer
competitive prices and improve margins. The Company's office furniture business
focuses on the budget to middle price range lines, although upscale lines are
offered as well. Office products, office furniture and office design operations
contributed $35.9 million, $41.5 million, and $41.4 million, or 25.4%,
25.1% and 27.9% of the Company's total revenues for the fiscal years ended
October 31, 2009, 2008 and 2007.
7
The
Company operates a daily newspaper in Huntington, WV. The Company entered the
newspaper business by purchasing the assets of The Herald-Dispatch from
Gatehouse Media, Inc. The Herald-Dispatch was previously owned by Gannett, Inc.
since 1971 and was sold to Gatehouse Media, Inc. in May of 2007.
The
Herald-Dispatch serves a regional market area in southwestern West Virginia
covering Cabell County and portions of neighboring Wayne County and eastern
Lawrence County, Ohio. The Herald-Dispatch is the primary print advertising
medium for the region, which centers on Huntington and draws business from
across the border into Ohio and Kentucky. The Herald-Dispatch has circulation of
24,000 Monday through Saturday mornings and 30,000 on
Sunday, according to the latest Audit Bureau of Circulations
(ABC) Newspaper Publisher's Statement for the 6 months ended September 30,
2009. The Herald-Dispatch faces a very limited amount of print competition
from other daily newspapers in its home county. It
is estimated, based on research performed by Scarborough
Management, that the designated market area readership (DMA) is
approximately 101,000 on Sunday and 86,000 for weekdays. The
website has attracted approximately 416,000 unique visitors per month and
approximately 5.16 million page views per month based on the latest
Newspaper Publisher's Statement. The historical on-line revenues for The
Herald-Dispatch have decreased from approximately $1.6 million in
fiscal year 2008 to approximately $1.1 million in fiscal year
2009. The six weeks of 2007 from the acquisition on September 14, 2007 to the
Company's fiscal calendar year ending on October 31, 2007 represented
approximately $200,000 of online revenues. The Herald-Dispatch
contributed $16.4 million, $18.9 million, and $2.5 million, or
11.6%, 11.4% and 1.7% of the Company's total revenues for the fiscal years ended
October 31, 2009, 2008 and 2007.
The
operations also publish the Putnam Herald serving Putnam County, West
Virginia, one of the fastest-growing counties in the state, and the
Lawrence Herald in Lawrence County, Ohio. The Putnam Herald and Lawrence
Herald are distributed free via mail on Saturday and Thursday,
respectively.
The
Huntington area has been heavily affected by the de-industrialization
experienced in the Upper Midwest since the 1970s. Huntington
has sought to recast itself as a university town home to 14,000
students. Downtown Huntington was recently revitalized with a $60
million retail/mixed use project; and new industries such as call
centers are opening and expanding their locations. The area is also a regional
shopping hub and growing medical and research center.
Marshall University
borders the downtown area of Huntington. Marshall is over 170 years old and is
the second largest university in West Virginia. The university currently enrolls
9,500 undergraduate and 4,500 graduate students and offers a full range of
programs. Marshall's positive effect on the local economy goes beyond being one
of Huntington's top two employers. The university's research corporation,
medical school and graduate programs are dedicated to bringing research and
development dollars into the community. The university's medical school is a
nationwide leader for rural healthcare delivery.
Huntington
has experienced several positive industrial developments in the last 10 plus
years. According
to the Huntington Area Development Council, 9,000 new jobs have been
brought to the Huntington area in the last ten years and 1.7 million square feet
of building space has been leased, sold or built. In 2005 the $60 million
Pullman Square open-air retail, restaurant and entertainment project was
completed to rejuvenate the downtown "Superblock" area, immediately increasing
downtown usage. The Harris Riverfront Park promenade that stretches
along the Ohio River and downtown is also a target of revitalization
efforts.
8
Kinetic Park was another major development to open for business in 2005. This
95-acre site was developed to become a business and technology
park/retail area. Early tenants included professional service firms and a
restaurant. In addition, Marshall University and the Huntington Area
Development Council, both committed to promoting the biotech industry in the
area, have teamed
up to plan to develop the Velocity Center in Kinetic Park. The
Velocity Center is envisioned as a technology business incubator that will
work with the Robert C. Byrd Biotechnology Center at
Marshall University to explore and expand commercial applications to
technology innovations. The 60,000-square-foot building is also projected to
house other technology businesses, including AFBTECH, the American
Foundation for the Blind Employment and Technology Center in
Huntington.
Other
developments in the area include the opening of two call centers.
Amazon.com opened a call center in 2000 that employs 350. Global Contact
Services opened a call center in 1998 and in recent years announced the
intent to expand their facility and employee base. The expansion will make
them one of the larger employers in the
area.
The
Huntington area also serves as a regional shopping center. The Huntington Mall,
the largest mall in the state, houses over 150 stores, restaurants and
boutiques. It is anchored by Sears, Macy's, JC Penney, Elder Beerman and Dick's
Sporting Goods. Many retail stores surround the mall including Best Buy,
Kohl's and Wal-Mart. Only a few minutes west on U.S. 60 from the Huntington
Mall is another growing shopping plaza, Merritt Creek Farm. This plaza of
30-plus shops includes Home Depot, Target, Marshall's, and the state's first
freestanding Starbucks. River Place, a bustling shopping center located near the
entrance to downtown Barboursville, is just another few miles down the road.
This area features many locally owned restaurants and
stores.
Huntington's medical
community provides health care for the region, which also includes portions of
Ohio and Kentucky. St. Mary's Hospital is the second-largest health care
facility in West Virginia with 393 beds, and has recently completed a $28
million regional heart center and expanded emergency medicine department.
Cabell-Huntington Hospital, with 322 beds, recently opened its $84 million
North Patient Tower, and shares its campus with the Marshall University Medical
Center and the $44 million Edwards Comprehensive Cancer Center,
which opened in 2006. The two hospitals are jointly designated as a
Level II trauma center. The third area hospital, the Huntington VA Medical
Center, is an 80-bed medical and surgical facility. In 1998 the hospital
completed a $10 million research facility. These hospitals are three of the top
employers in the region.
Huntington's historic
roots as an industrial hub remain alive today. Located along the Ohio River,
Huntington was founded as the western terminus of the C&O Railroad. CSX, the
successor to C&O, still maintains operations in the city. Huntington's
inland port along the Ohio River is the largest in the United States in terms of
total tonnage and ton miles, and much of the coal mined in southern West
Virginia is brought to Huntington via train to be transported by river barges to
industrial centers in other parts of the country. Several heavy industrial
plants still line the Ohio River and the
Guyandotte River.
9
ORGANIZATION
Champion’s
three lines of business are comprised of nineteen operating divisions. The
Huntington headquarters provides centralized financial management and
administrative services to all of its business segments.
Commercial
Printing
Eight commercial
printing divisions are located in Huntington, Charleston and Parkersburg, West
Virginia; Lexington, Kentucky; Baton Rouge, Louisiana; Cincinnati, Ohio;
Kingsport, Tennessee; and Asheville, North Carolina. Each has a sales force, a
customer service operation and a pre-press department that serve the customers
in their respective geographic areas. Although each customer's interface is
solely with its local division's personnel, its printing job may be produced in
another division using the equipment most suited to the quality and volume
requirements of the job. In this way, for example, Champion can effectively
compete for high quality process color jobs in Lexington by selling in
Lexington, printing in Cincinnati and binding in Huntington. The full range of
printing resources is available to customers in the entire market area without
Champion having to duplicate equipment in each area.
Interform
Corporation, doing business as Interform Solutions and located in Bridgeville,
Pennsylvania, manufactures business forms and related products, which it sells
through a network of independent distributors concentrated in Eastern
Pennsylvania, New Jersey and metropolitan New York.
Consolidated
Graphic Communications division in Bridgeville, Pennsylvania operates as a full
line printing and printing services distributor. The division offers complete
print management, fulfillment services and B2B e-commerce
solutions.
Carolina
Cut Sheets, Inc., located in Huntington, West Virginia, manufactures single
sheet business forms which are sold to other commercial printers and dealers and
through the Company's other divisions.
The
Huntington, West Virginia division of Chapman Printing Company manufactures
single sheet and multi-part, snap-out and continuous business forms for sale
through many of the Company's commercial printing divisions.
U.S.
Tag, located in Huntington, West Virginia, manufactures and sells tags used in
the manufacturing, shipping, postal, airline and cruise industries throughout
the United States through dealers and the Company's other divisions.
Chapman
Printing in Charleston, West Virginia operates as a full line printing,
printing services distributor and office products and office furniture
distributor. Chapman Printing Charleston offers complete print management,
fulfillment, mail, digital print, office furniture and print and office
products and
B2B e-commerce solutions. The Syscan operation was consolidated into the Chapman
Printing Charleston division effective November 1, 2005. This division also
operates a facility in Morgantown, West Virginia providing printing, office
products and office furniture, distribution and integration services. In 2007,
the Chapman Printing Charleston division spun off its print on demand and mail
operations into a new division located in Charleston, West Virginia operating
under the name Champion Output Solutions. Champion
Output Solutions is a comprehensive transactional printing and mail center
providing statement rendering, check and explanation of benefits variable print,
medical billing and postal optimization.
10
River Cities Printing
was acquired via the acquisition of The Herald-Dispatch and is a commercial
printer with sales comprised primarily of stick-on labels and other commercial
printing. In 2008, River Cities Printing was relocated to an existing facility
in Huntington, WV.
Office
Products, Office Furniture and Office Design
Stationers,
located in Huntington, Clarksburg (doing business as “Champion Clarksburg”),
Morgantown (through its Chapman Printing Morgantown division) and Parkersburg,
West Virginia (doing business as “Chapman Printing”), provides office products
and office furniture primarily to customers in the Company's West Virginia, Ohio
and Kentucky market areas. Products are sold by printing division sales people
and delivered in bulk daily to each division, or shipped directly to customers.
Smith
& Butterfield, located in Evansville, Indiana, provides office products and
office furniture primarily to customers in the Company's Indiana and Kentucky
market areas. Products are sold by Smith & Butterfield sales personnel and
delivered to customers daily.
Stationers,
through its Capitol division, offers office design services throughout West
Virginia and eastern Kentucky.
Newspaper
The Herald-Dispatch, located in Huntington, WV, publishes a daily
newspaper with a daily and Sunday circulation of approximately 24,000 and
30,000 respectively.
PRODUCTS
AND SERVICES
Printing
Services
Champion's
primary business is commercial printing and business forms manufacturing. The
Company, unlike most of its regional competitors, offers the full range of
printing production processes, enabling the Company to provide customers a
one-stop, one-vendor source without the time and service constraints of
subcontracting one or more aspects of production. Major production areas
include: (i) printing of business cards, letterhead, envelopes, and one, two, or
three color brochures; (ii) process color manufacturing of brochures, posters,
advertising sheets and catalogues; (iii) die cutting and foil stamping; (iv)
bindery services, including trimming, collating, folding and stitching the final
product; (v) forms printing, encompassing roll-to-roll computer forms, checks,
invoices, purchase orders and similar forms in single-part, multi-part,
continuous and snap-out formats; (vi) tag and label manufacturing; (vii)
high volume process color web printing of brochures and catalogs; and (viii)
output solutions including print on demand, inserting and mailing services. The
capabilities of the Company's various printing divisions are stated
below.
11
Division
|
|
Sales
& Customer Service
|
|
Pre-Press
|
|
Sheet
Printing
|
Rotary
Printing
|
|
Full
Color
|
|
High
Volume Full Color
|
Output
Solutions
|
|
|
|
|
|
|
|||||||
Huntington
|
|
*
|
|
*
|
|
*
|
*
|
|
|
|
|
|
Charleston
/ Morgantown
|
|
*
|
|
*
|
|
|
|
|
|
|
|
|
Champion
Output Solutions
|
*
|
*
|
||||||||||
Parkersburg
|
|
*
|
|
*
|
|
*
|
|
|
*
|
|
|
|
Lexington
|
|
*
|
|
*
|
|
|
|
|
|
|
|
|
Champion
Graphic Communications
(Baton Rouge)
|
|
*
|
|
*
|
|
*
|
|
|
*
|
|
|
|
Champion
Graphic Communications
(New Orleans)
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Carolina
Cut Sheets, Inc.
|
|
*
|
|
|
|
|
|
|
|
|
|
|
U.S.
Tag & Ticket Company, Inc.
|
|
*
|
|
*
|
|
|
*
|
|
|
|
|
|
Donihe
Graphics, Inc.
|
|
*
|
|
*
|
|
*
|
*
|
|
*
|
|
*
|
|
The
Merten Company
|
|
*
|
*
|
*
|
*
|
|
||||||
Interform
Corporation
|
|
*
|
|
*
|
|
|
*
|
|
*
|
*
|
||
Consolidated
Graphic Communications
|
|
*
|
*
|
|
||||||||
Blue
Ridge Printing Co., Inc.
|
|
*
|
*
|
*
|
*
|
|
||||||
River Cities Printing
|
*
|
|
*
|
*
|
* -
Services Provided
12
Office
Products, Office Furniture and Office Design
Champion
provides its customers with a wide range of product offerings in two major
categories: supplies, such as file folders, paper products, pens and pencils,
computer paper and laser cartridges; and furniture, including budget and middle
price range desks, chairs, file cabinets and computer furniture. Office supplies
are sold primarily by Company salespeople through the Company's own catalogs.
Office furniture is primarily sold from catalogs and supplied from in-house
stock. Special orders constitute a small portion of sales. The Capitol division
of Stationers provides interior design services to commercial customers. The
design services include space planning, purchasing and installation of office
furniture, and management of design projects.
Newspaper
The Company provides
its customers in the Tri-State regions surrounding Huntington, West Virginia
with the primary and premier print advertising solutions for the
region.
MANUFACTURING
AND DISTRIBUTION
The
Company's pre-press facilities have desktop publishing, typesetting, laser
imagesetting and scanning/retouching equipment, as well as complete layout,
design, stripping and plate processing operations. Sheet printing equipment (for
printing onto pre-cut, individual sheets)
includes single color duplicators, single to eight color presses and envelope
presses. Rotary equipment (for printing onto continuous rolls of paper) includes
multi-color business form web presses, carbon and multi-part collators, and a
high-speed 5-color half-web press.
Binding
equipment consists of hot-foil, embossing and die cutting equipment,
perforators, folders, folder-gluers, scoring machines,
collator/stitcher/trimmers for saddle stitching, automatic and manual perfect
binders, numbering machines and mailing equipment.
Each
of the Company's offices is linked with overnight distribution of products and
on-line electronic telecommunications permitting timely transfer of various
production work from facility to facility as required. While the Company
maintains a fleet of delivery vehicles for intracompany and customer deliveries,
it utilizes the most cost effective and expeditious means of delivery, including
common carriers.
Requirements
for the Company's press runs are determined shortly before the runs are made
and, therefore, backlog is not a meaningful measure in connection with the
Company's printing business.
The
Company's inventory goal is to have approximately 85% of the office product
items the Company sells in stock. Another 12% are ordered on a daily basis and
received overnight. The remaining 3% are items that come direct from
manufacturers and may take one week or more from placement of order to delivery
to customer. Office furniture sales for mid-line and budget are made primarily
from the Company's in-house stock. However, special orders from manufacturers
and project furniture may require 30 to 90 days for delivery.
13
The newspaper is produced nightly at its own in-house facility. The paper
is then distributed via contract haulers between 3:00AM and 4:00AM each morning.
The contract haulers then deliver the papers to each of the route delivery
personnel for a targeted delivery of 6:00AM each morning.
CUSTOMERS
The
Company believes that its reputation for quality, service, convenience and
selection allows it to enjoy significant loyalty from its customers. Champion's
marketing strategy is to focus on manufacturers, institutions, financial
services companies and professional firms. Consistent with customary practice in
the commercial printing and office products industries, the Company ordinarily
does not have long-term contracts with its customers, although a number of high
volume customers issue yearly purchase orders. These purchase orders, which are
typically for office products but may include printing services, are for firm
prices adjustable for paper price changes. Depending upon customer satisfaction
with price and service, these purchase orders may be renewed for another year or
up to three years without repeating the full bidding process.
During
the fiscal years ended October 31, 2009,
2008 and 2007, no single customer accounted for more than 3% of the
Company’s total revenues. Due to the project-oriented nature of customers'
printing and furniture requirements, sales to particular customers may vary
significantly from year to year depending upon the number and size of their
projects.
SUPPLIERS
The
Company has not experienced difficulties in obtaining materials in the past and
does not consider itself dependent on any particular supplier for supplies. The
Company has negotiated company-wide paper purchasing agreements directly with
paper manufacturers and is a member of a major office products buying group,
which management believes provides the Company with a competitive advantage. The
Company is also affiliated with a buying group with a national organization for
its newsprint purchases.
COMPETITION
The
markets for the Company's printing services and office products are highly
competitive, with success based primarily on price, quality, production
capability, capacity for prompt delivery and personal service.
Champion's
printing competitors are numerous and range in size from very large national
companies with substantially greater resources than the Company to many smaller
local companies. In recent years, despite consolidation within the printing
industry, there has been a substantial increase in technological advances in new
equipment, resulting in excess capacity and highly competitive pricing. The
Company has remained competitive by maintaining its printing equipment at
state-of-the-art levels and emphasizing personal attention to
customers.
14
Large
national and regional mail order discount operations provide significant
competition in the office products and office furniture business. The economies
afforded by membership in a national purchasing association and by purchasing
directly from manufacturers, and the high level of personal services to
customers, contribute substantially to the Company's ability to compete in the
office supply and office furniture market segments.
The Herald-Dispatch faces limited competition from other daily newspapers
in its primary market area of Cabell County, West Virginia. The Herald-Dispatch
competes with other advertising media in its designated market area, including
television and radio advertising.
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 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 and are included in normal
operating expenses. 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.
GEOGRAPHIC
CONCENTRATION AND ECONOMIC CONDITIONS
The
Company's operations and the majority of its customers are located in the United
States of America, east of the Mississippi River. The Company and its
profitability may be more susceptible to the effects of unfavorable or adverse
local or regional economic factors and conditions than a company with a more
geographically diverse customer base.
The Company's
newspaper operations are geographically concentrated and serve a regional market
area in southwestern West Virginia primarily covering Cabell County, West
Virginia, parts of neighboring Wayne County, West Virginia and eastern Lawrence
County, Ohio.
On
August 29, 2005, Hurricane Katrina made landfall and subsequently caused
extensive flooding and destruction along the coastal areas of the Gulf of
Mexico, including New Orleans and other communities in Louisiana and Mississippi
in which Champion conducts business. Operations in many of the Company’s markets
were disrupted by both the evacuation of large portions of the population as
well as damage and/or lack of access to the Company’s operating facility in New
Orleans.
The
Company filed insurance claims related to both actual and contingent
losses. The Company received an advance to claim payment from an insurance
company of $300,000 in February 2006 and final settlement claims of $278,000 in
April and May 2006. The Company recorded the $300,000 payment as an insurance
recovery and related receivable at January 31, 2006. The Company recorded
additional charges of approximately $42,000 in the first quarter of 2006
associated with Hurricane Katrina. The Company received a second advance to
claim check in April of 2006 in the amount of $200,000 and a full settlement of
any and all claims check of $78,000 in May of 2006. The Company recorded the
aggregate amount of these checks as an insurance recovery and the $78,000 as a
related receivable at April 30, 2006. The Company incurred additional charges of
$234,000 primarily related to additional inventory valuation reserves and costs
associated with relocation in the second quarter of 2006. During the fourth
quarter of 2006 the Company successfully negotiated an early lease termination
related to its New Orleans location resulting in Katrina related recoveries of
approximately $76,000.
15
SEASONALITY
Our business
is subject to seasonal fluctuations that we expect to continue to be reflected
in our operating results in future periods.
Historically, the Company has experienced
a greater portion of its profitability 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.
On a historical basis
The Herald-Dispatch's first and third calendar quarters
of the year tended to be the weakest because advertising volume is at its lowest
levels following the holiday season and a seasonal slowdown in the summer
months. Correspondingly, on a historical basis
the fourth calendar quarter followed by the second calendar quarter
tended to be the strongest quarters. The fourth calendar quarter includes
heavy holiday season advertising. Other factors that affect our quarterly
revenues and operating results may be beyond our control, including changes in
the pricing policies of our competitors, the hiring and retention of key
personnel, wage and cost pressures, distribution costs, changes in newsprint
prices and general economic factors.
EMPLOYEES
On
October 31, 2009, the Company had approximately 790 employees.
The
Company's subsidiary, Interform Corporation, is party to a collective bargaining
agreement with the United Steelworkers of America, AFL-CIO-CLC on behalf of its
Local Union 8263 covering all production and maintenance employees (totaling
approximately 40 employees
at October 31, 2009) at its Bridgeville, Pennsylvania facility. This contract
expires May 31, 2010. As a result of the acquisition of The
Herald-Dispatch, the Company also is party to a collective bargaining agreement
with Graphic Communication Conference/ International Brotherhood of
Teamsters Local 619-M of District Council 3 covering newspaper
press production employees (totaling approximately 10 employees at October
31, 2009) at The Herald-Dispatch Huntington, West Virginia location. The
contract expires December 31, 2010. The Company believes relations with the
unions and covered employees are good.
EXECUTIVE
OFFICERS OF CHAMPION
|
|
Position
and offices with Champion;
|
|
|
|
Name
|
Age
|
Principal
occupation or employment last five years
|
Marshall
T. Reynolds
|
73
|
Chief
Executive Officer and Chairman of the Board of Directors of the Company
from December 1992 to present; President of the Company December 1992 to
September 2000; President and General Manager of Harrah and Reynolds,
predecessor of the Company from 1964 (and sole shareholder from 1972 to
present) to 1993; Chairman of the Board of Directors of River City
Associates Inc. (owner of the Pullman Plaza Hotel) since 1989; Chairman of
the Board of Directors of Broughton Foods Company from November 1996 to
June 1999; Director (from 1983 to November 1993) and Chairman of the Board
of Directors (from 1983 to November 1993) of Banc One West Virginia
Corporation (formerly Key Centurion Bancshares, Inc.).
|
Toney
K. Adkins
|
60
|
President
and Chief Operating Officer of the Company since January 2005; Vice
President-Administration of the Company from November 1995 to January
2005; President, KYOWVA Corrugated Container Company, Inc. from 1991 to
1996.
|
J. Mac Aldridge | 68 |
Senior Vice President of the Company and Division Manager -
Stationers since January 2005; Vice President and Division Manager -
Stationers from December 1992 to January 2005; Vice President of Company
and Division Manager - Huntington from September 1995 to October 1997;
President and General Manager of Stationers since November 1989; Sales
Representative of Huntington Division of Harrah and Reynolds from July
1983 to October 1989.
|
16
R.
Douglas McElwain
|
62
|
Senior
Vice President and Division Manager - Champion Graphic Communications
Division of the Company since January 2005; Vice President and Division
Manager - Bourque Printing division of the Company from December 1993 to
January 2005; General Manager of Bourque Printing from June 1993 to
December 1993; Sales Representative of Charleston Division of Harrah and
Reynolds and Company from 1986 until June 1993.
|
Todd
R. Fry
|
44
|
Senior
Vice President and Chief Financial Officer of the Company since January
2005; Vice President and Chief Financial Officer of the Company from
November 1999 to January 2005; Treasurer and Chief Financial Officer of
Broughton Foods Company from September 1997 to June 1999; Coopers &
Lybrand L.L.P. from 1991 to September 1997.
|
Walter
R. Sansom
|
80
|
Secretary
of the Company since December 1992; Production Coordinator of the Company
since December 1992 and of Harrah and Reynolds from August 1968 to
December 1992.
|
James
A. Rhodes
|
53
|
Senior
Vice President of the Company since January 2005; Vice President of the
Company from March 1999 to January 2005; President of Interform since
October 2004; President of Consolidated Graphic Communications Division of
Interform since February 1999; Vice President of Sales of Consolidated
Graphic Communications from 1996 to 1999; General Sales Manager - Eastern
Division of Consolidated Graphic Communications from 1995 to
1996.
|
ITEM
1A - RISK FACTORS
The Company’s business
and results of operations are subject to a number of risks, many of which are
outside of the Company’s control. In addition to the other information in this
report, readers should carefully consider that the following important factors,
among others, including risks not presently known or currently deemed immaterial
by us could materially impact the Company’s business and future results of
operations.
Dependence
on Marshall T. Reynolds; Control of the Company.
The
Company's operations and prospects are dependent in large part on the continued
efforts of Marshall T. Reynolds. The loss of Mr. Reynolds could have an
adverse effect on the Company. In addition, by virtue of Mr. Reynolds' ownership
of Company common stock, Mr. Reynolds will continue to significantly influence
our operations. As of October 31, 2009, Marshall T. Reynolds and his affiliated
entities, including The Harrah and Reynolds Corporation ("Harrah and Reynolds"),
held 4,266,127 shares (41.8%) of the common stock of the Company. Sales by
Mr. Reynolds of common stock could adversely affect the prevailing market price
of the common stock. The Company is unable to estimate the amount of common
stock, if any, that may be sold in the future.
17
The
Company operates in a highly competitive market that could negatively
impact our results of operations.
In the printing segment, there has been an ongoing consolidation resulting in
fewer competitors. This in part has resulted in numerous competitors that are
larger with greater geographic diversity and broader product offerings. In
addition, the office products and office furniture industries are extremely
competitive and fragmented. The Company competes with numerous large and small
companies that operate in each industry, some of which have greater financial
resources than the Company. The Company competes on the basis of its reputation
for quality, production capability, prompt delivery, price and strength of its
continuing customer relationships.
Our supply-chain
management services are embedded into our printing and office products and
office furniture segments. The competitive factors faced by the Company
include customer service, price, distribution geography, information
technology and the customer's fulfillment and distribution needs.
The
Company may be adversely impacted by the rising costs of critical raw materials
such as paper, ink, energy, postage and other raw materials.
Our primary
raw material is paper, therefore, the purchase of paper and other
raw materials such as ink, energy, postage and items we distribute such as
office products and office furniture and goods and services represent a
large portion of our costs. Any increases in the costs of these items will also
increase our costs. Depending on the nature of such increases we may not be able
to pass these costs on to customers through higher prices. Increases in the
costs of these items may also adversely impact our customers’ demand for
printing and related services as well as for office products and office
furniture.
The
Company has substantial investment in the credit worthiness and financial
condition of our customers.
The largest current asset on the Company's balance sheet on a net basis is our
accounts receivable balances from our customers. We grant credit to
substantially all of our customers. A decline in financial condition across a
significant component of our customer base could hinder our ability to collect
amounts owed by customers. In addition, such a decline could result in lower
demand for our services. The potential causes of such a decline include national
or local economic downturns, the fact that many of our customers are in
highly-competitive industries or markets and the impact of regulatory actions
may impact the financial stability of our customers.
We may have difficulty adjusting our operating models
to meet changing or current market conditions.
Because the
markets in which we compete are highly-competitive, we must continue to improve
our operating efficiency in order to maintain or improve our profitability.
Although we have been able to improve efficiency and reduce costs in the past,
there is no assurance that we will continue to do so in the future. In addition,
the need to reduce ongoing operating costs may result in significant up-front
costs to reduce workforce, close or consolidate facilities, or upgrade equipment
and technology.
18
We may be unable to grow through acquisitions or to
successfully integrate acquired businesses.
The Company
has historically grown through a combination of organic growth and
acquisitions. It is critical that the Company achieve the anticipated benefits
of acquisitions. The integration of companies that have previously operated
independently may result in significant challenges, and we may be unable to
accomplish the integration smoothly or successfully. In particular, the
coordination of geographically dispersed organizations with differences in
corporate cultures and management philosophies may increase the difficulties of
integration. The integration of acquired businesses may also require the
dedication of significant management resources, which may temporarily shift
senior management’s attention from the other day-to-day operations of the
Company. Our strategy is, in part, predicated on our ability to realize cost
savings and to increase revenues through the acquisition of businesses that
strategically enhance our capabilities and
services.
We may have difficulty hiring and retaining
appropriate employees including senior management.
Our success
depends, in part, on our general ability to attract, develop, motivate and
retain highly skilled employees. The loss of a significant number of our
employees or the inability to attract, hire, develop, train and retain
additional skilled personnel could have a material adverse effect on us. We
currently operate in several locations with geographic diversity, individual
locations may encounter strong competition from other employers for skilled
labor. In addition, many members of our management have significant industry
experience and a long track record with us that is important to our continued
success. If one or more members of our senior management team leave and we
cannot replace them with a suitable candidate quickly, we could experience
difficulty in managing our business properly, which could harm our business and
results of operations.
We
may be negatively impacted by strikes or other work stoppages by our
employees.
We employ
approximately 50 persons who are covered by collective bargaining agreements. If
our unionized employees were to engage in a concerted strike or other work
stoppage, or if our other employees were to become unionized, we could
experience a disruption of operations, higher labor costs or both.
We may have increased employee benefit costs for
health care and other benefits.
We provide
health care and certain other benefits to our employees. In recent years, costs
for health care have increased more rapidly than general inflation in the U.S.
economy. If this trend in health care costs continues, our cost to provide such
benefits could increase, adversely impacting our business and results of
operations.
We may be negatively impacted by declines in general
economic conditions or acts of war and terrorism.
Demand for
printing services is highly correlated with general economic conditions. A
decline in U.S. economic conditions may, therefore, adversely impact our
business and results of operations. Because such outcomes are difficult to
predict, the industry may experience excess capacity resulting in declines in
prices for our services. The overall business climate may also be impacted by
foreign wars or domestic or foreign acts of terrorism. Such acts may have sudden
and unpredictable adverse impacts on demand for our services.
19
We may face adverse pricing pressures as a result of
operating in a highly-competitive market.
The markets
for our services are highly fragmented and we have a large number of
competitors, resulting in a highly-competitive market and increasing the risk of
adverse pricing pressures in various circumstances outside of our control,
including economic downturns.
We are dependent on the markets utilizing printed
materials in lieu of alternative media. If this changes we may be adversely
affected.
In addition to
traditional non-print based marketing and advertising channels, online
distribution and hosting of media content may gain broad acceptance or preferred
status relative to printed materials among consumers generally and have an
adverse effect on our business. Consumer acceptance of electronic delivery as
well as the extent that consumers may have previously replaced traditional
reading of print material with online hosted media contents is uncertain. We
have no ability to predict the likelihood that this may occur.
We
may be adversely affected by regulatory requirements, tax requirements and The
Sarbanes-Oxley Act.
We are
subject to numerous rules and regulations, including, but not limited to,
environmental and health and welfare benefit regulations as well as those
associated with being a public company as well as numerous federal, state, and
local tax rules and regulations. These rules and regulations and associated
interpretations may be changed by local, state or federal governments or
agencies. Changes in these regulations may result in a significant increase in
our compliance costs. Compliance with changes in rules and regulations could
require increases to our workforce, increased cost for services, compensation
and benefits, or investments in new or upgraded equipment. In addition, audits
and examinations of prior years may result in liabilities and additional
financial burdens. The Company will be subject to reporting on internal
controls in accordance with Section 404 of The Sarbanes-Oxley Act for
auditors attestation for fiscal years ending on or after June 15,
2010.
The Company is currently unable to predict the cost or difficulties required to
complete such certifications.
We
are highly dependent on information technology. If our systems fail or are
unreliable our operations may be adversely impacted.
The
efficient operation of our business depends on our information technology
infrastructure and our management information systems. In addition, production
technology in the printing industry has continued to evolve specifically
related to the pre-press component of production. We rely on our management
information systems to effectively manage accounting and financial functions,
job entry, tracking and cost accumulation and certain purchasing functions as
well as fulfillment and inventory management including e-commerce activities.
Our information technology infrastructure includes both third party solutions
and applications designed and maintained internally. Since our Company operates
on multiple platforms, the failure of our information technology infrastructure
and/or our management information systems to perform could severely disrupt our
business and adversely affect our results of operation. In addition, our
information technology infrastructure and/or our management information systems
are vulnerable to damage or interruption from natural or man-made disasters,
terrorist attacks, computer viruses or hackers, power loss, or other computer
systems, Internet telecommunications or data network failures. Any such
interruption could adversely affect our business and results of operations.
Competition
from alternative forms of media may impair our ability to achieve revenue
growth.
Advertising produces
the predominant share of our newspaper revenues. With the continued development
of alternative forms of media, particularly those based on the Internet, our
traditional print business faces increased competition. Alternative media
sources also affect our ability to increase our circulation revenues. This
competition could make it difficult for us to grow our advertising and
circulation revenues, which we believe will challenge us to expand the
contributions of our online business.
Changes
in economic conditions in the markets we serve may produce volatility in
demand for our products and services.
Our
operating results depend on the relative strength of the economy in our
principal newspaper market as well as the strength or weakness of national and
regional economic factors. Continuing or deepening softness in the U.S. economy
could significantly affect key national advertising and automotive advertising,
as well as retail and classified employment revenue.
20
If
there is a significant increase in the price of newsprint or a reduction in the
availability of newsprint, our results of operations and financial condition may
suffer.
Newsprint is
the major component of our cost of raw materials associated with production of
the newspaper. Accordingly, our earnings are sensitive to changes in newsprint
prices. We have not attempted to hedge fluctuations in the normal purchases of
newsprint or enter into contracts with embedded derivatives for the purchase of
newsprint. If the price of newsprint increases materially, our operating results
could be adversely affected. If our newsprint suppliers experience labor unrest,
transportation difficulties or other supply disruptions, our ability to produce
and deliver newspapers could be impaired and/or the cost of the newsprint could
increase, both of which would negatively affect our operating
results.
Our
indebtedness could adversely affect our financial health and reduce the funds
available to us for other purposes, including dividend
payments.
We have a significant
amount of indebtedness. At October 31, 2009, we had total indebtedness of
$66.7 million under our credit facilities. Our interest expense for the
year ended October 31, 2009 was approximately $5.2 million. At October
31, 2009, the borrowings under our credit facility were subject to a floating
interest rate of LIBOR plus the applicable margin or the prime rate plus
the applicable margin. Subsequent to October 31, 2009 the Administrative Agent
for Lenders suspended our LIBOR borrowing option. The borrowings under
our credit facility were hedged through the execution of interest rate
hedge agreements that convert the floating interest rate component to an
effective interest rate of 4.78% plus the applicable LIBOR margin on
initial borrowings of $25 million subsequently adjusted for scheduled
amortization of these borrowings through October 29, 2010.
On December 29, 2009, the Administrative
Agent and Lenders under the Company's Credit Agreement dated September 14, 2007
("Credit Agreement"), the Company and Marshall T. Reynolds entered into a
Forbearance Agreement (the "Forbearance Agreement") which provides, among other
things, that during a standstill period commencing on December 29, 2009 and
ending on March 31, 2010 (unless sooner terminated by default of Champion under
the Forbearance Agreement or the Credit Agreement), the Required Lenders are
willing to temporarily forbear exercising certain rights and remedies available
to them, including acceleration of the obligations or enforcement of any of the
liens provided for in the Credit Agreement. The Company acknowledged in the
Forbearance Agreement that as a result of the existing defaults, the Lenders are
entitled to decline to provide further credit to the Company, to terminate their
loan commitments, to accelerate the outstanding loans, and to enforce their
liens.
Volatility in U.S. credit markets could affect the
Company's ability to obtain financing to fund acquisitions, investments, or
other significant operating or capital expenditures.
At the end of 2009, the company had approximately $66.7 million of
indebtedness. A further tightening of credit availability could restrict the
Company's ability to finance significant transactions and also limit its ability
to refinance its existing capital structure or to fund its current
operation pursuant to the terms of the Forbearance Agreement.
We
may not be able to pay or maintain dividends and the failure to do so may
negatively affect our share price.
We have
historically paid regular quarterly dividends to the holders of our common
stock. Our ability to pay dividends, if any, will depend on, among other things,
our cash flows, our cash requirements, our financial condition, the degree to
which we are or become leveraged, contractual restrictions binding on us,
provisions of applicable law and other factors that our board of directors may
deem relevant. There can be no assurance that we will generate sufficient cash
from continuing operations in the future, or have sufficient surplus or net
profits to pay dividends on our common stock. Our dividend policy is based upon
our directors’ current assessment of our business and the environment in which
we operate and that assessment could change based on competitive or
technological developments (which could, for example, increase our need for
capital expenditures) or new growth opportunities. Our board of directors may,
in its discretion, amend or repeal our dividend policy to decrease the level of
dividends or entirely discontinue the payment of dividends. The reduction or
elimination of dividends may negatively affect the market price of our common
stock.
As a result
of the Company's inability to remain in compliance with various financial
covenants of the Credit Agreement during fiscal 2009, the Board of Directors
suspended the Company's dividend. Any future dividends will be subject to the
above mentioned factors under the current Forbearance Agreement and restricted
payments are not permitted.
21
Our
newspaper business is subject to seasonal and other fluctuations, which affects
our revenues and operating results.
Our business is
subject to seasonal fluctuations that we expect to continue to be reflected in
our operating results in future periods. On a historical basis The
Herald-Dispatch's first and third calendar quarters of the year tended to
be the weakest because advertising volume is at its lowest levels following the
holiday season and a seasonal slow down in the summer
months. Correspondingly, on a historical basis
the fourth calendar quarter followed by the second calendar quarter
tended to be the strongest quarters. The fourth calendar quarter includes
heavy holiday season advertising. Other factors that affect our quarterly
revenues and operating results may be beyond our control, including changes in
the pricing policies of our competitors, the hiring and retention of key
personnel, wage and cost pressures, distribution costs, changes in newsprint
prices and general economic factors.
We
could be adversely affected by declining newspaper
circulation.
According to the
Newspaper Association of America, overall daily newspaper circulation, including
national and urban newspapers, has continued to decline. There can be no
assurance that our circulation will not decline in the future. Further declines
in circulation could impair our ability to maintain or increase our advertising
prices, cause purchasers of advertising in our publications to reduce or
discontinue those purchases and discourage potential new advertising customers
which could have a material adverse effect on our business, financial condition,
results of operations or cash flows.
ITEM
2 - PROPERTIES
The Company conducts its operations primarily from twenty-one (21) different
physical locations, fourteen (14) of which are leased and seven (7) of which are
owned in fee simple by Company subsidiaries.
The Company also owns two facilities of which the operations have been
consolidated into other Champion facilities. The Company also leases
other
facilities primarily as sales and customer service locations, these operations
and locations are not included as core operating facilities. The Company does
not anticipate any issues in regards to the renewal of certain leases when the
terms expire. The properties leased and certain of the lease terms are set forth
below and may be subject to periodic adjustments based on the consumer price
index:
Property
|
|
Division
Occupying Property
|
|
Square
Feet
|
|
Annual
Rental
|
|
Expiration
Of Term
|
|||||||
2450
1st
Avenue
Huntington,
West Virginia (1)
|
|
Chapman
Printing- Huntington
|
|
85,000
|
$116,400
|
|
2013
|
||||||||
1945
5th
Avenue
Huntington,
West Virginia (1)
|
|
Stationers
|
|
37,025
|
30,000
|
|
2013
|
22
Property
|
|
Division
Occupying Property
|
|
Square
Feet
|
|
Annual
Rental
|
|
Expiration
Of Term
|
|||||||
615-619
4th
Avenue
Huntington,
West Virginia (1)
|
|
Stationers
|
|
59,641
|
21,600
|
|
2013
|
||||||||
405
Ann Street
Parkersburg,
West Virginia (1)
|
|
Chapman
Printing - Parkersburg
|
|
36,614
|
57,600
|
|
2013
|
||||||||
890
Russell Cave Road
Lexington,
Kentucky (1)
|
|
Chapman
Printing - Lexington
|
|
20,135
|
57,600
|
|
2013
|
||||||||
2800
Lynch Road
Evansville,
Indiana (1)
|
|
Smith
& Butterfield
|
|
42,375
|
121,640
|
|
2014
|
||||||||
1901
Mayview Road
Bridgeville,
Pennsylvania (1)
|
|
Interform
Corporation
|
|
120,000
|
293,503
|
|
2013
|
||||||||
1515
Central Parkway
Cincinnati,
Ohio (1)
|
|
The
Merten Company
|
|
40,000
|
107,163
|
|
2011
|
||||||||
1214
Main Street
Wheeling,
West Virginia (2)
|
|
CBI
- Wheeling
|
|
22,000
|
37,200
|
|
2010
|
||||||||
3000
Washington Street
Charleston,
West Virginia (1)
|
|
Chapman
Printing-Charleston
|
|
37,710
|
150,000
|
|
2014
|
||||||||
951
Point Marion Road
Morgantown,
West Virginia (1)
|
Chapman
Printing-Charleston
|
5,850 |
42,000 |
2010 |
|||||||||||
120
Hills Plaza
Charleston,
West Virginia (3)
|
Champion Output Solutions | 22,523 | 115,992 |
2011
|
|||||||||||
1539-A River Oaks Road
New Orleans, Louisiana (2)
|
Champion Graphic Communications | 3,000 | 36,000 |
2011
|
|||||||||||
1639-51
7th Avenue
Huntington, West Virginia (1)
|
The Herald-Dispatch | 14,000 | 39,600 |
Terminated
in 2009
|
|||||||||||
Route 2 Industrial Lane
Huntington, West Virginia (1)
|
The Herald-Dispatch | 35,000 | 84,000 |
2013
|
23
(1)
Lease
is “triple net”, whereby the Company pays for all utilities, insurance, taxes,
repairs and maintenance and all other costs associated with
properties.
(2) Lease is gross to the extent it excludes taxes and insurance
during the lease term.
(3) Lease
is gross to the extent it excludes taxes and insurance during the initial lease
term. The Company has renewal options through 2024 at various rates and the
lease essentially converts to a triple net lease in the renewal period.
The Company has entered into a sublease agreement commencing January 2007,
through June 30, 2011, at an annual sublease of $44,370, representing
approximately 8,500 square feet.
The
Dallas Printing subsidiary owns, and previously operated from, a single-story
masonry structure of approximately 19,600 square feet at 321-323 East Hamilton
Street, Jackson, Mississippi. This building was vacated during the fourth
quarter of 2005. The Company is currently evaluating its options regarding this
facility.
The
Chapman Printing Charleston operation previously conducted business from a
single story masonry building of approximately 21,360 square feet owned by the
Company at 1563 Hansford Street, Charleston, West Virginia. This building was
vacated during the second quarter of 2005. The Company is currently evaluating
its facility needs in Charleston and the future use, if any, of this building.
The Company also owns a structure in Charleston, WV that was purchased as a
result of the Syscan acquisition. This building is located at 811 Virginia
Street West and is a three-story block building.
The
Bourque Printing subsidiary owns, and operates from, a single-story building of
approximately 42,693 square feet at 10848 Airline Highway, Baton Rouge,
Louisiana. The Company also owns a warehouse and storage facility of
approximately 18,501 square feet at 13112 South Choctaw Drive, Baton Rouge,
Louisiana.
Stationers'
Clarksburg operation is conducted from a single-story masonry building of
approximately 20,800 square feet owned by the Company at 700 N. Fourth Street,
Clarksburg, West Virginia.
Donihe
owns, and operates from, a single-story steel building of approximately 38,500
square feet situated on roughly 14.5 acres at 766 Brookside Drive, Kingsport,
Tennessee.
Blue
Ridge owns, and operates from, a two-story masonry and steel building of
approximately 28,000 square feet and a contiguous 1,692 square foot former
residential structure at 544 and 560 Haywood Road, Asheville, North
Carolina.
24
The Herald-Dispatch owns and operates
from a five-story masonry building of approximately 65,000 square feet at 946
5th Avenue, Huntington, West Virginia.
The Company
continually reviews its production facilities and has and continues to
consolidate facilities as deemed economically feasible. The Company believes its
production facilities are suitable and adequate to meet current production
needs.
ITEM
3 - LEGAL PROCEEDINGS
The Company
is subject to various claims and legal actions that arise in the ordinary course
of business. In the opinion of management, after consulting with legal counsel,
the Company believes that the ultimate resolution of these claims and legal
actions will not have a material effect on the consolidated financial statements
of the Company.
ITEM
4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters
were submitted to a vote of security holders during the fourth quarter of the
fiscal year covered by this report.
PART
II
ITEM
5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Champion
common stock has traded on the National Association of Securities Dealers, Inc.
Automated Quotation System (“NASDAQ”) National Market System (now Global
Market) since the Offering under the symbol “CHMP.”
The
following table sets forth the high and low closing prices for Champion common
stock for the period indicated. The range of high and low closing prices are
based on data from NASDAQ and does not include retail mark-up, mark-down or
commission.
25
Fiscal Year 2009
|
Fiscal
Year 2008
|
||||||
High
|
Low
|
High
|
Low
|
||||
First
quarter
|
$3.40
|
$2.20
|
|
$
6.30
|
$
4.45
|
||
Second quarter
|
3.00
|
1.40
|
|
5.92
|
4.55
|
||
Third
quarter
|
1.98
|
1.42
|
|
5.16
|
4.25
|
||
Fourth
quarter
|
2.09
|
1.65
|
|
5.45
|
3.07
|
||
At the close of
business on January 14,
2010, there were 400 shareholders of record of Champion common stock. The
shareholders of record are determined by the Company’s transfer
agent.
The
following table sets forth the quarterly dividends per share declared on
Champion common stock.
Fiscal
Year 2010
|
Fiscal
Year 2009
|
Fiscal
Year 2008
|
|||||||||
|
First
quarter
|
$ |
-
|
$ |
0.06
|
$ |
0.06
|
||||
|
Second quarter
|
-
|
-
|
0.06
|
|||||||
|
Third
quarter
|
-
|
-
|
0.06
|
|||||||
|
Fourth quarter
|
- |
-
|
0.06
|
26
ITEM
6 - SELECTED FINANCIAL DATA
SELECTED
CONSOLIDATED FINANCIAL DATA
The
following selected consolidated financial data for each of the five years in the
period ended October 31, 2009, have been derived from the Audited Consolidated
Financial Statements of the Company. The information set forth below should be
read in conjunction with the Audited Consolidated Financial Statements, related
notes, and the information contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations appearing elsewhere herein.
Year
Ended October 31,
|
|||||||||||||||||||||
2009 (3)
|
2008
|
2007 (2)
|
2006 (1)
|
2005 (1)
|
|||||||||||||||||
(Restated) | |||||||||||||||||||||
(In
thousands, except share and per share data)
|
|||||||||||||||||||||
OPERATING
STATEMENT DATA:
|
|||||||||||||||||||||
Revenues:
|
|||||||||||||||||||||
Printing
|
$ |
88,990
|
$ |
105,275
|
$ |
104,500
|
$ |
108,475
|
$ |
100,308
|
|||||||||||
Office
products and office furniture
|
35,874
|
41,540
|
41,449
|
38,774
|
36,467
|
||||||||||||||||
Newspaper |
16,394
|
18,939 | 2,540 | - | - | ||||||||||||||||
Total
revenues
|
141,258
|
165,754
|
148,489
|
147,249
|
136,775
|
||||||||||||||||
Cost
of sales & newspaper operating costs:
|
|||||||||||||||||||||
Printing
|
66,856
|
75,590
|
75,617
|
77,077
|
72,828
|
||||||||||||||||
Office
products and office furniture
|
24,859
|
28,457
|
28,834
|
26,778
|
25,694
|
||||||||||||||||
Newspaper cost of sales & operating costs |
8,715
|
9,492 | 1,188 | - | - | ||||||||||||||||
Total
cost of sales & newspaper operating costs
|
100,430
|
113,539
|
105,639
|
103,855
|
98,522
|
||||||||||||||||
Gross
profit
|
40,828
|
52,215
|
42,850
|
43,394
|
38,253
|
||||||||||||||||
Selling,
general and administrative expense
|
37,126
|
39,529
|
32,336 |
34,018
|
34,797
|
||||||||||||||||
Asset impairments costs | 41,334 | - | - | - | - | ||||||||||||||||
Hurricane
and relocation costs, net of recoveries
|
(39
|
) | (33) |
-
|
(377
|
) |
1,021
|
||||||||||||||
(Loss)
income from operations
|
(37,593
|
) |
12,719
|
10,514
|
9,753
|
2,435
|
|||||||||||||||
Interest
income
|
3
|
66
|
45
|
28
|
18 | ||||||||||||||||
Interest
expense
|
(5,185 | ) | (5,734 | ) | (1,455 | ) | (610 | ) | (610 | ) | |||||||||||
Other
(expense) income
|
(476
|
) | 70 |
179
|
32
|
120
|
|||||||||||||||
(Loss)
income before income taxes
|
(43,251
|
) |
7,121
|
9,283
|
9,203
|
1,963
|
|||||||||||||||
Income
tax benefit (expense)
|
15,730 | (2,463 | ) | (3,203 | ) | (3,729 | ) | (846 | ) | ||||||||||||
Net
(loss) income
|
$ |
(27,521
|
) | $ |
4,658
|
$ |
6,080
|
$ |
5,474
|
$ |
1,117
|
||||||||||
(Loss)
earnings per share:
|
|||||||||||||||||||||
Basic
|
$ |
(2.76
|
) | $ |
0.47
|
$ |
0.61
|
$ |
0.56
|
$ |
0.11
|
||||||||||
Diluted
|
(2.76
|
) |
0.46
|
0.60
|
0.55
|
0.11
|
|||||||||||||||
Dividends per share | $ |
0.06
|
$ | 0.24 | $ | 0.24 | $ | 0.20 | $ | 0.20 | |||||||||||
|
|||||||||||||||||||||
Weighted average common shares outstanding: | |||||||||||||||||||||
Basic
|
9,988,000
|
9,986,000
|
9,957,000
|
9,818,000
|
9,735,000
|
||||||||||||||||
Diluted
|
9,988,000
|
10,024,000
|
10,103,000
|
9,972,000
|
9,809,000
|
||||||||||||||||
27
(1) | During the fourth quarter of 2005, the Company incurred various charges resulting from Hurricane Katrina. As a result of the hurricane, the Company recorded a pre-tax charge of $1,021,000 or $581,000 net of tax or $0.06 per share on a basic and diluted basis. In 2006, the Company recorded recoveries of approximately $377,000, or $224,000 net of tax or $0.02 per share on a basic and diluted basis. | |
(2) | The revenues associated with the acquisition of The Herald-Dispatch are primarily composed of advertising, circulation and commercial printing revenues. The advertising and circulation revenues are included as a component of the newspaper segment and the commercial printing revenues are recorded as a component of the printing segment. Approximately six weeks of the operations of The Herald-Dispatch are included in the Company's Statement of Operations commencing concurrent with the acquisition in 2007. | |
(3) | Includes impairment for goodwill and other intangibles in the fourth quarter of 2009 of $(41.1) million or $(25.5) million net of tax or $(2.55) per share on a basic and diluted basis. The Company also recorded a loss on an interest rate swap agreement resulting from a reclassification from other comprehensive income to other expense, pursuant to the elimination of a LIBOR borrowing option from the Administrative Agent of the Credit Agreement resulting in the ineffectiveness of a cash flow hedge in the amount of $(578,000), net of tax or $(0.06) per share on a basic and diluted basis. The Company also incurred a charge of $(206,000) or $(128,000) net of tax or $(0.01) per share on a basic and diluted basis related to impairment charges associated with property, plant and equipment. |
At
October 31,
|
|||||||||||||||||||||||||||
2009
|
2008
(Restated)
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||
(in
thousands)
|
|||||||||||||||||||||||||||
BALANCE
SHEET DATA:
|
|||||||||||||||||||||||||||
Cash
and cash equivalents/Negative book cash balances
|
$ |
1,159
|
$ |
(987
|
) | $ |
5,793
|
$ |
5,487
|
$ |
3,662
|
||||||||||||||||
Working
capital (1)
|
(42,579
|
) |
20,367
|
25,308
|
25,955
|
26,081
|
|||||||||||||||||||||
Total
assets
|
101,022
|
141,279
|
149,212
|
65,989
|
61,645
|
||||||||||||||||||||||
Long-term
debt (net of current portion) (2)
|
918
|
66,332
|
79,378
|
4,220
|
6,761
|
||||||||||||||||||||||
Shareholders'
equity
|
22,934
|
50,496
|
48,727
|
44,777
|
40,752
|
(1)
Includes $60.5 million of long-term debt reclassified to current debt due to the
Company's inability to remain in compliance with various financial covenants in
2009.
(2) Includes non-current borrowings under the Company’s
credit facilities.
28
ITEM
7 - 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 of the United States of
America, east of the Mississippi River. The Company also publishes The
Herald-Dispatch daily newspaper in Huntington, West Virginia with a total daily
and Sunday circulation of approximately
24,000 and 30,000 respectively. The Company has grown through
strategic acquisitions and internal growth. Through such growth, the Company has
realized regional economies of scale, operational efficiencies, and exposure of
its core products to new markets. The Company has acquired fifteen printing
companies, eight office products and office furniture companies, one company
with a combined emphasis on both printing and office products and office
furniture, a paper distribution division (which was subsequently sold in 2001)
and a daily newspaper since its initial public offering on January 28, 1993.
The
Company's net revenues consist primarily of sales of commercial printing,
business forms, tags, other printed products, document output solutions
including rendering, inserting and mailing, office supplies, office furniture,
data products and office design services as well as newspaper revenues primarily
from advertising and circulation. The Company recognizes revenues when
products are shipped or ownership is transferred and when services are rendered
to the customer. Newspaper advertising revenues are recognized, net of
agency commissions, in the period when advertising is printed or placed on web
sites. Circulation revenues are recognized when purchased newspapers are
distributed. The Company's revenues are subject to seasonal fluctuations caused
by variations in demand for its products.
The
Company's cost of sales primarily consists of raw materials, including paper,
ink, pre-press supplies and purchased office supplies, furniture and data
products, and manufacturing costs including direct labor, indirect labor and
overhead. Significant factors affecting the Company's cost of sales include the
costs of paper in printing, office supplies and the newspaper operations, costs
of labor and other raw materials.
The
Company's operating costs consist of selling, general and administrative
expenses. These costs include salaries, commissions and wages for sales,
customer service, accounting, administrative
and executive personnel, rent, utilities, legal, audit, information systems
equipment costs, software maintenance and depreciation.
CRITICAL
ACCOUNTING POLICIES INVOLVING SIGNIFICANT ESTIMATES
The
Company’s significant accounting policies are described in Note 1 to the
consolidated financial statements included in Item 15 of this Form 10-K. The
discussion and analysis of the financial statements and results of operations
are based upon the Company’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. The following critical accounting policies affect the Company’s
more significant judgments and estimates used in the preparation of the
consolidated financial statements. There can be no assurance that actual results
will not differ from those estimates.
29
Restatement of Prior Year: In the fourth quarter of fiscal
year 2009, the Company identified approximately $1.4 million or $0.14 per share on a basic and diluted basis of non-cash
deferred tax related adjustments for 2008. Accordingly, the Consolidated
Financial statements for October 31, 2008 presented in this Form 10-K have been
restated to increase deferred income tax expense and to increase deferred income
tax liability. This adjustment is related to the goodwill, tradename and
masthead associated with the acquisition of The Herald-Dispatch. This deferred
tax liability will remain on the balance sheet until such time as the associated
intangible assets are impaired, sold or otherwise disposed of. As a result of
the impairment charge recorded in 2009 this deferred tax liability is now
reflected as a deferred tax asset due to the non-cash benefit associated with
the impairment of goodwill, tradename and
masthead.
Asset Impairment: The Company is required to
test for asset impairment relating to property and equipment whenever events or
changes in circumstances indicate that the carrying value of an asset might not
be recoverable. The Company uses guidelines and applies requirements that are
set forth in the ASC Topic 360, “Impairment or Disposal of Long-Lived Assets” in
order to determine whether or not an asset is impaired. This standard requires
an impairment analysis when indicators of impairment are present. If such
indicators are present, the standard indicates that if the sum of the future
expected cash flows from the Company’s asset, undiscounted and without interest
charges, is less than the carrying value, an asset impairment must be recognized
in the financial statements. The amount of the impairment is the difference
between the fair value of the asset and the carrying value of the
asset.
The
Company believes that the accounting estimate related to asset impairment is a
“critical accounting estimate” because it is highly susceptible to change from
period to period because it requires management to make assumptions about future
cash flows over future years and that the impact of recognizing impairment could
have a significant effect on operations. Management’s assumptions about future
cash flows requires significant judgment because actual operating levels have
fluctuated in the past and are expected to continue to do so in the future.
Management has discussed the development and selection of this critical
accounting estimate with the audit committee of our board of directors and the
audit committee has reviewed the Company’s disclosure relating to it in the
MD&A.
Beginning
in fiscal year 2002, goodwill and other intangibles are required to be evaluated
annually for impairment in accordance with ASC 350, “Intangibles- Goodwill and
Other”. The standard requires a two-step process be performed to analyze whether
or not goodwill has been impaired. Step one is to test for potential impairment
and requires that the fair value of the reporting unit be compared to its book
value including goodwill and other intangibles. If the fair value is higher than
the book value, no impairment is recognized. If the fair value is lower than the
book value, a second step must be performed. The second step is to measure the
amount of impairment loss, if any, and requires that a hypothetical purchase
price allocation be done to determine the implied fair value of goodwill
and other intangibles. This fair value is then compared to the carrying value of
goodwill and other intangibles. If the implied fair value is lower than the
carrying value, an impairment must be recorded.
As
discussed in the notes to the financial statements, goodwill and other
intangibles are recorded at the adjusted book value and were analyzed for
impairment with the implementation of ASC 350. The fair value of the Company’s
goodwill and other intangibles was estimated using both the market and
income approaches. The Company determined that it should perform impairment
testing of goodwill and intangible assets during the fourth quarter of 2009,
due, in part, to declines in our stock price, increased volatility in operating
results and declines in market transactions in the industry. Based
on the analysis and with the assistance of third party valuation specialists the
Company determined that the fair value relating to goodwill and other
intangibles resulted in an implied fair value less than the book value
recorded for the corresponding goodwill and other intangibles, and therefore, an
impairment was recognized in the fourth quarter of 2009 in the amount of $(41.1)
million or $(25.5) million net of deferred tax benefit.
The
Company believes that the accounting estimate related to the goodwill and other
intangibles impairment is a “critical accounting estimate” because the
underlying assumptions used for the discounted cash flow can change from period
to period and could potentially cause a material impact to the income statement.
Management’s assumptions about discount rates, inflation rates and other
internal and external economic conditions, such as earnings growth rate, require
significant judgment based on fluctuating rates and expected revenues.
Additionally, ASC 350 requires that the goodwill and other intangibles be
analyzed for impairment on an annual basis using the assumptions that apply at
the time the analysis is updated. Management has discussed the development of
these estimates with the audit committee of the board of directors.
Additionally, the board of directors has reviewed this disclosure and its
relation to MD&A.
30
Allowance for Doubtful Accounts: The
Company encounters risks associated with sales and the collection of the
associated accounts receivable. As such, the Company records a monthly provision
for accounts receivable that are considered to be uncollectible. In order to
calculate the appropriate monthly provision, the Company primarily utilizes a
historical rate of accounts receivables written off as a percentage of total
revenue. This historical rate is applied to the current revenues on a monthly
basis. The historical rate is updated periodically based on events that may
change the rate such as a significant increase or decrease in collection
performance and timing of payments as well as the calculated total exposure in
relation to the allowance. Periodically, the Company compares the identified
credit risks with the allowance that has been established using historical
experience and adjusts the allowance accordingly.
The Company believes that the accounting estimate related to the allowance for
doubtful accounts is a “critical accounting estimate” because the underlying
assumptions used for the allowance can change from period to period and could
potentially cause a material impact to the income statement and working capital.
Management has discussed the development and selection of this estimate with the
audit committee of the board of directors, and the board has, in turn, reviewed
the disclosure and its relation to MD&A.
During
2009, 2008 and 2007, $876,000, $854,000, and $492,000 of bad debt expense was
incurred and the allowance for doubtful accounts was $1,353,000,
$1,851,000 and $1,511,000 of
October 31, 2009, 2008 and 2007. The actual write-offs for the periods were
$1,375,000, $514,000, and $657,000 during 2009, 2008 and 2007. General economic
conditions and specific geographic and customer concerns are major factors that
may affect the adequacy of the allowance and may result in a change in the
annual bad debt expense.
The
following discussion and analysis presents the significant changes in the
financial position and results of operations of the Company and should be read
in conjunction with the Audited Consolidated Financial Statements and notes
thereto included elsewhere herein.
31
RESULTS
OF OPERATIONS
The
following table sets forth for the periods indicated information derived from
the Company's Consolidated Statements of Operations, including certain
information presented as a percentage of total revenues.
Year
Ended October 31,
|
|||||||||||||||||||||
($
In thousands)
|
|||||||||||||||||||||
2009
|
2008
(Restated)
|
2007
|
|||||||||||||||||||
Revenues:
|
|||||||||||||||||||||
Printing
|
$
|
88,990
|
63.0
|
%
|
$
|
105,275
|
63.5
|
%
|
$
|
104,500
|
70.4
|
%
|
|||||||||
Office
products and office furniture
|
35,874
|
25.4
|
|
41,540
|
25.1
|
|
41,449
|
27.9
|
|
||||||||||||
Newspaper | 16,394 | 11.6 | 18,939 | 11.4 | 2,540 | 1.7 | |||||||||||||||
Total
revenues
|
141,258
|
100.0
|
|
165,754
|
100.0
|
|
148,489
|
100.0
|
|
||||||||||||
Cost
of sales & newspaper operating costs:
|
|||||||||||||||||||||
Printing
|
66,856
|
47.3
|
|
75,590
|
45.6
|
|
75,617
|
50.9
|
|
||||||||||||
Office
products and office furniture
|
24,859
|
17.6
|
|
28,457
|
17.2
|
|
28,834
|
19.4
|
|
||||||||||||
Newspaper cost of sales & operating costs | 8,715 | 6.2 | 9,492 | 5.7 | 1,188 | 0.8 | |||||||||||||||
Total
cost of sales and newspaper operating costs
|
100,430
|
71.1
|
|
113,539
|
68.5
|
|
105,639
|
71.1
|
|
||||||||||||
Gross
profit
|
40,828
|
28.9
|
|
52,215
|
31.5
|
|
42,850
|
28.9
|
|
||||||||||||
|
|||||||||||||||||||||
Selling
General and Administrative expenses
|
37,126
|
26.2
|
|
39,529
|
23.8
|
|
32,336
|
21.8
|
|
||||||||||||
Asset Impairment Costs | 41,334 | 29.3 | - | 0.0 | - | ||||||||||||||||
Hurricane
and relocation costs, net of recoveries
|
(39
|
) |
0.0
|
|
(33
|
) |
0.0
|
|
-
|
0.0
|
|
||||||||||
(Loss)
income from operations
|
(37,593
|
) |
(26.6
|
)
|
12,719
|
7.7
|
|
10,514
|
7.1
|
|
|||||||||||
Other
income (expense):
|
|||||||||||||||||||||
Interest
income
|
3
|
0.0
|
|
66
|
0.0
|
|
45
|
0.0
|
|
||||||||||||
Interest
expense
|
(5,185
|
)
|
(3.7
|
)
|
(5,734
|
)
|
(3.4
|
)
|
(1,455
|
)
|
(0.9
|
)
|
|||||||||
Other
income
|
(476
|
) |
(0.3
|
)
|
70
|
0.0
|
|
179
|
0.1
|
|
|||||||||||
(Loss)
income before income taxes
|
(43,251
|
) |
(30.6
|
)
|
7,121
|
4.3
|
|
9,283
|
6.3
|
|
|||||||||||
Income
tax benefit (expense)
|
15,730
|
|
11.1
|
|
(2,463
|
)
|
(1.5
|
)
|
(3,203
|
)
|
(2.2
|
)
|
|||||||||
Net
(loss) income
|
$
|
(27,521
|
) |
(19.5
|
)%
|
$
|
4,658
|
2.8
|
%
|
$
|
6,080
|
4.1
|
%
|
||||||||
32
Year
Ended October 31, 2009 Compared to Year Ended October 31, 2008
(Restated)
Revenues
Consolidated
net revenues were $141.3 million for the year ended October 31, 2009 compared to
$165.8 million in the prior fiscal year. This change represents a
decrease in revenues of approximately $24.5 million, or 14.8%. Printing
revenues decreased by $16.3 million or 15.5% from $105.3 million in 2008 to
$89.0 million in 2009. The decrease in printing sales was primarily due to
the continued impact of the global economic crisis. Office products and
office furniture revenue decreased from $41.5 million in 2008 to $35.9
million in 2009. The decrease in revenues for the office products and
office furniture segment was primarily attributable to lower sales in both
office products and office furniture. In 2009, newspaper revenues were composed
of approximately $12.5 million in advertising revenue and $3.9 million
in circulation revenue compared to the same period in 2008, in
which the newspaper revenues were composed of approximately $14.7 million
in advertising revenue and $4.2 million in circulation
revenues.
Cost
of Sales
Total
cost of sales for the year ended October 31, 2009 totaled $100.4 million
compared to $113.5 million in the previous year. This change represented a
decrease of $13.1 million or 11.5% in cost of sales. Printing cost of
sales decreased $ 8.7 million to $66.9 million in 2009 compared to $75.6
million in 2008. Printing cost of sales was lower due to lower sales
partially offset by higher cost of goods sold as a percent of print sales.
Printing cost of sales as a percentage of printing sales increased to 75.1%
as a percent of printing sales in 2009 from 71.8.% in 2008. This
increase was primarily the result of higher material, overhead
and labor costs as a percent of printing sales. Office
products and office furniture cost of sales decreased $3.6 million to $24.9
million in 2009 from $28.5 million in 2008. The decrease in office products and
office furniture cost of sales is attributable to a decrease in office products
and office furniture sales. The increase in office products and office furniture
cost of sales as a percent of office products and office furniture sales is
primarily reflective of higher furniture and office products costs as a
percent of furniture and office products sales. Newspaper cost of sales and
operating cost decreased $778,000 to $8.7 million in 2009 from $9.5 million in
2008. Newspaper cost of sales and operating costs as a percentage of newspaper
sales were 53.2% in 2009 and 50.1% in 2008.
33
Operating
Expenses and Income
Selling,
general and administrative (S,G&A) expenses decreased $2.4 million to
$37.1 million in 2009 from $39.5 million in 2008. S,G&A as a percentage of
net sales represented 26.2% of net sales in 2009 compared with 23.8% of net
sales in 2008. This decrease in selling, general and administrative costs
is primarily due to various cost reduction initiatives primarily reflective
of payroll related reductions. These reductions were initiated in part to
address the impact of the global economic crisis and the associated reduction in
sales.
In
accordance with ASC Topic 350, a two-step impairment test is performed on
goodwill. In the first step, a comparison is made of the estimated fair value of
a reporting unit to its carrying value. If the carrying value of a reporting
unit exceeds the estimated fair value, the second step of the impairment test is
required. In the second step, an estimate of the current fair values of all
assets and liabilities is made to determine the amount of implied goodwill
and consequently the amount of any goodwill impairment.
In
connection with our annual impairment testing of goodwill and other intangible
assets conducted in the fourth quarter of 2009 in accordance with ASC Topic 350,
we recorded a charge of $41.1 million ($25.5 million, net of deferred
tax benefit) for impairment of the value of the goodwill and other
intangible assets, which resulted from the 2007 acquisition of The
Herald-Dispatch daily newspaper in Huntington, WV. This charge
resulted in impairment charges of trademarks and masthead of $8.5 million,
subscriber base asset of $2.2 million, advertiser base asset of $6.8 million and
goodwill of $23.6 million, the associated deferred tax benefit of these charges
approximated $15.6 million.
The
valuation methodology utilized to estimate the fair value of the newspaper
operating segment was based on both the market and income approach. The
income approach was based off a discounted cash flow methodology, in which
expected future free net cash flows to invested capital are discounted to
present value, using an appropriate after-tax weighted average cost of
capital. The market approach using a guideline company analysis weighs
empirical evidence from shares of comparable companies sold in minority
transactions on stock exchanges and merger and acquisition analysis, which
analyses sales of newspapers in control transactions. The Company
then undertook the next step in the impairment testing process by
determining the fair value of assets and liabilities within this reporting unit.
The implied fair values of goodwill for this reporting unit was less than the
carrying amount by $41.1 million ($25.5 million net of deferred tax
benefit), and therefore an impairment charge in this amount was taken. The
goodwill and other intangible assets will continue to be amortized for tax
purposes over its remaining life in accordance with applicable Internal Revenue
Service standards.
The Company
has other reporting units within Goodwill. The Company evaluated these reporting
units during the fourth quarter of 2009, and while the estimated fair value of
these reporting units declined from 2008, the estimated fair value of each
of our other reporting units exceeded carrying values in 2009. As a
result, no additional testing or impairment charges were necessary.
During 2009,
the U.S. recession had a negative impact on the Company's operations across
multiple segment lines. The newspaper operating segment reflected lower
operating revenues in both advertising and circulation. In response to this
difficult operating environment Champion initiated a cost reduction plan and
eliminated 24 employee positions or approximately 15% of the workforce at
the Champion Publishing subsidiary.
The Company
also incurred asset impairment charges from property, plant and equipment of
approximately $(206,000), or $(128,000) net of tax or $(0.01) per share on a
basic and diluted basis.
34
Other
Income (Expense)
Other
expense increased approximately $59,000 from $5.6 million in 2008 to
$5.7 million in 2009. This was primarily due to charges
associated with ineffectiveness in the interest rate swap hedge due to the
elimination of the LIBOR borrowing option by the Administrative Agent of the
Credit Agreement partially offset by a decrease in interest expense of
$549,000 from $5,734,000 in 2008 to $5,185,000 in 2009. The decrease in
interest expense was attributed to the acquisition of The Herald-Dispatch which
was completed on September 14, 2007 and was reflective of lower benchmark rates
and debt offset partially by increased applicable margins due to the
implementation of the default rate by the Administrative Agent. The loss
reclassified to other expense from other comprehensive income approximated $0.6
million, net of tax or $(0.06) per share on a basic and diluted
basis.
Income
Taxes
Income
taxes as a percentage of income before taxes were a benefit of 36.4% in
2009 compared with an expense of (34.6%) in 2008. The income tax benefit
(expense) rate is reflective of deferred tax benefits associated with
impairment charges of The Herald-Dispatch partially offset by deferred tax
liabilities representing timing changes associated with goodwill and other
non-amortizing assets with indefinite lives being recorded as deferred tax
liabilities. The
effective income tax rate in 2009 and 2008 approximates the combined federal and
state, net of federal benefit, statutory income tax rate.
Net
(Loss) Income
For
reasons set forth above coupled with restructuring related expenses primarily
associated with employee separation costs of $0.2 million or $0.1 million net of
tax, net income decreased approximately $32.2 million to a loss of
$(27.5) million or $(2.76) per share on a basic and diluted basis, in
2009 from net income of $4.7 million for 2008, or $0.47 and $0.46 per share
on a basic and diluted
basis.
Year
Ended October 31, 2008 (Restated) Compared to Year Ended October 31,
2007
Revenues
Consolidated
net revenues were $165.8 million for the year ended October 31, 2008 compared to
$148.5 million in the prior fiscal year. This change represents an
increase in revenues of approximately $17.3 million, or 11.6%.
Printing revenues increased by $0.8 million or 0.7% from $104.5 million in
2007 to $105.3 million in 2008. The increase in printing sales was
primarily due to incremental printing sales associated with the acquisition of
The Herald-Dispatch. Office products and office furniture revenue
increased from $41.4 million in 2007 to $ 41.5 million in 2008. The
increase in revenues for the office products and office furniture segment was
primarily attributable to continued strong office furniture sales,
partially offset by a reduction in office supply and data sales. In 2008,
newspaper revenues were composed of approximately $14.7 million in advertising
revenue and $4.2 million in circulation revenue. During the approximately
six weeks period of 2007 in which the Company owned The
Herald-Dispatch, the newspaper revenues were composed of approximately $2.0
million in advertising revenue and $0.6 million in circulation
revenues.
Cost
of Sales
Total
cost of sales for the year ended October 31, 2008 totaled $113.5 million
compared to $105.6 million in the previous year. This change represented an
increase of $7.9 million or 7.5% in cost of sales. Printing cost of
sales decreased $27,000 to 75.6 million in 2008 compared to $75.6
million in 2007. Printing cost of sales was lower due to an overall
decrease in printing sales. Printing cost of sales as a percentage of
printing sales decreased to 71.8 % as a percent of printing sales in
2008 from 72.4% in 2007. This decrease was primarily the result of
improved material and absorption overhead partially offset by higher labor costs
as a percent of printing sales. Office products and office furniture cost
of sales decreased $377,000 to $28.5 million in 2008 from
$28.8 million in 2007. The decrease in office products and office furniture
cost of sales is attributable to improved gross margins in the office supply and
office furniture categories. The decrease in office products and
office furniture cost of sales as a percent of office products and office
furniture sales is primarily reflective of lower furniture and office
products costs as a percent of furniture and office products sales. The
increase in newspaper cost of sales and operating costs is reflective of a full
year operation for The Herald-Dispatch in 2008 compared to six weeks in
2007.
35
Operating
Expenses and Income
Selling,
general and administrative (S,G&A) expenses increased $7.2 million
to $39.5 million in 2008 from $32.3 million in 2007. S,G&A as a
percentage of net sales represented 23.8% of net sales in 2008 compared
with 21.8% of net sales in 2007. This increase in S,G&A costs is
primarily due to higher S,G&A expenses from a full year of operations
for The Herald-Dispatch in 2008 compared to six weeks in 2007.
Other
Income (Expense)
Other
expense increased approximately $4,367,000 from $1,231,000 in 2007 to
$ 5,598,000 in 2008. This was primarily due to an increase in interest
expense of $4.3 million from $1,455,000 in 2007 to $5,734,000 in
2008. The increase in interest expense was attributed to the
acquisition of The Herald-Dispatch which was completed on September 14,
2007.
Income
Taxes
Income
taxes as a percentage of income before taxes were 34.6% in 2008 compared
with 34.5% in 2007. The tax rate in 2008 is reflective of deferred tax
liabilities representing timing changes associated with goodwill and other
non-amortizing assets with indefinite lives being recorded as deferred tax
liabilities.
The
effective income tax rate in 2008 and 2007 approximates the combined federal and
state, net of federal benefit, statutory income tax rate.
Net
Income
For reasons
set forth above, net income for 2008 decreased approximately $1.4
million to $4.7 million, or $0.47 per share on a basic and $0.46 per share
on a diluted basis, from net income of $6.1 million for 2007, or $0.61 per share
on a basic basis and $0.60 on a diluted basis.
LIQUIDITY
AND CAPITAL RESOURCES
As
of October 31, 2009, the Company had $1.2 million book cash balance, a
net increase in cash and cash equivalents of $2.1 million from the
prior year when the Company had a (1.0) million negative book cash balance.
Working capital as of October 31, 2009 was $(42.6) million, and $20.4
million at October 31, 2008. The decrease in working capital is associated with
the classification as a current liability of approximately $60.5 million of debt
which was previously classified as long term. This debt was reclassified due to
the company's inability to remain in compliance with certain of its financial
covenants.
The
Company had historically used cash generated from operating activities and debt
to finance capital expenditures and the cash portion of the purchase price of
acquisitions. Management plans to continue making required investments in
equipment. The Company has two available lines of credit totaling up to
$21.0 million, of which $20.0 million is subject to borrowing
base limitations reserves which may be initiated by the Administrative
Agent for Lenders in its sole discretion and are subject to a minimum excess
availability threshold (See Note 3 of the Consolidated Financial
Statements). For the foreseeable future including through Fiscal 2010,
management believes it can fund operations, meet debt service requirements and
make the planned capital expenditures based on the available cash and cash
equivalents, cash flow from operations and lines of credit, subject to continued
availability of the aforementioned credit facilities. The Company may incur
costs in 2010 related to facility consolidations, employee termination costs and
other restructuring related activities. These costs may be incurred, in part, as
a response to the Company's efforts to overcome the impact of the global
economic crisis.
36
Additionally, the Company has future
contracted obligations (See Note 3 and Note 6 of the Consolidated Financial
Statements). The Company is not a guarantor of indebtedness of others.
On December
29, 2009, the Administrative Agent and Lenders under the Company's Credit
Agreement dated September 14, 2007 ("Credit Agreement"), the Company and
Marshall T. Reynolds entered into a Forbearance Agreement (the "Forbearance
Agreement") which provides, among other things, that during a standstill period
commencing on December 29, 2009 and ending on March 31, 2010 (unless sooner
terminated by default of Champion under the Forbearance Agreement or the Credit
Agreement), the Required Lenders are willing to temporarily forbear exercising
certain rights and remedies available to them, including acceleration of the
obligations or enforcement of any of the liens provided for in the Credit
Agreement. The Company acknowledged in the Forbearance Agreement that as a
result of the existing defaults, the Lenders are entitled to decline to provide
further credit to the Company, to terminate their loan commitments, to
accelerate the outstanding loans, and to enforce their liens. The Company
does not believe it will be in compliance with certain financial covenants in
the Credit Agreement during 2010.
The
Forbearance Agreement provides that during the standstill period, so long as the
Company has excess availability equal to or greater than $1,000,000 (and will
continue to have after any request for credit) and meets the conditions of the
Forbearance Agreement, it may continue to request credit under the revolving
credit line.
The
Forbearance Agreement imposes various reporting and disclosure requirements on
the Company, requires it to submit to a third party financial review, maintain
certain account levels, submit to field audits and inspections and reduce
outstanding term loans to $49,632,442. The reduction in the principal
outstanding obligations of the term loan will be accomplished through the
elimination of various borrowing base reserves established by the Administrative
Agent, the release of $3.0 million in cash collateral that was being held in
escrow subsequent to year end pursuant to previous actions by the Administrative
Agent and the $3.0 million in cash proceeds received by the Company from issuing
an unsecured promissory note.
The
Forbearance Agreement also required Marshall T. Reynolds to lend to the Company
$3,000,000 in exchange for a subordinated unsecured promissory note in like
amount, payment of principal and interest on which is prohibited until payment
of all liabilities under the Credit Agreement. This $3,000,000 was applied to
prepayment of $3,000,000 of the Company's loans. This subordinated unsecured
promissory note bearing interest at the Wall Street Journal prime rate
(currently 3.25%) and maturing September 14, 2014, and a debt subordination
agreement, both dated December 29, 2009, have been executed and delivered, and
Mr. Reynolds has advanced $3,000,000 to the Company. The Company paid to the
Administrative Agent a nonrefundable forbearance fee of $100,000 upon closing of
the Forbearance Agreement.
The Company had borrowed under its
$20.0 million line of credit approximately $8.7 million at
October 31, 2009 which encompassed refinancing of existing indebtedness prior to
The Herald-Dispatch acquisition and to partially fund the purchase of The
Herald-Dispatch. Pursuant to the borrowing base calculation and reflective of
the terms of the Forbearance Agreement and the Credit Agreement and exclusive of
any reserves which may be implemented by the Administrative Agent in its
sole discretion (the Company was notified pursuant to the filing of its December
31, 2009 borrowing base of an additional $1.5 million reserve being instituted
by the Administrative Agent), the Company had $8.9 million in
additional availability under its $20.0 million revolving credit line
subject to the $1.0 million excess availability threshold pursuant to the terms
of the Forbearance Agreement as of October 31, 2009. The Company has an
additional $1.0 million unsecured Line of Credit available with another Bank
that expires in July 2010.
As of
October 31, 2009, the Company had contractual obligations in the form of leases
and debt as follows:
Payments
Due by Fiscal Year
|
|||||||||||||||||||||||||||||
Contractual
Obligations
|
2010
|
2011
|
2012
|
2013
|
2014
|
Residual
|
Total
|
||||||||||||||||||||||
Non-cancelable operating leases | $ |
1,281,076
|
$ |
1,105,785
|
$ |
932,343
|
$ |
845,884
|
$ |
271,640
|
$ | - | $ |
4,436,728
|
|||||||||||||||
Revolving line of credit | 8,725,496 | - | - | - | - | - | 8,725,496 | ||||||||||||||||||||||
Term debt |
57,024,424
|
375,729
|
290,573
|
182,119
|
70,015
|
- |
57,942,860
|
||||||||||||||||||||||
$ |
67,030,996
|
$ |
1,481,514
|
$ |
1,222,916
|
$ |
1,028,003
|
$ |
341,655
|
$ | - | $ |
71,105,084
|
37
The Company
is required to make certain mandatory payments on its credit facilities related
to (1) net proceeds received from a loss subject to applicable thresholds, (2)
equity proceeds and (3) effective January 31, 2009, the Company is required to
prepay its credit facilities by 75% of excess cash flow for its most recently
completed fiscal year. The excess cash flow for purposes of this calculation is
defined as the difference (if any) between (a) EBITDA for such period and (b)
federal, state and local income taxes paid in cash during such period plus
capital expenditures during such period not financed with indebtedness plus
interest expense paid in cash during such period plus the aggregate amount of
scheduled payments made by the Borrower and its Subsidiaries during such period
in respect of all principal on all indebtedness (whether at maturity, as a
result of mandatory sinking fund redemption, or otherwise), plus restricted
payments paid in cash by the Borrower during such period in compliance with the
credit agreement. The Company has no prepayment obligation due January 31, 2010
pursuant to the applicable calculations.
Cash
Flows from Operating Activities
Cash
flows from operating activities for the years ended October 31, 2009, 2008 and
2007 were $11.3 million, $10.3 million,
and $8.7 million. The increase in cash flows from operating activities for
fiscal 2009 compared to 2008 was primarily associated with a decrease in
accounts receivable. The increase in cash flows from operating activities
for the fiscal year 2008 compared to 2007 was primarily
associated with higher depreciation and
amortization, deferred financing costs, deferred income taxes, and bad debt
expense. The
impairment costs associated primarily with the acquisition of The
Herald-Dispatch had no impact on cash flows from operating
activities.
Cash
Flows from Investing Activities
Cash
used in investing activities was $(1.0) million, $(3.8) million, and $(4.1)
million for the years ended October 31, 2009, 2008 and 2007. Cash flows used in
investing activities were down approximately $2.9 million in 2009 from
2008. The cash used in investing activities in 2009 was primarily related to
capital expenditures offset
by proceeds from cash surrender value of life insurance
policies. Cash
flows used in investing activities decreased in 2008 compared to 2007 and
for both periods the cash flows were primarily associated with purchases of
property and equipment and payments for businesses acquired in previous
periods.
Cash
Flows from Financing Activities
Net
cash flows used in financing activities for the years ended October 31,
2009, 2008 and 2007 were $(9.2) million, $(12.3) million, and $(4.2)
million. The decrease in cash used in financing activities was primarily
associated with less payments made on the Company's outstanding
indebtedness associated with its revolving credit facility and the elimination
of the Company's dividend in the second quarter of 2009. The
$12.3 million utilized for financing activities in 2008 was primarily
reflective of net payments on debt and dividends partially
offset by negative book cash balances and stock option proceeds. During
2009, the Company reduced net borrowings by approximately
$6.8 million after adjusting for non-cash investing and financing
activities. This, coupled with dividend payments of $600,000 was reflective
of net cash used in financing activities during 2009. Dividends paid in
2009, 2008, and 2007 were $0.6 million, $2.4 million, and $2.4
million.
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. In addition, the Company is not
particularly energy dependent; therefore, an increase in energy costs should not
have a significant impact on the Company.
38
SEASONALITY
Our business
is subject to seasonal fluctuations that we expect to continue to be reflected
in our operating results in future
periods.
Historically, the Company has experienced a greater portion of its
profitability 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.
On a
historical basis The Herald-Dispatch's first and
third calendar quarters of the year tended to be the weakest because
advertising volume is at its lowest levels following the holiday season and a
seasonal slowdown in the summer months. Correspondingly, on a
historical basis the fourth calendar quarter followed by the second
calendar quarter tended to be the strongest quarters. The fourth calendar
quarter includes heavy holiday season advertising. Other factors that affect our
quarterly revenues and operating results may be beyond our control, including
changes in the pricing policies of our competitors, the hiring and retention of
key personnel, wage and cost pressures, distribution costs, changes in newsprint
prices and general economic factors.
The United
States economy has been in a recession since December 2007, according to the
National Bureau of Economic Research, and it is widely believed that certain
elements of the economy, such as housing, were in decline before that time. The
duration and depth of an economic recession in markets in which the Company
operates may further reduce its future advertising and circulation revenue,
operating results and cash flows.
NEWLY
ISSUED ACCOUNTING STANDARDS
FASB ASC Topic
105
In June
2009, the FASB issued Statement of Financial Accounting Standards No. 168, "The
Hierarchy of Generally Accepted Accounting Principles"- a replacement of SFAS
No. 162. This statement establishes two levels of U.S. generally accepted
accounting principles ("GAAP"), authoritative and not. The FASB Accounting
Standards Codification ("the Codification") became the source of authoritative,
nongovernmental GAAP, with the exceptions of rules and interpretive guidelines
issued by the SEC, which are authoritative for SEC registrants. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification became non-authoritative for interim and annual reporting as of
September 15, 2009. The Company began using the Codification, for financial
reporting, as of the fiscal year ended October 31, 2009. As the Codification is
not intended to change any standards outlined in GAAP, but only to organize and
unify existing standards, this did not have an impact on the Company's financial
statements.
FASB ASC Topic 805
"Business
Combinations" (ASC 805) (formerly SFAS No. 141 and its revision 141(R)) changes
how business acquisitions are accounted for and will impact financial statements
both on the acquisition date and in subsequent periods. ASC 805 as it relates to
recognizing all (and only) the assets acquired and liabilities assumed in a
business combination, costs an acquirer expects but it not obligated to incur in
the future to exit an activity of an acquiree or to terminate or relocate an
acquiree's employees are not liabilities at the acquisition date but must be
expensed in accordance with other applicable generally accepted accounting
principles. Additionally, during the measurement period, which should not exceed
one year from the acquisition date, any adjustments that are needed to assets
acquired and liabilities assumed to reflect new information obtained about facts
and circumstances that existed as of that date will be adjusted retrospectively.
The acquirer will be required to expense all acquisition-related costs in the
periods such costs are incurred other than costs to issue debt or equity
securities. ASC 805 will have no impact on our results of operations, financial
position or cash flows at the date of adoption, but it could have a material
impact on our results of operations, financial position or cash flows in the
future when it is applied to acquisitions which occur in the fiscal year
beginning November 1, 2009.
39
FASB
ASC Topic 350-30-35
In April
2008, the FASB issued staff position FSP FAS 142-3 (FSP 142-3), "Determination
of the Useful Life of Intangible Assets", and has subsequently been codified
under FASB ASC 350-30-35, "Determining the Useful Life of an Intangible Asset"
and is hereon referred to as ASC 350-30-35, amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset. The intent of ASC 350-30-35 is to
improve the consistency between the useful life of a recognized intangible asset
and the period of expected cash flows used to measure the fair value of the
asset as outlined by the U.S. generally accepted accounting principles (GAAP).
ASC 350-30-35 is effective for fiscal years beginning after December 15, 2008
and interim periods within those fiscal years and should be applied
prospectively to intangible assets acquired after the effective date. Early
adoption is prohibited. Accordingly, we will adopt ASC 350-30-35 as of
November 1, 2009. We do not expect this to have an impact on our results of
operations, financial position or cash flows at the date of adoption, but it
could have a material impact on our results of operations, financial position or
cash flows in future periods.
FASB
ASC Topic 815
"Derivatives
and Hedging" (ASC 815) (formerly SFAS No. 161- an amendment of FASB Statement
No. 133) changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
how and why an entity uses derivative instruments, how derivative instruments
and related hedged items are accounted for under the former Statement 133 and
its related interpretations, and how derivative instruments and related hedged
items affect an entity's financial position, financial performance and cash
flows. ASC 815 is effective for fiscal years and interim periods beginning after
November 15, 2008, with early application permitted. The Company does not expect
the implementation of requirements outlined in ASC 815 to have a material impact
on its consolidated financial statements.
FASB
ASC Topic 820-10-35
In October 2008, the FASB issued FSP FAS
157-3 (FSP 157-3), “Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active” (FSP 157-3). FSP
157-3 clarifies the application of SFAS 157, “Fair Value Measurements,” in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. This FSP was effective upon
issuance, including prior periods for which financial statements have not been
issued.
40
ITEM
7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
Company does not have any significant exposure relating to market
risk.
ITEM
8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements and other information required by this Item are contained
in the financial statements and footnotes thereto included in Item 15 and listed
in the index on page F-1 of this report.
ITEM
9A(T) - CONTROLS AND PROCEDURES
a)
Evaluation of Disclosure Controls and Procedures
Company
management, including the Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15c as of
the end of the period covered by this annual report. Based on that evaluation,
the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this annual report has
been made known to them in a timely fashion.
41
b)
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Internal control over
financial reporting refers to the process designed by, or under the supervision
of, our Chief Executive Officer and Chief Financial Officer, and effected by our
Board of Directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles, and includes those policies and procedures
that:
(1) Pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
Company;
(2)
Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and
(3) Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that could
have a material effect on the Company's financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
has used the framework set forth in the report entitled "Internal Control -
Integrated Framework" published by the Committee of Sponsoring Organizations of
the Treadway Commission to evaluate the effectiveness of the Company's internal
control over financial reporting. Management has concluded that the Company's
internal control over financial reporting was effective as of the end of the
most recent fiscal year.
There were
no changes in internal controls over financial reporting during the fourth
fiscal quarter that have materially affected or are reasonably likely to
materially affect the company's internal controls over financial
reporting.
This annual
report does not include an attestation report of the Company's registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this annual report.
/s/ | Marshall T. Reynolds |
Marshall
T. Reynolds
|
|
Chairman
and Chief Executive Officer
|
|
/s/ |
Toney
K. Adkins
|
Toney
K. Adkins
|
|
President
and Chief Operating Executive
|
|
/s/ |
Todd
R. Fry
|
Todd
R. Fry
|
|
Senior Vice
President and Chief Financial Officer
|
|
42
PART
III
ITEM
10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Information
relating to the directors and corporate governance of the Company is contained
under the captions “Elections of Directors”, “Meetings, Committees and
Attendance”, “Section 16a Beneficial Ownership Reporting Compliance” and “Code
of Ethics” in the Company’s definitive Proxy Statement, expected to be dated
February 12, 2010, with respect to the Annual Meeting of Shareholders to be held
on March 15, 2010, which will be filed pursuant to regulation 14(a) of the
Securities Exchange Act of 1934 and which is incorporated herein by reference.
Certain information concerning executive officers of the Company appear in
“EXECUTIVE OFFICERS OF CHAMPION” at Part I of this report.
ITEM
11 - EXECUTIVE COMPENSATION
The
information called for by this Item is contained under the captions
"Executive
Compensation" including "Compensation Discussion and Analysis", "Compensation
Committee Report", "Summary Compensation Table", "Outstanding Equity Awards at
Fiscal Year-End" and "Director Compensation"
in the Company’s definitive Proxy Statement, expected to be dated February 12,
2010, with respect to the Annual Meeting of Shareholders to be held on March 15,
2010, which will be filed pursuant to regulation 14(a) of the Securities
Exchange Act of 1934 and which is incorporated herein by
reference.
ITEM
12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
information called for by this Item is contained under the captions “Equity
Compensation Plan Information” and “Ownership of Shares” in the Company’s
definitive Proxy Statement,
expected to be
dated February 12, 2010, with respect to the Annual Meeting of Shareholders to
be held on March 15, 2010, which will be filed pursuant to regulation 14(a) of
the Securities Exchange Act of 1934 and which is incorporated herein by
reference.
43
ITEM
13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
information called for by this Item is contained under the captions
“Transactions with Directors, Officers and Principal Shareholders” and
"Meetings, Committees and Attendance" in the Company’s definitive Proxy
Statement, expected to be dated February 12, 2010, with respect to the
Annual Meeting of Shareholders to be held on March 15, 2010, which will be filed
pursuant to regulation 14(a) of the Securities Exchange Act of 1934 and which is
incorporated herein by reference.
ITEM
14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by this Item is contained under the caption
“Independent Auditors” in the Company’s definitive Proxy Statement, expected to
be dated February 12, 2010, with respect to the Annual Meeting of Shareholders
to be held on March 15, 2010, which will be filed pursuant to regulation 14(a)
of the Securities Exchange Act of 1934 and which is incorporated herein by
reference.
PART
IV
ITEM
15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a)
(1) and (2)
The
Consolidated Financial Statements and Schedule, required by Item 8, are listed
on the index on page F-1 and included as part of Item 15.
All
other Schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been
omitted.
3.
EXHIBITS
(2)
|
|
Plan
of Acquisition
|
Stock
Purchase Agreement between Company and William G. Williams, Jr., sole
shareholder of Syscan Corporation, dated September 7, 2004 filed as
Exhibit 2.1 to Form 8-K dated September 7, 2004, filed September 10, 2004,
is incorporated herein by reference.
|
|
(3)
|
3.1
|
Articles
of Incorporation
|
Filed
as Exhibit 3.1 to Form 10-Q dated June 16, 1997, filed on June 16, 1997,
incorporated herein by reference.
|
|
|
3.2
|
By
Laws
|
Filed
as Exhibit 3.2 to Form 10-K dated January 21, 2008, filed on January 25,
2008, incorporated herein by reference.
|
|
(4)
|
|
Instruments
defining the rights of security holders, including
debentures.
|
See
Exhibit 3.1 above.
|
|
(10)
|
Material
Contracts
|
Realty
Lease dated January 28, 1993 between ADJ Corp. and Company regarding 2450
1st Avenue, Huntington, West Virginia, filed as Exhibit 10.1 to Form 10-K
dated January 27, 1994, filed January 31, 1994, is incorporated herein by
reference.
|
44
Realty
Lease dated January 28, 1993 between The Harrah and Reynolds Corporation
and Company regarding 615 4th Avenue, Huntington, West Virginia, filed as
Exhibit 10.2 to Form 10-K dated January 27, 1994, filed January 31, 1994,
is incorporated herein by reference.
Realty Lease dated January 28, 1993 between ADJ Corp. and Company regarding 617-619 4th Avenue, Huntington, West Virginia, filed as Exhibit 10.3 to Form 10-K dated January 27, 1994, filed January 31, 1994, is incorporated herein by reference. Realty
Lease dated January 28, 1993 between The Harrah and Reynolds Corporation
and Company regarding 1945 5th Avenue, Huntington, West Virginia, filed as
Exhibit 10.4 to Form 10-K dated January 27, 1994, filed January 31, 1994,
is incorporated herein by reference.
Realty
Lease dated January 28, 1993 between Printing Property Corp. and Company
regarding 405 Ann Street, Parkersburg, West Virginia, filed as Exhibit
10.5 to Form 10-K dated January 27, 1994, filed January 31, 1994, is
incorporated herein by reference.
Realty
Lease dated January 28, 1993 between Printing Property Corp. and Company
regarding 890 Russell Cave Road, Lexington, filed as Exhibit 10.6 to Form
10-K dated January 27, 1994, filed January 31, 1994, is incorporated
herein by reference.
Form
of Indemnification Agreement between Company and all directors and
executive officers, filed as Exhibit 10.4 to Registration Statement on
Form S-1, File No. 33-54454, filed on November 10, 1992, is incorporated
herein by reference.
|
45
Executive
Compensation Plans and Arrangements
|
Company's
1993 Stock Option Plan, effective March 22, 1994, filed as Exhibit 10.14
to Form 10- K dated January 27, 1994, filed January 31, 1994, is
incorporated herein by reference.
Company’s
2003 Stock Option Plan, filed as Exhibit A to proxy statement dated
February 12, 2004, filed February 13, 2004, is incorporated herein by
reference.
Form
of Stock Option Agreement pursuant to Company’s 2003 Stock Option Plan
filed as Exhibit 10.2 to form 10-Q dated September 10, 2004 filed
September 13, 2004, is incorporated herein by reference.
Employment
Agreement dated September 7, 2004 among William G. Williams, Jr., Syscan
Corporation and the Company, filed as Exhibit 10.1 to Form 8-K dated
September 7, 2004, filed September 10, 2004, is incorporated herein by
reference.
Confidentiality
and Non-Competition Agreement dated September 7, 2004 among William G.
Williams, Jr., Syscan Corporation and the Company, filed as Exhibit 10.2
to Form 8-K dated September 7, 2004, filed September 10, 2004, is
incorporated herein by reference.
$10,000,000
revolving credit agreement by and among the Company and its subsidiaries
and National City Bank dated as of April 1, 1999, filed as Exhibit 10.2 to
Form 10-K dated January 25, 2000, filed January 28, 2000, is incorporated
herein by reference.
Lease
Agreement dated November 1, 1999 between Randall M. Schulz, successor
trustee of The Butterfield Family Trust No. 2 and Smith & Butterfield
Co., Inc. regarding 2800 Lynch Road, Evansville, Indiana, filed as Exhibit
10.3 to Form 10-K
dated January 25, 2000, filed January 28, 2000, is incorporated herein by
reference.
|
46
Agreement
of Lease dated September 25, 1998 between Ronald H. Scott and Frank A.
Scott dba St. Clair Leasing Co. and Interform Corporation, regarding 1901
Mayview Road, Bridgeville, Pennsylvania, filed as Exhibit 10.4 to Form
10-K dated January 25, 2000, filed January 28, 2000, is incorporated
herein by reference.
First
Amendment of Real Estate Lease Agreement dated May 6, 2003 by and between
Ronald H. Scott and Frank J. Scott dba St. Clair Leasing Company and
Interform Corporation, filed as Exhibit 10.1 to Form 8-K filed October 4,
2004, is incorporated herein by reference.
Agreement
of Lease dated September 1, 2002 between Marion B. and Harold A. Merten,
Jr. and The Merten Company regarding 1515 Central Parkway, Cincinnati,
Ohio, filed as Exhibit (10.1) to form 10-K dated January 21, 2002, Filed
January 25, 2002 is incorporated herein by reference.
Agreement
Amending and Extending term of lease dated May 24, 2002 between Earl H.
and Elaine D. Seibert and Smith and Butterfield Co., Inc. Filed as Exhibit
(10.2) to form 10-K dated January 20, 2003, Filed January 24, 2003 is
incorporated herein by reference.
Business
Loan Agreement, $1,440,000 commercial loan between Bourque Printing
Company and Hibernia National Bank together with promissory note dated as
of March 19, 2003,filed as Exhibit 10.1 to form 10-K dated January 19,
2004 filed January 26, 2004, is incorporated herein by
reference.
Commercial
Security Agreement, $450,050 commercial loan between Champion Industries,
Inc. and First Century Bank dated as of March 2, 2003, filed as Exhibit
10.2 to form 10-K dated January 19, 2004 filed January 26, 2004, is
incorporated herein by
reference.
|
|
47
Business
Loan Agreement, $351,000 commercial loan between Champion Industries, Inc.
and City National Bank together with promissory note dated as of August
14, 2003, filed as Exhibit 10.3 to form 10-K dated January 19, 2004 filed
January 26, 2004, is
incorporated herein by reference.
Revolving
Credit Agreement, $10,000,000 revolving line of credit between Champion
Industries, Inc. and United Bank, Inc. dated as of August 1, 2003, filed
as Exhibit 10.4 to form 10-K dated January 19, 2004 filed January 26,
2004, is
incorporated herein by reference.
Agreement
Amending and Extending term of lease dated May 9, 2003 between Champion
Industries, Inc. dba, Upton Printing and AMB Property, L.P, filed as
Exhibit 10.5 to form 10-K dated January 19, 2004 filed January 26, 2004,
is
incorporated herein by reference.
Agreement
Amending and Extending term of lease dated October 1, 2003 between Bourque
Printing dba, Upton Printing and M. Field Gomila Et. Al. , filed as
Exhibit 10.6 to form 10-K dated January 19, 2004 filed January 26, 2004,
is
incorporated herein by reference.
Promissory
Note, $122,500 between Champion Industries, Inc. and Community Trust Bank
dated as of January 9, 2003, filed as Exhibit 10.7 to form 10-K dated
January 19, 2004 filed January 26, 2004, is
incorporated herein by reference.
Agreement
of Lease dated as of September 1, 2004, between Williams Land Corporation
and Syscan Corporation regarding North Hills Drive and Washington Street,
Charleston, West Virginia, filed as Exhibit 10.3 to Form 8-K dated
September 7, 2004, filed September 10, 2004, is incorporated herein by
reference.
Agreement
of Lease dated as of September 1, 2004, between Williams Land Corporation
and Syscan Corporation regarding 2800 Seventh Avenue, Charleston, West
Virginia, filed as Exhibit 10.4 to Form 8-K dated September 7, 2004, filed
September 10, 2004, is incorporated herein by reference.
|
48
Agreement
of Purchase and Sale dated September 7, 2004, between Syscan Corporation
and Williams Properties, LLC regarding 811 Virginia Street, East,
Charleston, West Virginia, filed
as Exhibit 10.5 to Form 8-K dated September 7, 2004, filed September 10,
2004, is incorporated herein by
reference.
Exercise
of Lease renewal option for 2800 Lynch Road Evansville, Indiana dated as
of September 22, 2003, filed as Exhibit 10.1 to form 10-K dated January
17, 2005 filed January 31, 2005, is incorporated herein by
reference.
$1,000,000
Business Loan Agreement and promissory note by and between the Company and
Community Trust Bank, N.A. as of March 19, 2004, filed as Exhibit 10.2 to
form 10-K dated January 17, 2005 filed January 31, 2005, is incorporated
herein by reference.
$1,000,000
revolving line of credit between Stationers, Inc. and First Sentry Bank
dated as of April 7, 2004, filed as Exhibit 10.3 to form 10-K dated
January 17, 2005 filed January 31, 2005, is incorporated herein by
reference.
$600,075
term note between Bourque Printing, Inc. and First Century Bank dated as
of September 9, 2004, filed as Exhibit 10.4 to form 10-K dated January 17,
2005 filed January 31, 2005, is incorporated herein by
reference.
$3,920,000 promissory note and security agreement between Champion
Industries, Inc. and United Bank, Inc. dated as of October 26, 2004, filed
as Exhibit 10.5 to Form 10-K dated January 17, 2005 filed January 31,
2005, is incorporated herein by reference.
Modification
letter to promissory note between Bourque Printing and Hibernia National
Bank, Inc. dated December 28, 2004, filed as Exhibit 10.6 to Form 10-K
dated January 17, 2005 filed January 31, 2005, is incorporated herein by
reference.
|
49
First
Amendment to Revolving Credit Agreement between Champion Industries, Inc.
and United Bank, Inc. Filed as Exhibit 10.1 to Form 8-K dated February 15,
2005, filed February 16, 2005, is incorporated herein by
reference.
Second
Amendment to Revolving Credit Agreement between Champion Industries, Inc.
and United Bank, Inc. Filed as Exhibit 10.1 to form 8-K dated July 11,
2005, filed July 11, 2005, is incorporated herein by
reference.
$605,095
term note between Champion Industries, Inc. and First Century Bank dated
as of July 27, 2005. Filed as Exhibit 10.1 to Form 10-Q dated
September 9, 2005, filed September 9, 2005, is incorporated herein by
reference.
$1,000,000
revolving line of credit between Stationers, Inc. and First Sentry Bank
dated as of October 7, 2005, filed as exhibit 10.1 to Form 10-K dated
January 16, 2006 filed January 27, 2006, is incorporated herein by
reference.
Lease
Agreement dated October 31, 2005, between SANS LLC and Champion
Industries, Inc. dba Chapman Printing Company regarding 951 Point
Marion Road Morgantown, West Virginia, filed as Exhibit 10.2 to Form 10-K
dated January 16, 2006, filed January 27, 2006, is incorporated herein by
reference.
Lease
Agreement dated June 28, 2006, between White Properties No. II, LLC and
Champion Industries, Inc. regarding 120 Hills Plaza Charleston, West
Virginia, filed as Exhibit 10.1 to Form 8-K dated July 3, 2006, filed July
3, 2006 is incorporated herein by reference.
$1,200,000 term note between Champion Industries, Inc. and
Community Trust Bank, Inc. dated as of July 28, 2006, filed as Exhibit
10.1 to Form 10-K dated January 15, 2007 filed January 28, 2007, is
incorporated herein by reference.
$642,831.68
term note between Champion Industries, Inc. and First Bank of Charleston,
Inc. dated as of August 30, 2006, filed as Exhibit 10.1 to Form 10-K dated
January 15, 2007 filed January 28, 2007, is incorporated herein by
reference.
$10,000,000
promissory note between Champion Industries, Inc. and United Bank, Inc.,
filed as Exhibit 10.2 to form 8-K dated March 20, 2007 filed March 22,
2007, is incorporated herein by reference.
|
50
$324,408.00
promissory note between Champion Industries, Inc. and First Bank of
Charleston, Inc. dated as of March 23, 2007, filed as Exhibit 10.1 to Form
10-Q dated June 8, 2007 filed June 8, 2007, is incorporated herein by
reference.
$1,000,000
revolving line of credit between Stationers, Inc. and First Sentry Bank
dated as of April 7, 2007, filed as exhibit 10.2 to Form 10-Q dated June
8, 2007 filed June 8, 2007, is incorporated herein by
reference.
$267,013
master loan agreement between Champion Industries, Inc. and US Bancorp
Equipment Finance dated as of May 30, 2007, filed as Exhibit 10.1 to Form
10-Q dated September 10, 2007 filed September 11, 2007, is
incorporated herein by reference.
$1,750,000
promissory note between Champion Industries, Inc. and Community Trust
Bank, Inc. dated as of June 12, 2007, filed as Exhibit 10.2 to Form
10-Q dated September 10, 2007 filed September 11, 2007, is
incorporated herein by reference.
Credit agreement between Champion Industries, Inc. and Fifth Third
Bank, filed as Exhibit 10.1 to Form 8-K dated September 14, 2007
filed September 19, 2007, is incorporated herein by
reference.
$767,852 term loan between Champion Industries, Inc. and First
Bank of Charleston, Inc. dated April 22, 2008, filed as Exhibit 10.1 to
Form 8-K dated April 25, 2008 filed April 25, 2008, is incorporated
herein by reference.
Agreement of lease dated November 1, 2008
between ADJ Corporation and Champion Publishing, Inc. regarding 100
Industrial Lane Property, Huntington, West Virginia. Filed as exhibit 10.1 to Form 10-K dated January 19, 2009, is
incorporated herein by reference.
$1,000,000 revolving line of
credit between Stationers, Inc. and First Sentry Bank dated as of January
13, 2009.
Filed as Exhibit 10.2 to Form 10-K dated January 19,
2009, is incorporated herein by reference.
Forbearance Agreement and related Promissory Note and Debt
Subordination Agreement dated December 19, 2009 between Champion
Industries Inc., Marshall Reynolds and Fifth Third Bank as Lender, L/C
Issuer and Administrative Agent for Lenders. Filed as Exhibits 10.1, 10.2
and 10.3 to Form 8-K dated January 4, 2010, is incorporated herein by
reference.
|
51
(10.1) |
$600,000
Promissory Note dated June 10, 2009 between Champion Industries, Inc and
First Sentry Bank.
Page Exhibit (10.1)
|
|||||
(10.2)
|
Agreement
of Lease dated October 27, 2009 between ADJ Corporation and Champion
Industries, Inc. regarding 3000 Washington St. West, Charleston,
WV.
Page Exhibit (10.2)
|
|||||
(14)
|
Code
of Ethics
|
Code
of Ethics for the Chief Executive Officer, Chief Operating Officer and
Chief Accounting Officer, filed as Exhibit 14 to form 10-K dated January
19, 2004 filed January 26, 2004, is incorporated herein by
reference.
Code
of Business Conduct and Ethics, filed as Exhibit 14.2 to Form 10-K dated
January 19, 2004 filed January 26, 2004, is incorporated herein by
reference.
|
||||
(16)
|
Letter
of BKD, LLP dated April 20, 2007, filed as Exhibit 16 to Form 8-K dated
April 20, 2007, filed April 20, 2007, is incorporated herein by
reference.
|
|||||
(21)
|
Subsidiaries
of the Registrant
|
Exhibit
21
|
Page
Exhibit 21-p1
|
|||
(23.1)
|
Consent
of Arnett and Foster, PLLC
|
Exhibit
23.1
|
Page
Exhibit 23.1-p1
|
|||
|
||||||
(31.1)
|
Principal
Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley act of 2002 - Marshall T. Reynolds
|
Exhibit
31.1
|
Page
Exhibit 31.1-p1
|
|||
(31.2)
|
Principal
Financial Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley act of 2002 - Todd R. Fry
|
Exhibit
31.2
|
Page
Exhibit 31.2-p1
|
(31.3)
|
Principal
Operating Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley act of 2002 - Toney K. Adkins
|
Exhibit
31.3
|
Page
Exhibit 31.3-p1
|
|||
(32)
|
Marshall
T. Reynolds, Todd R. Fry and Toney K. Adkins Certification Pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley act of 2002
|
Exhibit
32
|
Page
Exhibit 32-p1
|
(b)
Exhibits - Exhibits are filed as a separate section of this
report.
(c)
Financial Statement Schedules - Filed as separate section on page
F-41.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
By
/s/ Marshall T.
Reynolds
|
Marshall
T. Reynolds
|
Chief
Executive Officer
|
|
By
/s/ Toney K. Adkins
|
Toney
K. Adkins
|
President
and Chief Operating Officer
|
|
By
/s/ Todd R. Fry
|
Todd
R. Fry
|
Senior
Vice President and Chief Financial Officer
|
|
Date:
January 27, 2010
|
53
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated and on the dates indicated.
SIGNATURE
AND TITLE
|
|
DATE
|
|
|
|
/s/ Louis J. Akers
|
|
January
27, 2010
|
Louis
J. Akers, Director
|
|
|
|
|
|
/s/
Philip E.
Cline
|
|
January
27,
2010
|
Philip
E. Cline, Director
|
|
|
|
|
|
/s/
Harley F. Mooney,
Jr.
|
|
January
27, 2010
|
Harley
F. Mooney, Jr., Director
|
|
|
|
|
|
/s/
A. Michael
Perry
|
|
January
27, 2010
|
A.
Michael Perry, Director
|
|
|
|
|
|
/s/
Marshall T.
Reynolds
|
|
January
27,
2010
|
Marshall
T. Reynolds, Director
|
|
|
|
|
|
/s/
Neal W.
Scaggs
|
|
January
27, 2010
|
Neal
W. Scaggs, Director
|
|
|
|
|
|
/s/
Glenn W. Wilcox,
Sr.
|
|
January
27, 2010
|
Glenn
W. Wilcox, Sr., Director
|
|
|
54
Champion
Industries, Inc.
Audited
Consolidated Financial Statements and Schedule
October
31, 2009
Contents
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Audited
Consolidated Financial Statements:
|
|
|
|
Consolidated
Balance Sheets as of October 31, 2009 and 2008
|
F-3
|
|
Consolidated
Statements of Operations for the years ended October 31, 2009, 2008 and
2007
|
F-5
|
|
Consolidated
Statements of Shareholders’ Equity for the years ended October 31, 2009,
2008 and 2007
|
F-6
|
|
Consolidated
Statements of Cash Flows for the years ended October 31, 2009, 2008 and
2007
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
Schedule
II - Valuation and Qualifying Accounts
|
F-41
|
F-1
Report
of Independent Registered Public Accounting Firm
Audit
Committee, Board of Directors and Shareholders
Champion
Industries, Inc.
Huntington,
West Virginia
We have
audited the accompanying consolidated balance sheets of Champion Industries,
Inc. and Subsidiaries (the “Company”) as of October 31, 2009 and 2008, and the
related consolidated statements of operations, shareholders’ equity and cash
flows for each of the three years in the period ended October 31,
2009. Our audits also included the financial statement schedule
listed in the index at Item 15(a). These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and schedule based upon our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of October
31, 2009 and 2008, and the results of its operations and its cash flows for each
of the three years in the period ended October 31, 2009, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, the 2008
consolidated financial statements have been restated to correct a misstatement
of deferred tax expense associated with deferred tax liability attributes
relating to goodwill and other intangible assets.
As more
fully discussed in Note 12 to the consolidated financial statements, in
connection with the Company’s annual impairment evaluation of recorded goodwill
and other intangible assets, the Company recorded a noncash charge of
approximately $41.1 million ($25.5 million, net of deferred tax benefit) for
impairment of the value of the goodwill and other intangible assets, which
resulted from the 2007 acquisition of the Company’s newspaper
segment. Additionally, as more fully discussed in Note 14 to the
consolidated financial statements, the Company recorded a charge of
approximately $600,000 resulting from the discontinuation of hedge accounting
for the hedge ineffectiveness of the Company’s interest rate swap
agreement.
Additionally,
as more fully discussed in Note 3 to the consolidated financial statements, the
Company as of, and during the year ended October 31, 2009, was not in compliance
with certain of its financial covenants arising under a credit agreement
involving several lending financial institutions. The Company has been unable to
obtain a waiver or negotiate amendments to correct the covenant
violations. The Company has been negotiating with the financial
institutions’ administrative agent for the credit agreement to restructure the
existing arrangement; however, terms satisfactory to the Company and all lending
parties involved have not been reached. The Company and the
administrative agent entered into a Forbearance Agreement that concludes on March
31, 2010, which provides, among other things, a standstill period that
temporarily forbears exercising certain rights available to the lending
institutions including acceleration of the obligations and enforcement of any of
the liens, unless sooner terminated by default by the Company. Should
the Company and the administrative agent for the lending institutions not reach
mutually agreeable arrangements to amend or waive the current lending
agreement’s financial covenants, and the Company is unable to comply with those
covenants subsequent to the conclusion of the Forbearance Agreement, the entire
debt obligation could become due and payable immediately and the Company would
be forced to refinance or repay its debt obligations or seek other remedial
alternatives. Management’s plans concerning these matters are also
discussed in Note 3 to the consolidated financial statements. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty, except that certain debt obligations have been reflected as
current liabilities as of October 31, 2009.
We were
not engaged to examine management's assessment of the effectiveness of Champion
Industries, Inc.’s internal control over financial reporting as of October 31,
2009, included in the accompanying Management’s Report on Internal Control Over
Financial Reporting and, accordingly, we do not express an opinion
thereon.
/s/
Arnett & Foster, P.L.L.C.
Charleston,
West Virginia
January
28, 2010
F-2
Champion
Industries, Inc. and Subsidiaries
Consolidated
Balance Sheets
October
31,
|
||||||||
2009
|
2008
(Restated)
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ |
1,159,282
|
$ |
-
|
||||
Accounts
receivable, net of allowance of $1,353,000 and $1,851,000
|
18,424,310 | 23,888,688 | ||||||
Inventories
|
11,161,977
|
12,014,118
|
||||||
Income tax refund | 1,911,400 | 711,096 | ||||||
Other
current assets
|
925,120
|
833,066
|
||||||
Deferred
income tax assets
|
1,000,847
|
1,130,742
|
||||||
Total
current assets
|
34,582,936
|
38,577,710
|
||||||
Property
and equipment, at cost:
|
||||||||
Land
|
2,016,148
|
2,120,689
|
||||||
Buildings
and improvements
|
11,806,238
|
12,110,480
|
||||||
Machinery
and equipment
|
57,481,742
|
55,407,620
|
||||||
Furniture
and fixtures
|
4,129,537
|
4,089,466
|
||||||
Vehicles
|
3,145,772
|
3,144,682
|
||||||
78,579,437
|
76,872,937
|
|||||||
Less
accumulated depreciation
|
(53,170,108 | ) | (49,764,709 | ) | ||||
25,409,329
|
27,108,228
|
|||||||
Cash
surrender value of officers’ life insurance
|
-
|
874,397
|
||||||
Goodwill
|
15,332,283
|
38,894,778
|
||||||
Deferred financing costs |
1,199,199
|
1,508,669 | ||||||
Other
intangibles, net of accumulated amortization
|
5,645,078
|
15,730,841
|
||||||
Trademark and masthead
|
10,001,812 | 18,515,316 | ||||||
Deferred tax asset, net of current portion | 8,799,518 | - | ||||||
Other
assets
|
51,738
|
68,906
|
||||||
41,029,628
|
75,592,907
|
|||||||
Total
assets
|
$ |
101,021,893
|
$ |
141,278,845
|
||||
See
notes to consolidated financial statements.
F-3
Champion Industries, Inc. and
Subsidiaries
Consolidated
Balance Sheets (continued)
October
31,
|
||||||||
2009
|
2008
(Restated)
|
|||||||
Liabilities
and shareholders’ equity
|
||||||||
Current
liabilities:
|
||||||||
Line of credit | $ | 8,725,496 | $ | - | ||||
Negative book cash balances | - | 986,704 | ||||||
Accounts
payable
|
4,637,199
|
4,844,725
|
||||||
Accrued
payroll and commissions
|
2,392,971
|
2,726,911
|
||||||
Taxes
accrued and withheld
|
1,391,718
|
987,385
|
||||||
Accrued
expenses
|
2,027,266
|
1,546,055
|
||||||
Other current liabilities | 962,893 | - | ||||||
Current
portion of long-term debt:
|
||||||||
Notes
payable
|
57,024,424
|
7,118,543
|
||||||
Total
current liabilities
|
77,161,967
|
18,210,323
|
||||||
Long-term
debt, net of current portion:
|
||||||||
Line
of credit
|
-
|
9,125,496
|
||||||
Notes
payable
|
918,436
|
57,206,307
|
||||||
Deferred
income tax liabilities
|
-
|
5,301,581
|
||||||
Other
liabilities
|
7,350
|
939,006
|
||||||
Total
liabilities
|
78,087,753
|
90,782,713
|
||||||
Commitments
and contingencies-See Note
|
||||||||
Shareholders’
equity:
|
||||||||
Common
stock, $1 par value, 20,000,000 shares authorized;
|
||||||||
9,987,913 shares
issued
|
||||||||
and
outstanding
|
9,987,913
|
9,987,913
|
||||||
Additional
paid-in capital
|
22,768,610
|
22,768,610
|
||||||
Retained
(deficit) earnings
|
(9,822,383
|
) |
18,297,522
|
|||||
Other comprehensive loss | - | (557,913 | ) | |||||
Total
shareholders’ equity
|
22,934,140
|
50,496,132
|
||||||
Total
liabilities and shareholders’ equity
|
$ |
101,021,893
|
$ |
141,278,845
|
||||
See
notes to consolidated financial statements.
F-4
Champion Industries, Inc. and
Subsidiaries
Consolidated
Statements of Operations
Year
Ended October 31,
|
||||||||||
2009
|
|
2008
(Restated)
|
|
2007
|
||||||
Revenues:
|
||||||||||
Printing
|
$
|
88,989,794
|
$
|
105,275,191
|
$
|
104,500,337
|
||||
Office
products and office furniture
|
35,874,431
|
41,540,114
|
41,448,642
|
|||||||
Newspaper | 16,393,896 |
18,939,250
|
2,540,377 | |||||||
Total
revenues
|
141,258,121
|
165,754,555
|
148,489,356
|
|||||||
Cost
of sales & newspaper operating costs:
|
||||||||||
Printing
|
66,856,098
|
75,590,247
|
75,616,988
|
|||||||
Office
products and office furniture
|
24,859,285
|
28,457,142
|
28,834,642
|
|||||||
Newspaper cost of sales & operating costs | 8,714,941 |
9,492,591
|
1,187,444 | |||||||
Total
cost of sales & newspaper operating costs
|
100,430,324
|
113,539,980
|
105,639,074
|
|||||||
Gross
profit
|
40,827,797 |
52,214,575
|
42,850,282
|
|||||||
Selling,
general and administrative expenses
|
37,126,228
|
39,528,551
|
32,335,593
|
|||||||
Asset impairments costs | 41,333,653 | - | - | |||||||
Hurricane
and relocation costs, net of recoveries
|
(38,673
|
) |
(33,411
|
) |
-
|
|||||
(Loss)
Income from operations
|
(37,593,411
|
) |
12,719,435
|
10,514,689
|
||||||
Other
income (expense):
|
||||||||||
Interest
income
|
2,771
|
65,657
|
45,021
|
|||||||
Interest
expense
|
(5,184,668
|
)
|
(5,733,677
|
)
|
(1,455,470
|
)
|
||||
Other
|
(475,488
|
) |
69,602
|
179,126
|
||||||
(5,657,385
|
)
|
(5,598,418
|
)
|
(1,231,323
|
)
|
|||||
(Loss)
income before income taxes
|
(43,250,796
|
) |
7,121,017
|
9,283,366
|
||||||
Income
tax benefit (expense)
|
15,730,172
|
|
(2,462,856
|
)
|
(3,203,226
|
)
|
||||
Net (loss) income
|
$
|
(27,520,624
|
) |
$
|
4,658,161
|
$
|
6,080,140
|
|||
(Loss)
earnings per share:
|
||||||||||
Basic
|
$
|
(2.76
|
) |
$
|
0.47
|
$
|
0.61
|
|||
Diluted
|
(2.76
|
) |
0.46
|
0.60
|
||||||
Dividends
paid per share
|
0.06
|
0.24
|
0.24
|
|||||||
Weighted
average shares outstanding:
|
||||||||||
Basic
|
9,988,000
|
9,986,000
|
9,957,000
|
|||||||
Diluted
|
9,988,000
|
10,024,000
|
10,103,000
|
See
notes to consolidated financial statements.
F-5
Champion Industries, Inc. and
Subsidiaries
Consolidated
Statements of Shareholders’ Equity
Additional
|
Other
|
||||||||||||||||||
Common
Stock
|
Paid-In
|
Retained
|
Comprehensive
|
||||||||||||||||
Shares
|
Amount
|
Capital
|
Earnings
(Deficit)
|
Loss
|
Total
|
||||||||||||||
Balance,
October 31, 2006
|
9,922,913
|
$
|
9,922,913
|
$
|
22,636,620
|
$
|
12,217,152
|
$
|
-
|
$
|
44,776,685
|
||||||||
Net
income for 2007
|
-
|
-
|
-
|
6,080,140
|
-
|
6,080,140
|
|||||||||||||
Other
comprehensive loss (net of tax)
|
-
|
-
|
-
|
-
|
(11,350
|
)
|
(11,350
|
)
|
|||||||||||
Total
comprehensive income
|
-
|
-
|
-
|
6,080,140
|
(11,350
|
)
|
6,068,790
|
||||||||||||
Dividends
($0.24 per share)
|
-
|
-
|
-
|
(2,389,417
|
)
|
-
|
(2,389,417
|
)
|
|||||||||||
Stock
options exercised
|
46,000
|
46,000
|
96,680
|
-
|
-
|
142,680
|
|||||||||||||
Cumulative
effect of adjustment resulting from adoption of SAB 108, net of
tax
|
-
|
-
|
-
|
128,349
|
-
|
128,349
|
|||||||||||||
Balance,
October 31, 2007
|
9,968,913
|
9,968,913
|
22,733,300
|
16,036,224
|
(11,350
|
)
|
48,727,087
|
||||||||||||
Net
income for 2008 (Restated)
|
-
|
-
|
-
|
4,658,161
|
|
4,658,161
|
|||||||||||||
Other
comprehensive loss (net of tax)
|
-
|
-
|
-
|
-
|
(546,563
|
) | (546,563 | ) | |||||||||||
Total
comprehensive income (Restated)
|
-
|
-
|
-
|
4,658,161
|
(546,563
|
)
|
4,111,598
|
||||||||||||
Dividends
($0.24 per share)
|
-
|
-
|
-
|
(2,396,863
|
)
|
-
|
(2,396,863
|
)
|
|||||||||||
Stock
options exercised
|
19,000
|
19,000
|
35,310
|
-
|
-
|
54,310
|
|||||||||||||
Balance,
October 31, 2008 (Restated)
|
9,987,913
|
9,987,913
|
22,768,610
|
18,297,522
|
(557,913
|
)
|
50,496,132
|
||||||||||||
Net
loss for 2009
|
(27,520,624
|
)
|
-
|
(27,520,624
|
)
|
||||||||||||||
Other
comprehensive loss (net of tax)
|
-
|
-
|
-
|
-
|
(19,823
|
)
|
(19,823
|
)
|
|||||||||||
Ineffectiveness
hedging loss
|
-
|
577,736
|
577,736
|
||||||||||||||||
Total
comprehensive loss
|
(27,520,624
|
)
|
557,913
|
(26,962,711
|
)
|
||||||||||||||
Dividends
($0.06 per share)
|
-
|
-
|
-
|
(599,281
|
)
|
-
|
(599,281
|
)
|
|||||||||||
Stock
options exercised
|
-
|
-
|
-
|
||||||||||||||||
Balance,
October 31, 2009
|
9,987,913
|
$
|
9,987,913
|
$
|
22,768,610
|
$
|
(9,822,383
|
)
|
$
|
-
|
$
|
22,934,140
|
See
notes to consolidated financial statements.
F-6
Champion Industries, Inc. and
Subsidiaries
Consolidated
Statements of Cash Flows
Year
Ended October 31,
|
||||||||||
2009
|
2008
(Restated)
|
2007
|
||||||||
Cash
flows from operating activities:
|
||||||||||
Net
(loss) income
|
$
|
(27,520,624
|
) |
$
|
4,658,161
|
$
|
6,080,140
|
|||
Adjustments
to reconcile net (loss) income to cash
provided
by operating activities:
|
||||||||||
Depreciation
and amortization
|
5,244,938
|
5,384,509
|
3,992,640
|
|||||||
(Gain)
loss on sale of assets
|
(55,719
|
)
|
4,552
|
|
49,758
|
|||||
Deferred
income taxes
|
(13,957,990
|
)
|
2,129,999
|
|
(15,194
|
)
|
||||
Deferred financing costs | 309,471 | 309,471 | - | |||||||
Bad
debt expense
|
876,145
|
854,283
|
491,934
|
|||||||
Intangible
impairment
|
41,127,483
|
-
|
|
-
|
||||||
Asset Impairment | 206,170 | - | - | |||||||
Loss on hedging agreements | 577,736 | - | - | |||||||
Changes
in assets and liabilities:
|
||||||||||
Accounts
receivable
|
4,588,233
|
(1,503,868
|
)
|
(927,958
|
)
|
|||||
Inventories
|
852,141
|
(509,271
|
)
|
4,232
|
||||||
Other
current assets
|
(92,053
|
)
|
49,469
|
|
(166,758
|
) | ||||
Accounts
payable
|
(207,527
|
)
|
(635,114
|
)
|
959,552
|
|||||
Accrued
payroll and commissions
|
(333,940
|
)
|
266,624
|
298,569
|
|
|||||
Taxes
accrued and withheld
|
404,333
|
|
(306,740
|
)
|
(132,206
|
)
|
||||
Accrued
income taxes
|
(1,200,304
|
) |
(78,657
|
)
|
(1,825,842
|
)
|
||||
Accrued
expenses
|
481,211
|
|
(271,800
|
) |
248,251
|
|
||||
Other
liabilities
|
(1,800
|
)
|
(1,800
|
)
|
(377,434
|
)
|
||||
Net
cash provided by operating activities
|
11,297,904
|
10,349,818
|
8,679,684
|
|||||||
Cash
flows from investing activities:
|
||||||||||
Purchase
of property and equipment
|
(1,993,029
|
)
|
(2,373,122
|
)
|
(3,530,050
|
)
|
||||
Proceeds
from sale of fixed assets
|
160,324
|
192,749
|
146,857
|
|||||||
Businesses
acquired, net of cash received
|
-
|
|
(1,657,239
|
)
|
(1,214,283
|
)
|
||||
Goodwill
and other intangible additions
|
-
|
|
-
|
|
(45,811
|
)
|
||||
Change
in other assets
|
5,168
|
52,003
|
|
127,657
|
|
|||||
Cash
surrender value proceeds
|
874,397 |
-
|
291,836 | |||||||
(Increase)
decrease in cash surrender value
|
-
|
|
(40,291
|
)
|
76,754
|
|
||||
Net
cash used in investing activities
|
(953,140
|
)
|
(3,825,900
|
)
|
(4,147,040
|
)
|
||||
Cash
flows from financing activities:
|
||||||||||
Borrowings
on line of credit
|
600,000
|
-
|
12,101,000
|
|||||||
Payments
on line of credit
|
(1,000,000
|
)
|
(6,415,000
|
)
|
(12,101,000
|
)
|
||||
(Decrease) increase in negative book cash balances | (986,704 | ) | 986,704 | - | ||||||
Proceeds from
long-term debt
|
-
|
767,852
|
2,654,254
|
|||||||
Principal
payments on long-term debt
|
(7,199,497
|
)
|
(5,314,041
|
)
|
(4,313,471
|
)
|
||||
Financing
costs paid
|
- |
-
|
(320,147 | ) | ||||||
Proceeds
from exercise of stock options
|
-
|
54,310
|
142,680
|
|||||||
Dividends
paid
|
(599,281
|
)
|
(2,396,863
|
)
|
(2,389,417
|
)
|
||||
Net
cash used in financing activities
|
(9,185,482
|
)
|
(12,317,038
|
) |
(4,226,101
|
)
|
||||
Net
increase (decrease) in cash and cash equivalents
|
1,159,282 |
(5,793,120
|
)
|
306,543
|
|
|||||
Cash
and cash equivalents at beginning of year
|
-
|
5,793,120
|
5,486,577
|
|||||||
Cash
and cash equivalents at end of year
|
$
|
1,159,282
|
$
|
-
|
$
|
5,793,120
|
See
notes to consolidated financial statements.
F-7
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial
Statements
1.
Summary of Significant Accounting Policies
Champion
is a commercial printer, business forms manufacturer and office products and
office furniture supplier in regional markets in the United States of America,
east of the Mississippi. Champion also publishes The Herald-Dispatch daily
newspaper in Huntington, WV with a total daily and Sunday circulation of
approximately 24,000 and 30,000 respectively.
The
accounting and reporting policies of Champion conform to accounting principles
generally accepted in the United States. The preparation of the financial
statements in conformity with generally accepted accounting principles (GAAP)
require 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.
As of
July 1, 2009, FASB (Financial Accounting Standards Board) Accounting Standards
Codification became the single reference source of authoritative
non-governmental U.S. GAAP. In the succeeding footnotes references to GAAP
issued by the FASB are to the FASB Accounting Standards Codification which is
denoted here forth as ASC. The following is a summary of the more significant
accounting and reporting policies which include updated references to GAAP as
stated by the ASC which became effective for financial reporting purposes as of
September 15, 2009.
Restatement
of Prior Year
In the fourth quarter of fiscal year
2009, the Company identified approximately $1.4 million or
$0.14 per share on a basic and diluted basis of non-cash
deferred tax related adjustments for 2008. Accordingly, the Consolidated
Financial statements for October 31, 2008 presented in this Form 10-K have been
restated to increase deferred income tax expense and to increase deferred income
tax liability. This adjustment is related to the goodwill, tradename and
masthead associated with the acquisition of The Herald-Dispatch. This deferred
tax liability will remain on the balance sheet until such time as the associated
intangible assets are impaired, sold or otherwise disposed of. As a result of
the impairment charge recorded in 2009 this deferred tax liability is now
reflected as a deferred tax asset due to the non-cash benefit associated with
the impairment of goodwill, tradename and
masthead.
Principles
of Consolidation
The
accompanying consolidated financial statements of Champion Industries, Inc. and
Subsidiaries (the “Company”) include the accounts of The Chapman Printing
Company, Inc., Bourque Printing, Inc., Dallas Printing Company, Inc.,
Stationers, Inc., Carolina Cut Sheets, Inc., U.S. Tag & Ticket, Donihe
Graphics, Inc., Smith and Butterfield Co., Inc., The Merten Company, Interform
Corporation, Blue Ridge Printing Co., Inc., CHMP Leasing, Inc., Rose City Press,
Capitol Business Equipment, Inc., Thompson’s of Morgantown, Inc., Independent
Printing Service, Inc., Diez Business Machines, Transdata Systems, Inc., Syscan
Corporation and Champion Publishing, Inc.
Significant
intercompany transactions have been eliminated in consolidation.
Cash
and Cash Equivalents
Cash
and cash equivalents consist principally of cash on deposit with banks
and repurchase agreements for government securities, all highly liquid
investments with an original maturity of three months or less. At October
31, 2009 and 2008, the Company held overnight repurchase agreements for
$ 0 and $30,000 of Eurodollar Sweep Investments with stated
interest rates of 0.40% and 1.22%, respectively. The Company's cash
deposits in excess of federally insured amounts are primarily maintained at a
large well-known financial institution.
Accounts
Receivable
Accounts
receivable are stated at the amount billed to customers. Accounts receivable are
ordinarily due 30 days from the invoice date.
F-8
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
The
Company encounters risks associated with sales and the collection of the
associated accounts receivable. As such, the Company records a monthly provision
for accounts receivable that are considered to be uncollectible. In order to
calculate the appropriate monthly provision, the Company primarily utilizes a
historical rate of accounts receivable written off as a percentage of total
revenue. This historical rate is applied to the current revenues on a monthly
basis. The
historical rate is
updated periodically based on events that may change the rate such
as a significant increase or decrease in collection performance and timing of
payments as well as the calculated total exposure in relation to the allowance.
Periodically, the Company compares the
identified credit risks with the allowance that has been established using
historical experience and adjusts the allowance accordingly.
During
2009, 2008 and 2007, $876,000, $854,000, and $492,000 of bad debt expense was
incurred and the allowance for doubtful accounts was $1,353,000, $1,851,000, and
$1,511,000 as of October 31, 2009, 2008 and 2007. The actual write-offs for the
periods were $1,375,000, $514,000, and $657,000 during 2009, 2008 and 2007. The
actual write-offs occur when it is determined an account will not be collected.
General economic conditions and specific geographic and customer concerns are
major factors that may affect the adequacy of the allowance and may result in a
change in the annual bad debt expense.
No
individual customer represented greater than 3.0% of the gross outstanding
accounts receivable at October 31, 2009 and 2008. The Company’s ten largest
accounts receivable balances represented 13.8% and 18.1% of gross outstanding
accounts receivable at October 31, 2009 and 2008.
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.
FASB
ASC Topic 330, "Inventories" (ASC 330) (formerly SFAS No.151, an amendment of
ARB No.43, chapter 4) clarifies the accounting for items such as abnormal
freight, handling costs, and amounts of wasted material (spoilage). ASC 330
requires such items to be treated as current period charges rather than as
a portion of the inventory cost. This did not have a material effect on the
Company's financial statement.
F-9
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Property
and Equipment
Depreciation of
property and equipment and amortization of leasehold improvements and equipment
under capital leases are recognized primarily on the straight-line and
declining-balance methods in amounts adequate to amortize costs over the
estimated useful lives of the assets as
follows:
Buildings
and improvements
|
5
- 40 years
|
Machinery
and equipment
|
3
- 10 years
|
Furniture
and fixtures
|
5
- 10 years
|
Vehicles
|
3
- 5 years
|
Major renewals,
betterments and replacements are capitalized while maintenance and repair costs
are charged to operations as incurred. Upon the sale or disposition of assets,
the cost and related accumulated depreciation are removed from the accounts with
the resulting gains or losses reflected in income. Depreciation expense
approximated $4,199,000, $4,324,000 and $3,538,000 for the years ended
October 31, 2009, 2008 and 2007 and is
reflected as a component of cost of sales and newspaper operating costs and
selling, general and administrative
expenses.
Long-lived property
and equipment are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. This evaluation includes the review of operating performance and
estimated future undiscounted cash flows of the underlying assets or
businesses.
Goodwill
and Other Intangibles
The excess cost over
fair value of net assets of acquired businesses, goodwill, was in years prior to
2002 being amortized by the straight-line method over periods ranging from 15 to
25 years. The other intangible assets are being amortized over 5 to 20 years
representing the future benefit of the intangible. The fair values of these
intangible assets are estimated based on management's assessment as well as
independent third party appraisals in some
cases.
F-10
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
FASB ASC
Topics 805, “Business Combinations” and 350, “Intangibles- Goodwill and Other”
(formerly SFAS No. 141 and 142 respectively) express that Goodwill shall not be
amortized. Instead, Goodwill shall be tested for impairment at a level of
reporting referred to as a reporting unit. The first step of impairment analysis
is a screen for potential impairment and was to be completed within six months
of adopting the former SFAS No. 142. The second step, if required, measures the
amount of the impairment. The Company completed step one of the initial
impairment analysis and subsequent annual analysis during the second and fourth
quarters of 2002. Additionally, this analysis was performed in the fourth
quarter of each year thereafter.
Advertising
Costs
Advertising costs are
expensed as incurred. Advertising expense for the years ended October 31, 2009,
2008 and 2007 approximated $791,000, $978,000, and
$609,000.
Income
Taxes
Provisions
for income taxes currently payable and deferred income taxes are based on the
liability method. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. A valuation
allowance is established to reduce deferred tax assets if it is more likely than
not that a deferred tax asset will not be
realized.
F-11
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 using the treasury stock method. The effect of dilutive stock
options increased weighted average shares outstanding by 0, 38,000 and 146,000
for the years ended October 31, 2009, 2008 and 2007.
Segment
Information
The
Company designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company’s reportable segments. The Company’s operating segments are more fully
described in Note 9.
Accounting
for Web Site Development Costs
Certain
external costs and internal payroll and payroll-related costs have been
capitalized during the application, development and implementation stages of the
Company’s web site. The costs regarding the ongoing operation and maintenance
are expensed in the period incurred. The Company’s internet sales are based on a
cooperative effort with the Company’s direct sales force as an optional ordering
alternative.
F-12
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Revenue
Recognition
Revenues
are recognized when products are shipped or ownership is transferred and when
services are rendered to customers. The Company acts as a principal party in
sales transactions, assumes title to products and assumes the risks and rewards
of ownership including risk of loss for collection, delivery or returns. The
Company typically recognizes revenue for the majority of its products upon
shipment to the customer and transfer of title. Under agreements with certain
customers, custom forms may be stored by the Company for future delivery. In
these situations, the Company may receive a logistics and warehouse management
fee for the services provided. In these cases, delivery and bill schedules are
outlined with the customer and product revenue is recognized when manufacturing
is complete and the product is received into the warehouse, title transfers to
the customer, the order is invoiced and there is reasonable assurance of
collectability. Since the majority of products are customized, product returns
are not significant. Therefore, the Company records sales on a gross
basis. Advertising revenues are recognized, net of agency commissions, in
the period when advertising is printed or placed on websites. Circulation
revenues are recognized when purchased newspapers are distributed. Amounts
received from customers in advance of revenue recognized are recorded as
deferred revenue. The deferred revenue associated with The Herald-Dispatch
approximated $611,000 and $684,000 at October 31, 2009 and 2008.
Accounting
for Costs Associated with Exit or Disposal Activities
FASB ASC
Topic 420, “Exit or Disposal Cost Obligations” (formerly SFAS No. 146) states
that a liability for a cost associated with an exit or disposal activity shall
be measured initially at its fair value in the period in which the liability is
incurred. The adoption of this standard has been effective for exit or disposal
activities that were initiated after December 31,
2002.
F-13
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Accounting
for Stock-Based Compensation
FASB
ASC Topic 718, “Compensation- Stock Compensation” (formerly FASB SFAS No. 123R)
states that an entity shall recognize the services received in a share-based
payment transaction with an employee as services are received. Employee services
themselves are not recognized before they are received. The entity shall
recognize either a corresponding increase in equity or a liability, depending on
whether the instruments granted satisfy the equity or liability classification
criteria. As the services are consumed, the entity shall recognize the related
cost. This Topic uses the terms compensation and payment in their broadest
senses to refer to the consideration paid for employee services. This standard
has been effective as of the interim and annual periods beginning after June 15,
2005. Therefore this was in effect for the Company as of November 1, 2005. Since
the Company’s employee stock options vest immediately in the year granted, the
initial adoption did not have any effect on the Company’s financial statements.
However, the Company will be required to expense the value of employee stock
options when future options are granted. There were no stock option grants in
2009, 2008 or 2007.
Before
the adoption of the former SFAS 123R, the Company had 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 was recognized.
Historically,
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 regarding risk-free interest rates; dividend yields; volatility
factors of the expected market price of the Company's common stock; 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 was expensed in the year granted since the options vested
immediately. The Company's pro forma information for the years ended October 31
are as follows:
Year
Ended October 31,
|
||||||||||
2009 (1)
|
2008 (1)
(Restated)
|
2007
(1)
|
||||||||
Net
(loss) income as reported
|
$
|
(27,520,624
|
) |
$
|
4,658,161
|
$
|
6,080,140
|
|||
Deduct:
Total stock-based employee compensation expense determined under the fair
value method for all awards, net of related tax effects
|
-
|
-
|
-
|
|||||||
Pro
forma net (loss) income
|
$
|
(27,520,624
|
) |
$
|
4,658,161
|
$
|
6,080,140
|
|||
(Loss)
earnings per share:
|
||||||||||
Basic,
as reported
|
$
|
(2.76
|
) |
$
|
0.47
|
$
|
0.61
|
|||
Basic,
pro forma
|
$
|
(2.76
|
) |
$
|
0.47
|
$
|
0.61
|
|||
Diluted,
as reported
|
$
|
(2.76
|
) |
$
|
0.46
|
$
|
0.60
|
|||
Diluted,
pro forma
|
$
|
(2.76
|
) |
$
|
0.46
|
$
|
0.60
|
(1)
Not applicable, since the Company adopted the former SFAS 123R on November 1,
2005 and there were no stock options granted during 2007, 2008 and
2009.
F-14
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
FASB
ASC Topic 250
In September 2006, the
SEC Staff issued SAB No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (SAB 108). SAB 108 was issued in
order to eliminate the diversity of practice surrounding how public companies
quantify financial statement misstatements. SAB
108 is now subsequently codified under FASB ASC 250, “Accounting Changes and
Error Corrections”.
Traditionally, there
have been two widely-recognized methods for quantifying the effects of financial
statement misstatements: the “rollover” method and the “iron curtain” method.
The rollover method focuses primarily on the impact of a misstatement on the
income statement-including the reversing effect of prior year misstatements- but
its use can lead to the accumulation of misstatements in the balance sheet. The
iron curtain method, on the other hand, focuses primarily on the effect of
correcting the period-end balance sheet with less emphasis on the reversing
effects of prior year errors on the income statement. We currently use the
rollover method for quantifying identified financial statement
misstatements.
In SAB 108, the SEC
Staff established an approach that requires quantification of financial
statement misstatements based on the effects of the misstatements on each of the
company’s financial statements and the related financial statement disclosures.
This model is commonly referred to as a “dual approach” because it requires
quantification of errors under both the iron curtain and the rollover
methods.
SAB 108 permits
existing public companies to initially apply its provisions by (i) restating
prior financial statements as if the “dual approach” had always been used or
(ii) recording the cumulative effect of initially applying the “dual approach”
as adjustments to the carrying value of assets and liabilities as
of November 1, 2006, with an offsetting adjustment recorded to the opening
balance of retained earnings. Use of the “cumulative effect” transition method
requires detailed disclosure of the nature and amount of each individual error
being corrected through the cumulative adjustment and how and when it
arose.
We adopted the
provisions of SAB 108 using the cumulative effect transition method in
connection with the preparation of our annual financial statements for the year
ended October 31, 2007. As a result of the adoption of SAB 108, the
Company recorded an increase in net fixed assets of approximately $95,000,
an increase in accounts receivable of approximately $101,000, a decrease in
accrued payroll of approximately $68,000, a decrease in accrued
professional fees of approximately $83,000, reductions in accounts receivable
and inventory of approximately $65,000, other accrual increases of
$68,000 and an increase in retained earnings of approximately $128,000, net
of tax, as of November 1, 2006. The accompanying financial
statements reflect these adjustments.
F-15
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
FASB ASC Topic 605-45-50
FASB
ASC Topic 605-45-50 “Taxes Collected from Customers and Remitted to Governmental
Authorities” (ASC 605-45-50) (formerly EITF 06-03) clarifies the proper
treatment in accounting for taxes collected and remitted to government
authorities. This standard states that taxes should be, within the scope of the
issue, reported on either a gross basis (included in revenues and costs) or a
net basis (excluded from revenues). For any such taxes that are reported on a
gross basis, an entity shall disclose the amounts of those taxes in interim and
annual financial statements for each period for which an income statement is
presented if those amounts are significant. The disclosure of those taxes can be
done on an aggregate basis. The Company adopted the former EITF 06-03 on
February 1, 2007 and records sales tax on a net basis. The adoption of this
standard did not have a material impact on our results of operations, financial
position or cash flows.
FASB
ASC Topic 820
FASB
ASC Topic 820, “Fair Value Measurements and Disclosures” (ASC 820) (formerly
SFAS No. 157) defines fair value, establishes methods used to measure fair value
and expands disclosure requirements about fair value measurements. In
September 2006, the FASB issued the former FAS No. 157, “Fair Value
Measurements.” ASC 820 provides guidance for using fair value to measure assets
and liabilities and only applies when other standards require or permit the fair
value measurement of assets and liabilities. It does not expand the use of fair
value measurements. ASC 820, as issued, is effective for fiscal years beginning
after November 15, 2007. The former FASB Staff Position (FSB) FAS No. 157-2 was
issued in February 2008 and deferred the effective date of ASC 820 to fiscal
years beginning after November 15, 2008 for nonfinancial assets and nonfinancial
liabilities. Accordingly, as of November 1, 2008, the Company adopted ASC 820
for financial assets and liabilities only. The Company's interest rate swap
derivative liability is based on third party valuation models, and is therefore
classified as having Level 2 inputs. The adoption of ASC 820 for financial
assets and financial liabilities did not have a material impact on the Company's
results of operations, financial condition or liquidity. The full adoption of
ASC 820 for nonfinancial assets and nonfinancial liabilities is also not
expected to have a significant impact on the Company's results of operations,
financial condition or liquidity.
FASB
ASC Topic 825-10-35
FASB
ASC Topic 825-10-35, “Fair Value Option” (ASC 825-10-35) (formerly SFAS No. 159)
states that a business entity shall report unrealized gains and losses on items
for which the fair
value option has been elected in earnings (or another performance indicator if
the business entity does not report earnings) at each subsequent reporting date.
ASC 825-10-35 does not affect any existing accounting literature that requires
certain assets and liabilities to be carried at fair value. ASC 825-10-35 has
been effective for the Company since the adoption of ASC 825-10-35 beginning
November 1, 2008. The Company elected to not apply the provisions of ASC
825-10-35; therefore the adoption of ASC 825-10-35 did not affect our
consolidated financial position, results of operations or cash
flows.
F-16
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
FASB ASC Topic
805
FASB ASC
Topic 805, “Business Combinations” (ASC 805) (formerly SFAS No. 141 and its
revision 141(R)) changes how business acquisitions are accounted and will impact
financial statements both on the acquisition date and in subsequent
periods. ASC 805 as it relates to recognizing all (and only) the
assets acquired and liabilities assumed in a business combination, costs an
acquirer expects but it not obligated to incur in the future to exit an activity
of an acquiree or to terminate or relocate an acquiree's employees are not
liabilities at the acquisition date but must be expensed in accordance with
other applicable generally accepted accounting principles. Additionally, during
the measurement period, which should not exceed one year from the acquisition
date, any adjustments that are needed to assets acquired and liabilities assumed
to reflect new information obtained about facts and circumstances that existed
as of that date will be adjusted retrospectively. The acquirer will be required
to expense all acquisition-related costs in the periods such costs are incurred
other than costs to issue debt or equity securities. ASC 805 will have no impact
on our results of operations, financial position or cash flows at the date
of adoption, but it could have a material impact on our results of operations,
financial position or cash flows in the future when it is applied to
acquisitions which occur in the fiscal year beginning November 1,
2009.
FASB ASC Topic
50-30-35
In April
2008, the FASB issued staff position FSP FAS 142-3 (FSP 142-3),
"Determination of the Useful Life of Intangible Assets", and has subsequently
been codified under FASB ASC 350-30-35, “Determining the Useful Life of an
Intangible Asset” and is hereon referred to as ASC 350-30-35, amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. The intent of ASC
350-30-35 is to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to
measure the fair value of the asset as outlined by the U.S. generally
accepted accounting principles (GAAP). ASC 350-30-35 is effective for fiscal
years beginning after December 15, 2008 and interim periods within those fiscal
years and should be applied prospectively to intangible assets acquired after
the effective date. Early adoption is prohibited. Accordingly, we have adopted
ASC 350-30-35 as of November 1, 2009. We do not expect this to have an
impact on our results of operations, financial position or cash flows at
the date of adoption, but it could have a material impact on our results of
operations, financial position or cash flows in future
periods.
FASB ASC Topic
815
FASB ASC
815, “Derivatives and Hedging” (ASC 815) (formerly SFAS No. 161- an amendment of
FASB Statement No. 133) changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about how and why an entity uses derivative instruments, how
derivative instruments and related hedged items are accounted for under ASC 815
and its related interpretations, and how derivative instruments and related
hedged items affect an entity’s financial position, financial performance and
cash flows. ASC 815 is effective for fiscal years and interim periods beginning
after November 15, 2008, with early application permitted.
The implementation of requirements outlined in ASC 815 did not have a
material impact on the Company's consolidated financial
statements.
FASB ASC Topic 820-10-35-15A
FASB ASC
Topic 820-10-35 paragraph 15A, “Financial Assets in a Market that is Not Active”
(ASC 820-10-35-15A) (formerly FSP FAS No. 157-3) describes the proper
determination of fair market value in a situation where there is little, if any,
market activity. For additional guidance on measurement of fair value in such
situations ASC 820-10-35-15A references ASC Topics 820-10-35-3 and 820-10-35-53.
This has been in effect for the Company since the issuance of ASC 820-10-35-15A,
including prior periods for which financial statements have not been
issued.
FASB
ASC Topic 105
In June
2009, The FASB issued the former SFAS No.168, "The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, a replacement of the former FASB Statement No. 162 ("SFAS 162").
SFAS 168 replaces the former SFAS 162 and establishes The FASB Accounting
Standards Codification as the source of authoritative accounting principles
recognized by the FASB to be applied by non-governmental entities in the
preparation of financial statements in conformity with GAAP. Rules and
interpretive releases of the SEC under federal securities
laws are sources of authoritative GAAP for SEC registrants. The
former SFAS 168 will become effective for the Company for interim and annual
periods ending after September 15, 2009. The Company has adopted the
Codification for the year ending October 31,
2009.
F-17
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
FASB
ASC Topic 820-10-35
In
October 2008, the FASB issued FSP FAS 157-3 (FSP 157-3), “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP
157-3). FSP
157-3 clarifies the application of SFAS 157, “Fair Value Measurements,” in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. This FSP was effective upon
issuance, including prior periods for which financial statements have not been
issued.
FASB
ASC Topic 855
Effective
July 31, 2009, the Company adopted the former SFAS No. 165, "Subsequent Events"
("SFAS 165"). ASC 855 requires the disclosure of the date through
which an entity has evaluated subsequent events and the basis for that date,
whether that date represents the date the financial statements were issued or
were available to be issued. The Company will recognize in its consolidated
financial statements the effects of all subsequent events that provide
additional evidence about conditions that existed at the date of the balance
sheet, including the estimates inherent in the process of preparing its
financial statements. Events that provide evidence about conditions that did not
exist at the date of the balance sheet but arose after that date will be
disclosed in a footnote. In accordance with ASC 855, the Company has evaluated
events and transactions after the close of its balance sheet on October 31,
2009, until the date of the Company's 10-K filing with the SEC on January 29,
2010, for potential recognition or disclosure in the Company's consolidated
financial statements
FASB
ASC Topic 805
"BusinessCombinations" (ASC 805)
(formerly SFAS No. 141 and its revision 141(R)) changes how business
acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. ASC 805 as it relates to recognizing
all (and only) the assets acquired and liabilities assumed in a business
combination, costs an acquirer expects but it not obligated to incur in the
future to exit an activity of an acquiree or to terminate or relocate an
acquiree's employees are not liabilities at the acquisition date but must be
expensed in accordance with other applicable generally accepted accounting
principles. Additionally, during the measurement period, which should not exceed
one year from the acquisition date, any adjustments that are needed to assets
acquired and liabilities assumed to reflect new information obtained about facts
and circumstances that existed as of that date will be adjusted retrospectively.
The acquirer will be required to expense all acquisition-related costs in the
periods such costs are incurred other than costs to issue debt or equity
securities. ASC 805 will have no impact on our results of operations, financial
position or cash flows at the date of adoption, but it could have a material
impact on our results of operations, financial position or cash flows in the
future when it is applied to acquisitions which occur in the fiscal year
beginning November 1, 2009.
FASB
ASC Topic 350-30-35
In April
2008, the FASB issued staff position FSP FAS 142-3 (FSP 142-3), "Determination
of the Useful Life of Intangible Assets", and has subsequently been codified
under FASB ASC 350-30-35, "Determining the Useful Life of an Intangible Asset"
and is hereon referred to as ASC 350-30-35, amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset. The intent of ASC 350-30-35 is to
improve the consistency between the useful life of a recognized intangible asset
and the period of expected cash flows used to measure the fair value of the
asset as outlined by the U.S. generally accepted accounting principles (GAAP).
ASC 350-30-35 is effective for fiscal years beginning after December 15, 2008
and interim periods within those fiscal years and should be applied
prospectively to intangible assets acquired after the effective date. Early
adoption is prohibited. Accordingly, we have adopted ASC 350-30-35 as of
November 1, 2009. We do not expect this to have an impact on our results of
operations, financial position or cash flows at the date of adoption, but it
could have a material impact on our results of operations, financial position or
cash flows in future periods.
F-18
Champion
Industries, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
Certain prior-year amounts have been
reclassified to conform to the current year Financial Statement
Presentation.
2.
Inventories
Inventories
consisted of the following:
|
October 31, | |||||||
2009 | 2008 | |||||||
Printing and Newspaper: |
|
|||||||
Raw materials | $ | 2,854,938 | $ | 3,137,060 | ||||
Work in process | 1,405,320 | 1,929,581 | ||||||
Finished goods | 3,765,244 | 3,867,023 | ||||||
Office products and office furniture | 3,136,475 | 3,080,454 | ||||||
$ | 11,161,977 | $ | 12,014,118 |
3.
Long-term Debt
Long-term
debt consisted of the following:
October
31,
|
||||||||
2009
|
2008
|
|||||||
Installment
notes payable to banks, due in monthly installments plus interest at rates
approximating the bank’s prime rate maturing in various periods ranging
from June 2011-June 2014, collateralized by equipment
and vehicles.
|
$ |
1,310,418
|
$ |
749,850
|
||||
Term
loan facility with a bank, due in quarterly installments of $1,225,000
plus interest payments equal to the Base Rate plus the applicable margin
or the adjusted LIBOR Rate plus the applicable margin maturing September 2013, collateralized by substantially all of
the assets of the Company.
|
56,632,442 | 63,575,000 | ||||||
57,942,860 |
64,324,850
|
|||||||
Less
current portion
|
57,024,424
|
7,118,543
|
||||||
Long-term
debt, net of current portion
|
$ |
918,436
|
$ |
57,206,307
|
F-19
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
(continued)
On December
29, 2009, the Administrative Agent and Lenders under the Company's Credit
Agreement dated September 14, 2007 ("Credit Agreement"), the Company and
Marshall T. Reynolds entered into a Forbearance Agreement (the "Forbearance
Agreement") which provides, among other things, that during a standstill period
commencing on December 29, 2009 and ending on March 31, 2010 (unless sooner
terminated by default of Champion under the Forbearance Agreement or the Credit
Agreement), the Required Lenders are willing to temporarily forbear exercising
certain rights and remedies available to them, including acceleration of the
obligations or enforcement of any of the liens provided for in the Credit
Agreement. The Company acknowledged in the Forbearance Agreement that as a
result of the existing defaults, the Lenders are entitled to decline to provide
further credit to the Company, to terminate their loan commitments, to
accelerate the outstanding loans, and to enforce their
liens.
The Forbearance
Agreement provides that during the standstill period, so long as the
Company has excess availability equal to or greater than $1,000,000 (and
will continue to have after any request for credit) and meets the conditions of
the Forbearance Agreement, it may continue to request credit under the revolving
credit line.
The
Forbearance Agreement imposes various reporting and disclosure requirements on
the Company, requires it to submit to a third party financial review, maintain
certain account levels, maintain a cash concentration account with a balance of
at least $750,000 at all times, submit to field audits and inspections and
reduce outstanding term loans to $49,632,442. The
reduction in the principal outstanding obligations of the term loan will be
accomplished through the elimination of various borrowing base reserves
established by the Administrative Agent, the release of $3.0 million in cash
collateral that was being held in escrow subsequent to year end pursuant to
previous actions by the Administrative Agent and the $3.0 million in cash
proceeds received by the Company from issuing an unsecured promissory
note.
The
Forbearance Agreement also required Marshall T. Reynolds to lend to the
Company $3,000,000 in exchange for a subordinated unsecured promissory note
in like amount, payment of principal and interest on which is prohibited until
payment of all liabilities under the Credit Agreement. This $3,000,000 was
applied to prepayment of $3,000,000 of the Company's loans. This
subordinated unsecured promissory note bearing interest at the Wall Street
Journal prime rate (currently 3.25%) and maturing September 14, 2014, and a debt
subordination agreement, both dated December 29, 2009, have been executed and
delivered, and Mr. Reynolds has advanced $3,000,000 to the
Company. The
Company paid to the Administrative Agent a nonrefundable forbearance fee of
$100,000 upon closing of the Forbearance
Agreement.
The secured
and unsecured credit facilities contain restrictive financial covenants
requiring the Company to maintain certain financial ratios. The Company was
unable to remain in compliance with certain of its financial covenants arising
under substantially all of its long-term note agreements. The creditors have not
waived the financial covenant requirements. The Company received a notice of
default on March 25, 2009 which was reported pursuant to item 2.04 of Form 8-K
filed March 27, 2009. This notice of default advised that the
administrative agent had not waived the event of default and reserves all rights
and remedies thereof. These remedies include, under the credit
agreement, the right to accelerate and declare due and immediately payable the
principal and accrued interest on all loans outstanding under the credit
agreement. The notice of default further stated that any extension of
additional credit under the credit agreement would be made by the lenders in
their sole discretion without any intention to waive any event of default. The
Company has been working with the different creditors to restructure the
existing debt; however, an agreement satisfactory to the Company has not been
reached. Upon the expiration of the Forbearance Agreement, a total of
$65,357,938 of long-term debt and outstanding revolving line of
credit borrowing are subject to accelerated maturity and, as such, the creditors
may, at their option, give notice to the Company that amounts owed are
immediately due and payable. As a result, the full amount of the related
long-term debt has been classified as a current liability in the accompanying
Balance Sheet at October 31, 2009 representing $60,457,938. Regardless of
the non-compliance with financial covenants, the Company has made every
scheduled payment of principal and interest, including an excess cash flow
recapture payment of approximately $2.0 million in January 2009 and net payments
of $400,000 on the Company's revolving line of credit in
2009.
The Company
is required to make certain mandatory payments on its credit facilities related
to (1) net proceeds received from a loss subject to applicable thresholds, (2)
equity proceeds and (3) effective January 31, 2009, and continuing each year
thereafter under the terms of the agreement the Company is required to prepay
its credit facilities by 75% of excess cash flow for its most recently completed
fiscal year. The excess cash flow for purposes of this calculation is defined as
the difference (if any) between (a) EBITDA for such period and (b) federal,
state and local income taxes paid in cash during such period plus capital
expenditures during such period not financed with indebtedness plus interest
expense paid in cash during such period plus the aggregate amount of scheduled
payments made by the Borrower and its Subsidiaries during such period in respect
of all principal on all indebtedness (whether at maturity, as a result of
mandatory sinking fund redemption, or otherwise), plus restricted payments paid
in cash by the Borrower during such period in compliance with the credit
agreement. The Company paid its prepayment obligation of approximately $2.0
million in January 2009 and had no balance due under its prepayment
obligation for fiscal 2009 that would have been payable January
2010.
F-20
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Maturities
of long-term debt for each of the next five years
follow:
2010
|
$ |
57,024,424
|
||
2011
|
375,729
|
|||
2012
|
290,573
|
|||
2013
|
182,119
|
|||
2014
|
70,015
|
|||
$ |
57,942,860
|
The Company was previously permitted to borrow a maximum of
$30,000,000 under its revolving line of credit subject to a borrowing base
limitation with interest payable monthly at the prime rate of interest and/or
LIBOR plus a margin. In November of 2009 the Administrative Agent advised the
Company that the aggregate availability under its revolving credit commitments
would be $20,000,000. In December of 2009, the Administrative Agent notified the
Company that Eurodollar loans would no longer be permitted. Therefore, all
future borrowings will be indexed from the base rate (prime rate based) plus the
applicable margin. The Company had borrowed $8,725,496 under this
facility at October 31, 2009 and $9,125,496 at October 31, 2008. Pursuant
to its borrowing base calculation applicable at the time the Company had $9.1
million in additional availability under its $30.0 million revolving credit line
at October 31, 2008. The minimum excess availability and cash and cash
equivalents at October 31, 2008 were subject to $3.0 million minimum excess
availability threshold. Pursuant to the terms of the Forbearance Agreement
the borrowing base certificate at October 31, 2009 would have reflected minimum
excess availability of approximately $8.9 million. The minimum excess
availability and cash and cash equivalents threshold at October 31, 2009,
reflective of the terms of the Forbearance Agreement, was subject to a $1.0
million minimum excess availability threshold. Any reserves, which may be
applied at the sole discretion of the Administrative Agent, are not reflected in
the availability calculations. In 2009, the Administrative Agent revised the
borrowing base calculation, which limited the eligibility of certain
accounts receivable and pursuant to the filing of its December 31, 2009
borrowing base the Company was notified of an additional $1.5 million reserve
being instituted by the Administrative Agent. The line of credit expires in
September 2012 and contains certain restrictive financial covenants, is subject
to borrowing base limitations and is collateralized by substantially all of
the assets of the Company.
The
prime rate was the primary interest rate on the above loans prior to
September 14, 2007. After this date, the primary interest rate consisted
primarily of LIBOR 30-day and 90-day rates plus the applicable margin. Prime
rate approximated 3.25% and 4.00% at October 31, 2009 and 2008, while the 30-day
LIBOR rate approximated 0.24% and 3.12% at October 31, 2009 and 2008. The
Company has entered into a hedging arrangement to convert $25.0 million of
variable interest rate debt to fixed interest rate debt the current balance
outstanding subject to the hedge was $21,062,500 and $22,812,500 at
October 31, 2009 and 2008 (see Note 14). Interest paid during the
years ended October 31, 2009, 2008 and 2007 approximated $4,345,000, $5,713,000,
and $1,168,000.
The Company had accrued interest of approximately $532,000 and $8,000 at
October 31, 2009 and 2008. Deferred financing costs are amortized over the
life of the related credit facilities and are reported as part of interest
expense. In 2009, 2008 and 2007, $309,000, $309,000 and $46,000 of deferred
financing costs were included as interest
expense.
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. This line of credit expires in July 2010 is subject to a floor of
4.25% and contains certain financial covenants. There were no borrowings
outstanding under this facility at October 31, 2009 or 2008.
The
Company may incur costs in 2010 related to facility consolidations, employee
termination costs and other restructuring related activities. These costs may be
incurred, in part, as a response to the Company's efforts to overcome the
impact of the global economic crisis.
The
Company’s non-cash activities for 2009, 2008 and 2007 included equipment
purchases of approximately $818,000, $0, and $1,738,000 which were
financed by a bank. The Company recorded non-cash investing and financing
activities for the acquisition of The Herald-Dispatch of approximately $78.5
million in 2007. The Company also accrued approximately $1.6 million for a final
working capital payment for the acquisition of The Herald-Dispatch. The working
capital payment was made in the first quarter of 2008 totaling approximately
$1.6 million.
F-21
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
4. Employee Benefit Plan
The
Company had a Profit Sharing Plan that covered all eligible employees and
qualified as a Savings Plan under Section 401(k) of the Internal Revenue Code.
Effective January 1, 1998, the Profit Sharing Plan was merged into The Champion
Industries, Inc. 401(k) Plan (the "Plan"). The Plan covers all eligible
employees who satisfy the age and service requirements. Each participant may
elect to contribute up to 15% of annual compensation and the Company is
obligated to contribute 100% of the participant's contribution not to exceed 2%
of the participant's annual compensation. The Company may make
discretionary contributions to the Plan. The Company's expense under these Plans
was approximately $445,000, $525,000 and $428,000 for the years ended October
31, 2009, 2008 and 2007.
The
Company's accrued vacation liability as of October 31, 2009 and 2008 was
approximately $615,000 and $645,000. This item is classified as a component of
accrued expenses on the financial statements.
The
Company's 1993 Stock Option Plan provides for the granting of both incentive and
non-qualified stock options to management personnel for up to 762,939 shares of
the Company's common stock. In March 2004, the Company’s 2003 stock option plan
was adopted to provide for the granting of both incentive and non-qualified
stock options to management personnel for up to 475,000 shares of the Company’s
common stock.
The
option price per share for incentive stock options shall not be lower than the
fair market value of the common stock at the date of grant. The option price per
share for non-qualified stock options shall be at such price as the
Compensation Committee of the Board of Directors may determine at its sole
discretion. All options to date are incentive stock options. Exercise prices for
options outstanding as of October 31, 2009 ranged from $4.24 to $4.66.
Options vest immediately and may be exercised within five years from the date of
grant. The weighted average remaining contractual life of those options is 0.96
years.
A
summary of the Company’s stock option activity and related information for the
years ended October 31 follows:
Weighted
|
Weighted
|
Weighted
|
|||||||||||||||||
Average
|
Average
|
Average
|
|||||||||||||||||
Exercise
|
Exercise
|
Exercise
|
|||||||||||||||||
2009
|
Price
|
2008
|
Price
|
2007
|
Price
|
||||||||||||||
Outstanding-beginning
of year
|
|
311,000
|
$
|
4.27
|
330,000
|
$
|
4.18
|
382,000
|
$
|
4.01
|
|||||||||
Granted
|
|
|
-
|
-
|
-
|
-
|
|||||||||||||
Exercised
|
-
|
|
-
|
(19,000
|
)
|
2.77
|
(46,000
|
) |
3.10
|
||||||||||
Forfeited
or expired
|
(91,000
|
)
|
4.29
|
-
|
|
-
|
(6,000
|
)
|
2.49
|
||||||||||
Outstanding-end
of year
|
220,000
|
4.26
|
311,000
|
4.27
|
330,000
|
4.18
|
|||||||||||||
Weighted
average fair value of options granted during the year
|
$
|
-
|
$
|
-
|
$
|
-
|
A
summary of stock options outstanding and exercisable at October 31, 2009,
follows:
Exercise
|
Number
|
Remaining
|
|||||
Price
|
Outstanding
|
Life
|
|||||
4.26
|
220,000
|
0.96
|
|||||
|
|
|
F-22
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
The Company
had a deferred compensation agreement with one employee of Blue Ridge Printing
Co., Inc. providing for payments totaling approximately $500,000 over a ten year
period after retirement. During
fiscal year 2007, a one-time payment to this employee of $375,000 was made by
the Company satisfying its obligation in full. To assist in the
funding of the payment, the Company had invested in life insurance policies
which were monetized to effectuate this transaction. There was no expense for
years ended October 31, 2009, 2008 and 2007.
5.
Income Taxes
Income tax
expense consisted of the following:
Year
Ended October 31,
|
||||||||||
2009
|
2008
(Restated)
|
2007
|
||||||||
Current
expense (benefit):
|
||||||||||
Federal
|
$
|
(1,601,934
|
) |
$
|
463,599
|
$
|
2,666,371
|
|||
State
|
(170,248
|
) |
(130,742
|
) |
552,049
|
|||||
Deferred
expenses (benefit)
|
(13,957,990
|
)
|
2,129,999
|
|
(15,194
|
)
|
||||
$
|
(15,730,172
|
) |
$
|
2,462,856
|
$
|
3,203,226
|
Deferred
tax assets and liabilities are as follows:
October
31,
|
||||||||
2009
|
2008
(Restated)
|
|||||||
Deferred
tax assets:
|
||||||||
Allowance
for doubtful accounts
|
$ |
497,795
|
$ |
697,181
|
||||
Net
operating loss carryforward of acquired companies
|
555,470
|
393,911
|
||||||
Accrued
vacation
|
240,311
|
253,127
|
||||||
Other
accrued liabilities
|
265,681
|
184,093
|
||||||
Interest rate swap | 385,157 | 371,943 | ||||||
Intangible assets | 11,784,699 | - | ||||||
Gross
deferred tax assets
|
13,729,113
|
1,900,255
|
||||||
Deferred
tax liabilities:
|
||||||||
Property
and equipment
|
(3,449,830
|
) |
(3,325,252
|
) | ||||
Intangible
assets
|
-
|
(2,454,633
|
) | |||||
Gross
deferred tax liability
|
(3,449,830
|
) |
(5,779,885
|
) | ||||
Net
deferred tax asset (liabilities) before valuation
allowance
|
10,279,283
|
(3,879,630
|
) | |||||
Valuation
allowance:
|
||||||||
Beginning
balance
|
291,209
|
291,209
|
||||||
Increase
during the period
|
187,709
|
|
-
|
|||||
Ending
balance
|
478,918
|
291,209
|
||||||
Net
deferred tax asset (liabilities)
|
$ |
9,800,365
|
$ |
(4,170,839
|
) |
F-23
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
The above net
deferred tax asset (liability) is presented on the balance sheet as
follows:
2009
|
2008
(Restated)
|
|||||||
Deferred
tax asset - current
|
$ |
1,000,847
|
$ |
1,130,742
|
||||
Deferred tax assets -non-current | 8,799,518 | - | ||||||
Deferred
tax liability - long-term
|
- | (5,301,581 | ) | |||||
$ | 9,800,365 | $ | (4,170,839 | ) |
A
reconciliation of the statutory federal income tax rate to the Company’s
effective income tax rate is as follows:
Year
Ended October 31,
|
||||||||||||
2009
|
2008
(Restated)
|
2007
|
||||||||||
Statutory
federal income tax rate
|
(34.0 | )% | 34.0 | % | 34.0 | % | ||||||
State
taxes, net of federal benefit
|
(0.7
|
) |
3.3
|
5.7
|
||||||||
Change
in valuation allowance
|
0.3
|
-
|
(0.1
|
) | ||||||||
Selling
expenses
|
0.2
|
1.1
|
0.7
|
|||||||||
Cash
surrender value of life insurance accretion
|
0.4 | (0.2 | ) | (0.2 | ) | |||||||
Amended state
returns
|
- | - | (0.8 | ) | ||||||||
State
apportionment tax accrual adjustments
|
0.3 | (3.6 | ) | (1.9 | ) | |||||||
Federal
and state tax accrual adjustments
|
(0.1 | ) | (0.8 | ) | (0.7 | ) | ||||||
Other
|
(3.2 | ) |
0.8
|
(2.2 | ) | |||||||
Interest rate swap | 0.4 | |||||||||||
Effective
tax rate
|
(36.4 | )% | 34.6 | % | 34.5 | % |
Income
taxes (refunded) paid during the years ended October 31, 2009, 2008 and 2007 approximated
$(572,000), $412,000, and $5,084,000. The Company recorded an income tax refund
at October 31, 2009 and 2008 of $1,911,000 and $711,000 .
The
Company has available for income tax purposes net operating loss carryforwards
from acquired companies of approximately $827,000, of which $794,000 expires in
2012 and $33,000 in 2013. The Company has available for state income tax
purposes net operating loss carryforwards from acquired companies of
approximately $1,181,000, $203,000 expires in 2019, $478,000 expires in 2020,
$98,000 expires in 2023, $120,000 expires in 2024 and $281,000 expires in 2025.
In 2007, the valuation allowance decreased by approximately $12,000, which is
primarily reflective of the usage of net operating losses in the state of
Mississippi. In 2009, the Company had additional net operating losses of
$3,308,000 which a valuation allowance of approximately $162,000 in tax
benefits was recorded. In addition, the Company increased its valuation
allowance associated with net operating losses of acquired companies pursuant to
the expiration of such carry forward periods in the amount of $65,000
representing an increase in valuation allowance of approximately $26,000. The
Company did not record a change in the valuation allowance
in 2008.
F-24
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
In June
2006, the FASB issued the former FASB Interpretation No. 48 (FIN 48)
(ASC 740) , this interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with the former SFAS No. 109, "Accounting
for Income Taxes" (SFAS 109). This interpretation is effective for
fiscal years beginning after December 15, 2006. The Company adopted the standard
addressing "Accounting for Uncertainty in Income Taxes" effective November 1,
2007 with no effect on the Company's consolidated financial statements. As of
the date of adoption, the Company had approximately $150,000 of unrecognized tax
benefits, all of which would impact the effective tax rate if recognized. The
Company was notified in April 2008 and an examination began in May 2008 by the
IRS covering our fiscal year-end 2005 federal tax return. This audit was
completed and settled during the third quarter of 2008. As of October 31, 2009,
the Company is subject to U.S. Federal income tax examination for the fiscal tax
years ended October 31, 2007, 2008 and 2009. State Income Tax returns are
generally subject to a period of examination for a period of three to five
years. We have one state income tax return covering our fiscal years ended 2004
and 2005 currently under examination. Tax interest and penalties are classified
as income taxes in the accompanying statements of income and were insignificant
for all periods presented. The unrecognized tax benefit at October 31, 2009 and
2008 was approximately $0 and $36,000. The Company is currently unable to
assess whether any significant increase or decrease to the unrecognized tax
benefit will be recorded during the next 12 months.
The
Company's unrecognized tax benefit activity for the fiscal year ended October
31, 2009 was a follows:
Unrecognized tax benefit at November 1, 2008 | $ | 36,000 | ||
Other | (36,000 | ) | ||
Settlements/Audits | - |
|
||
Unrecognized tax benefit at October 31, 2009 | $ | - |
F-25
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
6.
Related Party Transactions and Operating Lease Commitments
The Company
leases operating facilities from entities controlled by its Chief Executive
Officer, his family and affiliates as well as facilities controlled by a Company
owned by the former sole owner of Syscan pursuant
to the acquisition of Syscan (see note 8). The original terms of these leases,
which are accounted for as operating leases, range from two to fifteen
years.
A summary of
significant related party transactions follows:
Year
Ended October 31,
|
||||||||||
2009
|
2008
|
2007
|
||||||||
Rent
expense paid to affiliated entities
|
||||||||||
for
operating facilities
|
$
|
367,000
|
$
|
434,000
|
$
|
434,000
|
||||
Sales
of office products, office furniture and printing services to affiliated
entities
|
861,000
|
895,000
|
934,000
|
In
addition, the Company leases property and equipment from unrelated entities
under operating leases. Rent expense amounted to $1,060,000, $912,000, and
$819,000 for the years ended October 31, 2009, 2008 and 2007.
Under
the terms and conditions of the above-mentioned leases, the Company is
primarily responsible for all taxes, assessments, maintenance, repairs or
replacements, utilities and insurance. The Champion Output Solutions' lease
excludes taxes and insurance during the initial lease term. Champion Output
Solutions subleases approximately 8,500 square feet at an annual rate of
approximately $38,000 through June 30th, 2011. The Company has renewal options
for certain leases covering varying periods.
In
addition, the Company purchased vehicles from an entity controlled by family
members of its Chief Executive Officer in the amounts of $58,000, $150,000
and $105,000 for the years ended October 31, 2009, 2008 and
2007.
F-26
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Future
minimum rental commitments for all noncancelable operating leases including
related party commitments with initial terms of one year or more consisted of
the following at October 31, 2009:
2010
|
$
|
1,281,076
|
||
2011
|
1,090,785
|
|||
2012
|
932,343
|
|||
2013
|
845,884
|
|||
2014 | 271,640 | |||
Residual
|
- | |||
$
|
4,436,728
|
The
Company participates in a self-insurance program for employee health care
benefits with affiliates controlled by its Chief Executive Officer and as such
is responsible for paying claims of Company participants as required by the plan
document. The Company is allocated costs primarily related to the
reinsurance premiums based on its proportionate share to provide such benefits
to its employees. The Company’s expense related to this program for the years
ended October 31, 2009, 2008 and 2007 was approximately $5,196,000, $5,017,000,
and $3,493,000.
During
2009, 2008 and 2007, the Company utilized an aircraft from an entity controlled
by its Chief Executive Officer and reimbursed the controlled entity for the use
of the aircraft, fuel, aircrew, ramp fees and other expenses attendant to the
Company’s use, in amounts aggregating $49,000, $56,000, and $91,000. The Company
believes that such amounts
are at or below the market rate charged by third-party commercial charter
companies for similar aircraft.
The Company exercised its
option to purchase a building at 3000 Washington Street, Charleston, WV on
June 16, 2009. The Company assigned its option to a related
party purchaser and leased the building back from the related party for a
period of five years with a call option to purchase the building within the new
five year lease period which commenced October 27, 2009 for $1.5 million.
On December
29, 2009, the Company, Marshall T. Reynolds, Fifth Third Bank, as administrative
agent for lenders under the Company's credit agreement dated September 14, 2007,
and the other lenders entered into a Forbearance Agreement. The Forbearance
Agreement, among other provisions, required Marshall T. Reynolds to lend to the
Company $3,000,000 in exchange for a subordinated unsecured promissory note in
like amount, payment of principal and interest on which is prohibited until
payment of all liabilities under the credit agreement. The subordinated
unsecured promissory note, bearing interest at a floating Wall Street Journal
prime rate and maturing September 14, 2014, and a debt subordination agreement,
both dated December 29,2009, were executed and delivered, and Mr. Reynolds
advanced $3,000,000 to the Company. The $3,000,000 was applied to prepayment of
$3,000,000 of the Company's loans.
The
Company believes that the terms of its related party transactions are no less
favorable to the Company than could be obtained with an independent third
party.
F-27
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
7.
Commitments and Contingencies
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 and are included in normal
operating expenses. 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.
The Company is subject to
various claims and legal actions that arise in the ordinary course of business
as well as various governmental audits and examinations. In the opinion of
management, after consulting with legal counsel where applicable, the Company
believes that the ultimate resolution of these claims, audits and legal
actions will not have a material effect on the consolidated financial statements
of the Company.
8.
Acquisitions
On
September 14, 2007, the Company completed, pursuant to an asset purchase
agreement, the acquisition of The Herald-Dispatch daily newspaper in
Huntington, WV. The purchase price was $77.0 million and subject to a working
capital payment of $837,554 plus or minus any change in working capital from the
index working capital base of $1,675,107 at the closing date of September 14,
2007. The working capital payment totaled approximately $1.6 million.
Approximately
six weeks of the operations of The Herald-Dispatch are included in the Company's
Statement of Operations commencing concurrent with the acquisition in
2007.
F-28
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
The
Company acquired substantially all of the net assets of The Herald-Dispatch for
a purchase price of $77.0 million consisting of cash. The purchase price
included a cash payment of $77.0 million plus acquisition costs of approximately
$373,000 and a working capital adjustment of approximately $1,616,000. The
working capital adjustment was recorded under accrued expenses at October 31,
2007. The purchase price was financed by the Company through a term debt
facility and a revolving credit facility. The purchase of The Herald-Dispatch
was consummated based on certain specifically identified synergies due in part
to duplicative functions, to achieve cash flow
diversity, to capitalize on a unique investment opportunity in the
Company's core territory, and to provide a platform for future growth and
expansion opportunities. The following is a condensed balance sheet indicating
the amount assigned to each major asset and liability caption of The
Herald-Dispatch at September 14, 2007:
Current assets, net of cash received | $ | 2,748,445 | ||
Property, plant and equipment | 8,582,200 | |||
Goodwill | 35,396,335 | |||
Trademark & masthead | 18,515,316 | |||
Subscriber base asset | 3,427,755 | |||
Advertiser base asset | 10,613,497 | |||
Total assets | $ | 79,283,548 | ||
Current liabilities | $ | 740,395 | ||
Net assets acquired | $ | 78,543,153 |
F-29
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
The following table summarizes the unaudited consolidated pro forma
results of operations and pro forma net income per share for the years ended
October 31, 2007, assuming The Herald-Dispatch acquisition had occurred at
the start of the Company's fiscal year for the period represented below.
The pro forma results below were derived from The Herald-Dispatch internal
financial statements representing the periods approximating the Company's fiscal
year and are reflective of adjustments associated with additional interest
expense and associated deferred financing costs not recorded on the Company's
financial statements of approximately $5.2 million for 2007. The
Company recorded pro forma adjustments resulting from additional amortization
expense of $614,000 for 2007, additional depreciation
of $524,000 for 2007 and adjustments associated with retirement plans
and postretirement benefits other than pensions which were not assumed by
the Company totaling $398,000 in 2007.
2007 | |||
(in millions, expect per share data) | |||
Revenues
|
$ | 167.5 | |
Net income | $ | 6.9 | |
Earnings | |||
Basic | $ | 0.69 | |
Diluted | $ | 0.68 | |
Weighted average shares outstanding: | |||
Basic | 10.0 | ||
Diluted | 10.1 | ||
The
identifiable intangible assets of The Herald-Dispatch are being amortized on a
straight-line basis over a period of 20 and 25 years for the subscriber and
advertiser base, respectively. The weighted average life of the amortizable
intangible assets for the acquisition of The Herald-Dispatch at the acquisition
date was approximately 20 years. The trademarks and masthead for the acquisition
of The Herald-Dispatch was determined to have an indefinite life. The remaining
allocation of the purchase price of The Herald-Dispatch was assigned to
goodwill. The Company expects to achieve tax deductions associated with
non-amortizing intangibles and goodwill of approximately $3.6 million per year
for a period of 15 years. In 2009, the Company recorded asset impairment charges
of $41.1 million ($25.5 million, net of deferred tax benefit) associated
with the acquisition of The Herald-Dispatch (see Note 12).
On
September 7, 2004, the Company acquired all the issued and outstanding capital
stock of Syscan Corporation (“Syscan”), a West Virginia corporation, for a cash
price of $3,500,000 and a contingent purchase price, dependent upon satisfaction
of certain conditions, not to exceed the amount of $1,500,000. On December
14, 2006, the Company paid the contingent purchase price in the amount of
$1,350,725. This amount was accrued at October 31, 2006. The Company also
purchased a building from an entity controlled by Syscan’s sole shareholder for
$117,000 concurrent with the Syscan acquisition. After considering the cash
received, the acquisition of a building and acquisition costs the net assets
acquired totaled approximately $2,688,000. Syscan Corporation is a provider of
integrated business products, with a primary emphasis on office and data
products, printing, mailing and fulfillment services, and office furniture. The
acquisition was consummated based on significant identified synergies which
could be achieved due to a duplication of market territory. The acquisition
brought additional supply chain management and mailing expertise to the Company
and allowed Syscan to offer a broader array of printing services to its existing
customer base.
F-30
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
The Williams
Land Corporation had the option to put the 3000 Washington Street building
occupied by Syscan to the Company for a purchase price of $1.5 million and the
Company had the option to purchase the building for $1.5 million at the
conclusion of the five year lease term ending September 1, 2009. This
option may be exercised no later than 60 days prior to the end of the lease and
closing of said purchase cannot exceed 45 days from the end of the lease. The
Company exercised its option to purchase this building on June 16, 2009. The
Company assigned its option to a related party to purchase the
building and leased the building back from the related party for a period of
five years with a call option to purchase the building within the new five year
lease period which commenced October 27, 2009 for $1.5
million.
All
of the above transactions have been accounted for using the purchase method of
accounting.
9.
Industry Segment Information
The
Company operates principally in three 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); the sale of office products and office
furniture including interior design services; and publication of
The Herald-Dispatch daily newspaper in Huntington, West Virginia with a total
daily and Sunday circulation of approximately 24,000 and
30,000 respectively. Approximately
six weeks of the operations of The Herald-Dispatch are included in the Company's
Statement of Operations commencing concurrent with the acquisition in 2007.
The Company employs approximately 790
people,
of whom approximately 50, or 6%, are covered by collective bargaining
agreements, which expire on May 31, 2010 and December 31, 2010, respectively.
F-31
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
The
table below presents information about reported segments for the years ended
October 31:
2009
|
Printing
|
Office
Products & Furniture
|
Newspaper
|
Total
|
||||||||||||
Revenues
|
$ |
99,463,762
|
$ |
42,518,613
|
$ |
16,393,896
|
$ |
158,376,271
|
||||||||
Elimination
of intersegment revenue
|
(10,473,968 | ) | (6,644,182 | ) |
-
|
(17,118,150 | ) | |||||||||
Consolidated
revenues
|
$ |
88,989,794
|
$ |
35,874,431
|
$ |
16,393,896
|
$ |
141,258,121
|
||||||||
Operating
income
|
(1,166,528
|
) |
2,284,729
|
(38,711,612
|
) |
(37,593,411
|
) | |||||||||
Depreciation
& amortization
|
3,370,162
|
168,659
|
1,706,117
|
5,244,938
|
||||||||||||
Capital
expenditures
|
2,606,836
|
143,533
|
60,167
|
2,810,536
|
||||||||||||
Identifiable
assets
|
49,718,525
|
1,822,983
|
49,480,385
|
101,021,893
|
||||||||||||
Goodwill
|
2,226,837
|
1,230,485
|
11,874,961
|
15,332,283
|
||||||||||||
2008
|
Printing
|
Office
Products & Furniture
|
Newspaper
|
Total
|
||||||||||||
Revenues
|
$ |
118,634,673
|
$ |
49,708,630
|
$ |
18,939,250
|
$ |
187,282,553
|
||||||||
Elimination
of intersegment revenue
|
(13,359,482 | ) | (8,168,516 | ) |
-
|
(21,527,998 | ) | |||||||||
Consolidated
revenues
|
$ |
105,275,191
|
$ |
41,540,114
|
$ |
18,939,250
|
$ |
165,754,555
|
||||||||
Operating
income
|
5,533,022
|
3,628,716
|
3,557,697
|
12,719,435
|
||||||||||||
Depreciation
& amortization
|
3,534,326
|
214,298
|
1,635,885
|
5,384,509
|
||||||||||||
Capital
expenditures
|
2,136,125
|
84,434
|
152,563
|
2,373,122
|
||||||||||||
Identifiable
assets
|
54,152,606
|
5,228,906
|
81,897,333
|
141,278,845
|
||||||||||||
Goodwill
|
2,226,837
|
1,230,485
|
35,437,456
|
38,894,778
|
||||||||||||
2007
|
Printing
|
Office
Products & Furniture
|
Newspaper
|
Total
|
||||||||||||
Revenues
|
$ |
117,241,620
|
$ |
49,881,702
|
2,540,377
|
$ |
169,663,699
|
|||||||||
Elimination
of intersegment revenue
|
(12,741,283 | ) | (8,433,060 | ) |
-
|
(21,174,343 | ) | |||||||||
Consolidated
revenues
|
$ |
104,500,337
|
$ |
41,448,642
|
2,540,377
|
$ |
148,489,356
|
|||||||||
Operating
income
|
6,416,551
|
3,438,459
|
659,679
|
10,514,689
|
||||||||||||
Depreciation
& amortization
|
3,576,975
|
211,167
|
204,498
|
3,992,640
|
||||||||||||
Capital
expenditures
|
4,919,357
|
145,471
|
203,086
|
5,267,914
|
||||||||||||
Identifiable
assets
|
57,020,668
|
10,339,686
|
81,851,237
|
149,211,591
|
||||||||||||
Goodwill
|
2,226,837
|
1,230,485
|
35,396,335
|
38,853,657
|
F-32
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
A
reconciliation of total segment revenue, assets and operating income to
consolidated income before income taxes for the years ended October 31, 2009,
2008 and 2007 is as follows:
2009
|
2008
(Restated)
|
2007
|
||||||||||
Revenues:
|
||||||||||||
Total
segment revenues
|
$ |
158,376,271
|
$ |
187,282,553
|
$ |
169,663,699
|
||||||
Elimination
of intersegment revenue
|
(17,118,150 | ) | (21,527,998 | ) | (21,174,343 | ) | ||||||
Consolidated
revenue
|
$ |
141,258,121
|
$ |
165,754,555
|
$ |
148,489,356
|
||||||
Operating
income:
|
||||||||||||
Total
segment operating income
|
$ |
(37,593,411
|
) | $ |
12,719,435
|
$ |
10,514,689
|
|||||
Interest
income
|
2,771
|
65,657
|
45,021
|
|||||||||
Interest
expense
|
(5,184,668 | ) | (5,733,677 | ) | (1,455,470 | ) | ||||||
Other
(loss) income
|
(475,488
|
) |
69,602
|
179,126
|
||||||||
Consolidated
income before income taxes
|
$ |
(43,250,796
|
) | $ |
7,121,017
|
$ |
9,283,366
|
|||||
Identifiable
assets:
|
||||||||||||
Total
segment identifiable assets
|
$ |
101,021,893
|
$ |
141,278,845
|
$ |
149,211,591
|
||||||
Elimination
of intersegment assets
|
-
|
-
|
-
|
|||||||||
Total
consolidated assets
|
$ |
101,021,893
|
$ |
141,278,845
|
$ |
149,211,591
|
F-33
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
10. Restructuring of
Operations
On May 22, 2009
the Company announced a reduction in force at its Champion Publishing Subsidiary
resulting in the elimination of 24 positions and recorded a charge of
approximately $144,000 associated with employee related separation costs. The
Company incurred an additional $68,000 in restructuring related expenses in 2009
primarily associated with employee related separation costs. Inclusive of the
Champion Publishing charges the Company incurred a total of $211,000 in employee
related separation costs in 2009.
11.
Fair Value of Financial Instruments
The
carrying amount reported in the balance sheet for cash and cash equivalents
approximates its fair value. The fair value of long-term debt was estimated
using discounted cash flows and it approximates its carrying
value.
ASC 820 (Formerly SFAS No.157) provides guidance for using fair
value to measure assets and liabilities and only applies when other standards
require or permit the fair value measurement of assets and liabilities. It does
not expand the use of fair value measurements. The former FAS No. 157, as
issued, is effective for fiscal years beginning after November 15, 2007. The
former FASB Staff Position (FSB) FAS No. 157-2 was issued in February 2008 and
deferred the effective date of ASC 820 to fiscal years beginning after November
15, 2008 for nonfinancial assets and nonfinancial liabilities. Accordingly, as
of November 1, 2008, the Company adopted ASC 820 for financial assets and
liabilities only. The Company's interest rate swap derivative liability is based
on third party valuation models, and is therefore classified as having Level 2
inputs. The adoption of ASC 820 for financial assets and financial liabilities
did not have a material impact on the Company's results of operations, financial
condition or liquidity. The full adoption of ASC 820 for nonfinancial assets and
nonfinancial liabilities is also not expected to have a significant impact on
the Company's results of operations, financial condition or
liquidity.
ASC 825-10-35 previously the former SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities,
including an amendment of the former FASB Statement No. 115." ASC
825-10-35 permits entities to choose to measure at fair value many financial
instruments and certain other items at fair value that are not currently
required to be measured. Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings. ASC 825-10-35 does
not affect any existing accounting literature that requires certain assets and
liabilities to be carried at fair value. ASC 825-10-35 is effective for
fiscal years beginning after November 15, 2007. The Company elected to not apply
the provisions of ASC 825-10-35 ; therefore the adoption ASC 825-10-35 did
not affect our consolidated financial position, results of operations or cash
flows.
The Company measures and records in the
accompanying consolidated financial statements certain liabilities at fair value
on a recurring basis. SFAS No.157 establishes a fair value hierarchy for those
instruments measured at fair value that distinguishes between assumptions based
on market data (observable inputs) and our own assumptions (unobservable
inputs). The hierarchy consists of three levels:
Level 1 - Quoted market prices
in active markets for identical assets or liabilities
Level 2 - Inputs other than
Level 1 inputs that are either directly or indirectly observable;
and
Level 3 - Unobservable inputs
developed using estimates and assumptions developed by the Company, which
reflect those that a market participant would use.
The
following table summarizes the financial instruments measured at fair value in
the accompanying consolidated balance sheet as of October 31, 2009 and recorded
as other liabilities (current):
Fair
Value Measurements as of
|
||||||||||||||||
October 31, 2009
|
||||||||||||||||
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
Liabilities:
|
||||||||||||||||
Interest
rate swap
|
$
|
-
|
$
|
962,893
|
$
|
-
|
$
|
962,893
|
F-34
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
12.
Acquired Intangible Assets and Goodwill
2009
|
2008
|
|||||||||||||||
Gross
|
Gross
|
|||||||||||||||
Carrying
|
Accumulated
|
Carrying
|
Accumulated
|
|||||||||||||
Amount
|
Amortization
|
Amount
|
Amortization
|
|||||||||||||
Amortizable
intangible
assets:
|
||||||||||||||||
Non-compete
agreement
|
$ | 1,000,000 | $ |
738,095
|
$ |
1,000,000
|
$ |
595,238
|
||||||||
Customer
relationships
|
2,451,073 | 660,641 |
2,451,073
|
538,544
|
||||||||||||
Advertising and subscriber base | 4,989,768 | 1,509,335 | 14,041,252 | 789,820 | ||||||||||||
Other
|
564,946 | 452,638 |
564,946
|
402,828
|
||||||||||||
9,005,787 | 3,360,709 |
18,057,271
|
2,326,430
|
|||||||||||||
Unamortizable
intangible
assets:
|
||||||||||||||||
Goodwill
|
15,839,561 | 507,278 |
39,402,056
|
507,278
|
||||||||||||
Trademark and masthead | 10,001,812 | - | 18,515,316 | - | ||||||||||||
|
25,841,373 | 507,278 | 57,917,372 | 507,278 | ||||||||||||
Total goodwill and other intangibles | $ | 34,847,160 | $ | 3,867,987 | $ |
75,974,643
|
$ |
2,833,708
|
||||||||
In
accordance with ASC Topic 350, a two-step impairment test is performed on
goodwill. In the first step, a comparison is made of the estimated fair value of
a reporting unit to its carrying value. If the carrying value of a reporting
unit exceeds the estimated fair value, the second step of the impairment test is
required. In the second step, an estimate of the current fair values of all
assets and liabilities is made to determine the amount of implied goodwill
and consequently the amount of any goodwill impairment.
In
connection with our annual impairment testing of goodwill and other intangible
assets conducted in the fourth quarter of 2009 in accordance with ASC Topic 350,
we recorded a charge of $41.1 million ($25.5 million, net of deferred
tax benefit) for impairment of the value of the goodwill and other
intangible assets, which resulted from the 2007 acquisition of The
Herald-Dispatch daily newspaper in Huntington, WV. This charge
resulted in impairment charges of trademarks, masthead $8.5 million, subscriber
base asset of $2.2 million, advertiser base asset $6.8 million and goodwill
$23.6 million. The associated deferred tax benefit of these charges
approximated $15.6 million.
During 2009,
the U.S. recession had a negative impact on the Company's operations across
multiple segment lines. The newspaper operating segment reflected lower
operating revenues in both advertising and circulation. In response to this
difficult operating environment Champion initiated a cost reduction plan and
eliminated 24 employee positions or approximately 15% of the workforce at the
Champion Publishing subsidiary.
The Company
determined that it should perform impairment testing of goodwill and intangible
assets during the fourth quarter of 2009, due, in part, to declines in our stock
price, increased volatility in operating results and declines in market
transactions in the industry. The valuation
methodology utilized to estimate the fair value of the newspaper operating
segment was based on both the market and income approach. The Company
then undertook the next step in the impairment testing process by
determining the fair value of assets and liabilities within this reporting unit.
The implied fair values of goodwill for this reporting unit was less than the
carrying amount by $41.1 million ($25.5 million net of deferred tax
benefit) based on the analysis by the Company and with assistance of third party
valuation specialists, and therefore an impairment charge in this amount was
taken. The goodwill and other intangible assets will continue to be amortized
for tax purposes over its remaining life in accordance with applicable internal
revenue service standards.
F-35
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
The
Company has other reporting units within Goodwill. The Company evaluated these
reporting units during the fourth quarter of 2009, and while the estimated fair
value of these reporting units declined from 2008, the estimated carrying value
of each of our other reporting units exceeded their carrying values in
2009. As a result, no additional testing or impairment charges were
necessary.
Amortization
expense for the years ended October 31, 2009, 2008 and 2007 was $1,034,000,
$1,048,000 and $443,000 respectively. A non-compete agreement is being amortized
over a period of seven years and the customer relationships are being amortized
over a period of 20 years. These items are both related to the acquisition of
Syscan in 2004. The advertising and subscribers bases related to the
acquisition of The Herald-Dispatch are being amortized over 25 and 20 years
respectively. The trademark and masthead associated with the acquisition of The
Herald-Dispatch are non-amortizing assets. The weighted average remaining life
of the Company's amortizable intangible assets was approximately 13 years.
Estimated amortization expense for each of the following years is:
2010
|
$
|
449,718
|
||
2011
|
417,308
|
|||
2012
|
292,761
|
|||
2013
|
287,261
|
|||
2014
|
275,970
|
|||
Thereafter
|
3,922,060
|
|||
$
|
5,645,078
|
The
changes in the carrying amount of goodwill for the years ended October 31, 2009
and 2008 were:
2009
|
2008
|
|||||||
Balance
as of November 1, 2008 and 2007
|
$ |
38,894,778
|
$ |
38,853,657
|
||||
Goodwill
acquired during the year additions
|
-
|
41,121
|
||||||
Impairment of intangibles |
(23,562,495
|
) | - | |||||
Balance
as of October 31, 2009 and 2008
|
$ |
15,332,283
|
$ |
38,894,778
|
F-36
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
The
changes in the carrying amounts of goodwill and other intangibles attributed to
each segment at October 31, 2009 and 2008 are as follows:
GOODWILL
|
||||||||||||||||
October
31, 2008
|
Amortization
Expense
|
Other
|
October
31, 2009
|
|||||||||||||
Printing
|
$ |
2,226,837
|
$ |
-
|
$ |
-
|
$ |
2,226,837
|
||||||||
Office
products & furniture
|
1,230,485
|
-
|
-
|
1,230,485
|
||||||||||||
Newspaper | 35,437,456 | - | (23,562,495 | ) | 11,874,961 | |||||||||||
Total
|
$ |
38,894,778
|
$ |
-
|
$ |
(23,562,495
|
) | $ |
15,332,283
|
|||||||
October
31, 2007
|
Amortization
Expense
|
Other
|
October
31, 2008
|
|||||||||||||
Printing
|
$ |
2,226,837
|
$ |
-
|
$ |
-
|
$ |
2,226,837
|
||||||||
Office
products & furniture
|
1,230,485
|
-
|
-
|
1,230,485
|
||||||||||||
Newspaper | 35,396,335 | - | 41,121 | 35,437,456 | ||||||||||||
Total
|
$ |
38,853,657
|
$ |
-
|
$ |
41,121
|
$ |
38,894,778
|
||||||||
OTHER
INTANGIBLES
|
||||||||||||||||
October
31, 2008
|
Amortization
Expense
|
Other
|
October
31, 2009
|
|||||||||||||
Printing
|
$ |
586,021
|
$ |
314,766
|
$ |
-
|
$ |
271,255
|
||||||||
Office
products & furniture
|
1,893,389
|
-
|
-
|
1,893,389
|
||||||||||||
Newspaper | 31,766,747 | 719,513 | (17,564,988 | ) | 13,482,246 | |||||||||||
Total
|
$ |
34,246,157
|
$ |
1,034,279
|
$ |
(17,564,988
|
) | $ | 15,646,890 | |||||||
October
31, 2007
|
Amortization
Expense
|
Other
|
October
31, 2008
|
|||||||||||||
Printing
|
$ |
925,210
|
$ |
339,189
|
$ | - | $ |
586,021
|
||||||||
Office
products & furniture
|
1,900,537
|
7,148
|
- |
1,893,389
|
||||||||||||
Newspaper | 32,468,810 | 702,063 | - | 31,766,747 | ||||||||||||
Total
|
$ |
35,294,557
|
$ |
1,048,400
|
$ | - | $ |
34,246,157
|
F-37
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
13.
Certain Significant Estimates
Our
estimates that influence the financial statements are normally based on
knowledge and experience about past and current events and assumptions about
future events. The following estimates affecting the financial statements are
particularly sensitive because
of their significance and it is at least reasonably possible that a change in
these estimates will occur in the near term.
Goodwill
and Intangible Assets
We
evaluate the recoverability of the goodwill and intangible assets of each of our
reporting units as required under ASC 350 by comparing the fair value
of each reporting unit with its carrying value. The fair values of our reporting
units are determined using a combination of a discounted cash flow analysis and
market multiples based on historical and projected financial information. We
apply our best judgment when assessing the reasonableness of the financial
projections used to determine the fair value of each reporting
unit.
Allowance for Doubtful Accounts
The Company encounters risks associated with sales and the collection of
the associated accounts receivable. As such, the Company records a monthly
provision for accounts receivable that are considered to be uncollectible. In
order to calculate the appropriate monthly provision, the Company primarily
utilizes a historical rate of accounts receivables written off as a percentage
of total revenue. This historical rate is applied to the current revenues on a
monthly basis. The historical rate is updated periodically based on events that
may change the rate such as a significant increase or decrease in collection
performance and timing of payments as well as the calculated total exposure in
relation to the allowance. Periodically, the Company compares the identified
credit risks with the allowance that has been established using historical
experience and adjusts the allowance accordingly. The underlying assumptions
used for the allowance can change from period to period and could potentially
cause a material impact to the income statement and working
capital.
Financial
Instruments
In managing interest
rate risk exposure, the Company enters into interest rate swap agreements. An
interest rate swap is a contractual exchange of interest payments between two
parties. A standard interest rate swap involves the payment of a fixed rate
times a notional amount by one party in exchange for a floating rate times the
same notional amount from another party. As interest rates change, the
difference to be paid or received is accrued and recognized as interest expense
or income over the life of the agreement. These instruments are not entered into
for trading purposes. Counter
Parties to the Company’s interest rate swap agreements are major financial
institutions. In accordance with guidance outlined in FASB ASC 815, “Derivatives
and Hedging” (formerly SFAS No. 133 , “Accounting for Derivative Instruments and
Certain Hedging Activities”, as amended by SFAS No. 137 and 138), the Company
recognizes interest rate swap agreements on the balance sheet at fair
value.
F-38
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
14.
Derivative Instruments and Hedging Activities
The Company
manages exposure to changes in market interest rates. The Company’s use of
derivative instruments is limited to highly effective fixed and floating
interest rate swap agreements used to manage well-defined interest rate risk
exposures. The Company monitors its positions and the credit ratings of its
counterparties and does not anticipate non-performance by the counterparties.
Interest rate swap agreements are not entered into for trading
purposes.
At September
28, 2007, the Company was party to an interest rate swap agreement which
terminates on October 29, 2010. The swap agreement is with a major financial
institution and aggregates an initial $25 million in notional principal amount
$21 million and $23 million of outstanding notional principal at
October 31, 2009 and 2008. This swap agreement effectively converted $25 million
of variable interest rate debt to fixed rate debt. The swap agreement requires
the Company to make fixed interest payments based on an average effective rate
of 4.78% and receive variable interest payments from its counterparties based on
one-month LIBOR (actual rate of 0.24 and 3.12% at October 31, 2009 and 2008).
The remaining term of this swap agreement is approximately one year. In
fiscal 2009, 2008 and 2007, the Company recorded a net change in the fair value
of the fixed interest rate swap agreement in the amount of $19,823, $546,563 and
$11,350, net of income tax as other comprehensive loss. In
2009 ineffectiveness resulting in a $0.6 million loss, was charged to other
expense on the Consolidated Statements of Operations. This loss resulted from
the termination of LIBOR borrowing eligibility from the Administrative Agent.
The net additional interest payments made or received under this swap agreement
are recognized in interest expense.
15. Earnings Per
Share
(Loss)
earnings per share (EPS) were computed as follows:
|
|
(Loss)
income
|
|
Weighted
Average
Shares
|
|
Per
Share
Amount
|
|
|||
Year
Ended October 31, 2009
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(27,520,624
|
)
|
|
|
|
|
|
|
Basic (loss)
per share
|
|
|
|
|
|
|
|
|
|
|
(Loss)
available to common shareholders
|
|
|
(27,520,624
|
)
|
|
9,988,000
|
|
$
|
(2.76)
|
|
Effect
of dilutive securities stock options
|
|
|
|
|
|
-
|
|
|
|
|
Diluted (loss)
per share
|
|
|
|
|
|
|
|
|
|
|
(Loss) available
to common shareholders and assumed conversions
|
|
$
|
(27,520,624
|
)
|
|
9,988,000
|
|
$
|
(2.76)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended October 31, 2008 (Restated)
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,658,161
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
Income
available to common shareholders
|
|
|
4,658,161
|
|
|
9,986,000
|
|
$
|
0.47
|
|
Effect
of dilutive securities stock options
|
|
|
|
|
38,000
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
Income
available to common shareholders and assumed conversions
|
|
$
|
4,658,161
|
|
|
10,024,000
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended October 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
6,080,140
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
Income
available to common shareholders
|
|
|
6,080,140
|
|
|
9,957,000
|
|
$
|
0.61
|
|
Effect
of dilutive securities stock options
|
|
|
|
|
146,000
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
Income
available to common shareholders and assumed conversions
|
|
$
|
6,080,140
|
|
|
10,103,000
|
|
$
|
0.60
|
|
F-39
Champion Industries, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements (continued)
16.
Quarterly Results of Operations (unaudited)
The
following is a summary of the quarterly results of operations for the years
ended October 31, 2009 and 2008.
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
||||
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
36,891,000
|
|
$
|
36,140,000
|
|
$
|
34,356,000
|
|
$
|
33,871,000
|
|
2008
|
|
$
|
40,967,000
|
|
$
|
40,104,000
|
|
$
|
40,501,000
|
|
$
|
44,183,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
9,779,000
|
|
$
|
10,439,000
|
|
$
|
9,666,000
|
|
$
|
10,944,000
|
|
2008
|
|
$
|
12,897,000
|
|
$
|
12,770,000
|
|
$
|
12,272,000
|
|
$
|
14,276,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
(Restated)
|
|
$
|
(634,000
|
)
|
$
|
295,000
|
|
$
|
(307,000
|
)
|
$
|
(26,875,000
|
)
|
2008
(Restated)
|
|
$
|
937,000
|
|
$
|
1,054,000
|
|
$
|
726,000
|
|
$
|
1,941,000
|
|
Earnings per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
(Restated)
|
|
$
|
(0.06
|
)
|
$
|
0.03
|
|
$
|
(0.03
|
)
|
$
|
(2.69
|
)
|
2008
(Restated)
|
|
$
|
0.09
|
|
$
|
0.11
|
|
$
|
0.07
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
(Restated)
|
|
$
|
(0.06
|
)
|
$
|
0.03 |
|
$
|
(0.03
|
)
|
$
|
(2.69
|
)
|
2008
(Restated)
|
|
$
|
0.09
|
|
$
|
0.10
|
|
$
|
0.07
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
9,988,000
|
|
|
9,988,000
|
|
|
9,988,000
|
|
|
9,988,000
|
|
2008
|
|
|
9,981,000
|
|
|
9,988,000
|
|
|
9,988,000
|
|
|
9,988,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
9,988,000
|
|
|
9,988,000
|
|
|
9,988,000
|
|
|
9,988,600
|
|
2008
|
|
|
10,045,000
|
|
|
10,041,000
|
|
|
10,023,000
|
|
|
9,988,000
|
|
F-40
Champion Industries, Inc. and
Subsidiaries
Schedule
II
Valuation
and Qualifying Accounts
Years
Ended October 31, 2009, 2008 and 2007
Description
|
|
Balance
at beginning of period
|
|
|
Balances
of acquired companies
|
|
|
Additions
charged to costs and expense
|
|
|
Deductions(1)
|
|
|
Balance
at end of period
|
|
|||||
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Allowance
for doubtful accounts
|
|
$
|
1,851,485
|
|
|
$
|
-
|
|
|
$
|
876,145
|
|
|
$
|
(1,374,609
|
)
|
|
$
|
1,353,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
1,511,037
|
|
|
$
|
-
|
|
|
$
|
854,283
|
|
|
$
|
(513,835
|
)
|
|
$
|
1,851,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
1,557,895
|
|
|
$
|
117,768
|
|
|
$
|
491,934
|
|
|
$
|
(656,560
|
)
|
|
|
1,511,037
|
|
(1)
Uncollectible accounts written off, net of
recoveries.
F-41