10-Q 1 w40345e10-q.txt QUARTERLY REPORT 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2000 Commission File No. 0-21084 ------------------- CHAMPION INDUSTRIES, INC. (Exact name of Registrant as specified in its charter) West Virginia 55-0717455 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
Route 2 Kyle Industrial Park Industrial Lane P. O. Box 2968 Huntington, West Virginia 25728 (Address of principal executives offices) (Zip Code) (304) 528-2700 (Registrant's telephone number, including area code) ------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _x_ No . 9,713,913 shares of common stock of the Registrant were outstanding at July 31, 2000. 2 CHAMPION INDUSTRIES, INC. INDEX
PAGE NO. Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets................................................................2 Consolidated Income Statements.............................................................4 Consolidated Statements of Cash Flows......................................................5 Notes to Consolidated Financial Statements.................................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..........................................................11 Part II. Other Information Item 2. Change in Securities...............................................................17 Item 6. Exhibits and Reports on Form 8-K...................................................17 Signatures..........................................................................................18 Exhibit Index.......................................................................................19
1 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS
JULY 31, OCTOBER 31, 2000 1999 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 4,504,967 $ 2,463,554 Accounts receivable, net of allowance of $1,698,000 and $1,448,000 19,372,241 24,041,919 Inventories 13,720,694 14,072,694 Other current assets 1,115,230 828,189 Prepaid income taxes 207,076 - Deferred income tax assets 849,181 849,181 ----------- ----------- Total current assets 39,769,389 42,255,537 PROPERTY AND EQUIPMENT, AT COST: Land 984,889 984,889 Buildings and improvements 6,432,096 6,308,530 Machinery and equipment 34,439,828 32,861,577 Equipment under capital leases 1,600,000 1,600,000 Furniture and fixtures 2,278,992 2,353,191 Vehicles 2,826,733 2,621,696 ----------- ----------- 48,562,538 46,729,883 Less accumulated depreciation (23,301,280) (20,667,666) ----------- ----------- 25,261,258 26,062,217 Cash surrender value of officers' life insurance 972,969 956,769 Goodwill, net of accumulated amortization 3,483,418 3,317,849 Other assets 831,669 728,833 ----------- ----------- 5,288,056 5,003,451 ----------- ----------- Total assets $70,318,703 $73,321,205 =========== ===========
See notes to consolidated financial statements. 2 4 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY
JULY 31, OCTOBER 31, 2000 1999 ----------- ----------- CURRENT LIABILITIES: Accounts payable $ 2,789,901 $ 3,521,282 Accrued payroll 1,763,981 1,768,345 Taxes accrued and withheld 1,059,727 905,854 Accrued income taxes - 677,119 Accrued expenses 795,140 885,864 CURRENT PORTION OF LONG-TERM DEBT: Notes payable 3,802,769 3,607,354 Capital lease obligations 332,932 316,598 ----------- ----------- Total current liabilities 10,544,450 11,682,416 LONG-TERM DEBT, NET OF CURRENT PORTION: Notes payable 7,469,086 9,222,191 Capital lease obligations 431,957 710,433 Deferred income tax liability 4,318,571 4,318,571 Other liabilities 808,335 827,725 ----------- ----------- Total liabilities 23,572,399 26,761,336 SHAREHOLDERS' EQUITY: Common stock, $1 par value, 20,000,000 shares authorized; 9,713,913 shares issued and outstanding 9,713,913 9,713,913 Additional paid-in capital 22,242,047 22,242,047 Retained earnings 14,790,344 14,603,909 ----------- ----------- Total shareholders' equity 46,746,304 46,559,869 ----------- ----------- Total liabilities and shareholders' equity $70,318,703 $73,321,205 =========== ===========
See notes to consolidated financial statements. 3 5 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED JULY 31, JULY 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ REVENUES: Printing $ 23,266,019 $ 22,134,943 $ 71,727,385 $ 68,062,806 Office products and office furniture 7,148,779 7,902,302 22,353,743 22,079,180 ------------ ------------ ------------ ------------ Total revenues 30,414,798 30,037,245 94,081,128 90,141,986 COST OF SALES: Printing 16,286,665 15,673,928 51,149,599 47,979,210 Office products and office furniture 4,860,728 5,448,321 15,050,762 14,819,106 ------------ ------------ ------------ ------------ Total cost of sales 21,147,393 21,122,249 66,200,361 62,798,316 ------------ ------------ ------------ ------------ Gross profit 9,267,405 8,914,996 27,880,767 27,343,670 Selling, general and administrative expenses 8,244,724 8,292,890 24,471,200 22,883,723 ------------ ------------ ------------ ------------ Income from operations 1,022,681 622,106 3,409,567 4,459,947 OTHER INCOME (EXPENSE): Interest income 14,791 25,334 37,516 116,331 Interest expense (287,648) (274,077) (770,374) (948,570) Other 14,677 37,364 100,945 104,051 ------------ ------------ ------------ ------------ (258,180) (211,379) (631,913) (728,188) ------------ ------------ ------------ ------------ Income before income taxes 764,501 410,727 2,777,654 3,731,759 Income taxes (312,602) (154,628) (1,134,131) (1,484,166) ------------ ------------ ------------ ------------ Net income $ 451,899 $ 256,099 $ 1,643,523 $ 2,247,593 ============ ============ ============ ============ EARNINGS PER SHARE: Basic $ 0.05 $ 0.03 $ 0.17 $ 0.23 ============ ============ ============ ============ Diluted $ 0.05 $ 0.03 $ 0.17 $ 0.23 ============ ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 9,714,000 9,714,000 9,714,000 9,714,000 ============ ============ ============ ============ Diluted 9,714,000 9,716,000 9,714,000 9,715,000 ============ ============ ============ ============ Dividends per share $ 0.05 $ 0.05 $ 0.15 $ 0.15 ============ ============ ============ ============
See notes to consolidated financial statements. 4 6 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JULY 31, ------------------------------- 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,643,523 $ 2,247,593 ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization 3,145,407 2,928,367 Gain on sales of assets (704) (5,680) Other (19,390) (16,200) Bad debt expense 534,551 339,621 Changes in assets and liabilities: Accounts receivable 4,277,437 1,071,579 Inventories 427,000 (1,167,544) Other current assets (255,691) (349,934) Accounts payable (826,934) (1,156,571) Accrued payroll (4,364) 17,084 Taxes accrued and withheld 143,643 191,833 Accrued and prepaid income taxes (884,195) (195,663) Accrued expenses (90,724) 130,611 ----------- ----------- Net cash provided by operations 8,089,559 4,035,096 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (1,688,172) (3,066,166) Proceeds from sales of property 167,077 150,388 Business acquisitions, net of cash received (463,477) (1,014,236) Other assets (164,565) 44,456 ----------- ----------- Net cash used in investing activities (2,149,137) (3,885,558) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from term debt and leases 618,720 45,615 Principal payments on long-term debt (3,060,641) (3,791,428) Dividends paid (1,457,088) (1,457,085) ----------- ----------- Net cash used in financing activities (3,899,009) (5,202,898) ----------- ----------- Net increase (decrease) in cash 2,041,413 (5,053,360) Cash and cash equivalents, beginning of period 2,463,554 9,773,193 ----------- ----------- Cash and cash equivalents, end of period $ 4,504,967 $ 4,719,833 =========== ===========
See notes to consolidated financial statements. 5 7 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JULY 31, 2000 1. BASIS OF PRESENTATION AND BUSINESS OPERATIONS The foregoing financial information has been prepared in accordance with generally accepted accounting principles and rules and regulations of the Securities and Exchange Commission for interim financial reporting. The preparation of the financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. In the opinion of management, the financial information reflects all adjustments (consisting of items of a normal recurring nature) necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. These interim financial statements should be read in conjunction with the consolidated financial statements for the year ended October 31, 1999, and related notes thereto contained in the Champion Industries, Inc.'s Form 10-K dated January 28, 2000. The accompanying interim financial information is unaudited. The accompanying consolidated financial statements of the Company include the accounts of The Chapman Printing Company, Inc., Stationers, Inc., Bourque Printing, Inc., Dallas Printing Company, Inc., Carolina Cut Sheets, Inc., U.S. Tag & Ticket Company, Inc., Donihe Graphics, Inc., The Merten Company, Smith & Butterfield Co., Inc., Interform Corporation, Rose City Press, Capitol Business Equipment, Inc. d.b.a. Capitol Business Interiors, Thompson's of Morgantown, Inc., Independent Printing Service Inc. and Diez Business Machines. 2. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by the weighted average shares of common stock outstanding for the period and excludes any dilutive effects of stock options. Diluted earnings per share is computed by dividing net income by the weighted average shares of common stock outstanding for the period plus the shares that would be outstanding assuming the exercise of dilutive stock options. The effect of dilutive stock options increased weighted average shares outstanding by 2,000 shares for the three months ended and 1,000 shares for the nine months ended July 31, 1999. 3. INVENTORIES Inventories are principally stated at the lower of first-in, first-out cost or market. Manufactured finished goods and work in process inventories include material, direct labor and overhead based on standard costs, which approximate actual costs. The Company utilizes an estimated gross profit method for determining cost of sales in interim periods. 6 8 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) 3. INVENTORIES (CONTINUED) Inventories consisted of the following:
July 31, October 31, 2000 1999 ----------- ----------- Printing: Raw materials $ 3,253,092 $ 3,267,880 Work in process 2,347,186 2,357,856 Finished goods 4,186,032 4,205,061 Office products and office furniture 3,934,384 4,241,897 ----------- ----------- $13,720,694 $14,072,694 =========== ===========
4. LONG-TERM DEBT Long-term debt consisted of the following:
July 31, October 31, 2000 1999 ----------- ----------- Unsecured term note payable $ 6,696,429 $ 8,035,714 Installment notes payable to banks 2,865,780 2,444,181 Mortgage note payable to a bank 1,709,646 2,349,650 Capital lease obligations 764,889 1,027,031 ----------- ----------- 12,036,744 13,856,576 Less current portion 4,135,701 3,923,952 ----------- ----------- Long-term debt, net of current portion $ 7,901,043 $ 9,932,624 =========== ===========
The Company has an unsecured revolving line of credit with a bank for borrowings to a maximum of $10,000,000 with interest payable monthly at an interest rate approximating the prime rate. This line of credit expires in April 2002 and contains certain restrictive financial covenants. There were no borrowings outstanding under this facility at July 31, 2000. The company's non-cash activities for the nine months ended July 31, 2000 and 1999 included equipment purchases consisting primarily of vehicles of approximately $622,000 and $478,000. 7 9 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) 5. SHAREHOLDERS' EQUITY The Company declared a dividend of five cents per share to be paid on September 25, 2000, to stockholders of record on September 8, 2000. 6. ACQUISITIONS On November 30, 1999, the Company acquired all of the issued and outstanding common stock of Diez Business Machines, Inc. of Gonzales, Louisiana. This transaction was accounted for under the purchase method of accounting. On July 16, 1999, the Company acquired certain assets and assumed certain liabilities of AIM Printing of Knoxville, Tennessee. On June 1, 1999, the Company acquired all of the issued and outstanding common stock of Independent Printing Service, Inc. of Evansville, Indiana. These transactions were accounted for under the purchase method of accounting. Pro forma financial information related to these acquisitions has not been presented because such information would not be materially different than that reported herein. 7. INDUSTRY SEGMENT INFORMATION In 1999, the Company adopted SFAS 131. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies." The Company evaluates the performance of its segments based on an operating profit basis prior to interest expense, interest income or other income. The Company operates principally in two industry segments organized on the basis of product lines: the production, printing and sale, principally to commercial customers, of printed materials (including brochures, pamphlets, reports, tags, continuous and other forms); and the sale of office products and office furniture including interior design services. 8 10 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) The table below presents information about reported segments for the three and nine months ending July 31:
OFFICE PRODUCTS 2000 QUARTER 3 PRINTING & FURNITURE TOTAL ------------------------------------------------------- Revenues $ 25,573,233 $ 7,977,806 $ 33,551,039 Elimination of intersegment revenue (2,307,214) (829,027) (3,136,241) ------------------------------------------------------- Consolidated revenues 23,266,019 7,148,779 30,414,798 Operating income 743,129 279,552 1,022,681 Depreciation & amortization 1,005,078 72,511 1,077,589 Capital expenditures 741,609 30,135 771,744 Identifiable assets 57,939,115 12,379,588 70,318,703 1999 QUARTER 3 Revenues $ 24,210,944 $ 8,402,453 $ 32,613,397 Elimination of intersegment revenue (2,076,001) (500,151) (2,576,152) ------------------------------------------------------- Consolidated revenues 22,134,943 7,902,302 30,037,245 Operating income 259,056 363,050 622,106 Depreciation & amortization 946,559 89,070 1,035,629 Capital expenditures 1,236,551 64,520 1,301,071 Identifiable assets 58,816,758 12,854,123 71,670,881 2000 YEAR TO DATE Revenues $ 78,588,549 $ 25,063,116 $ 103,651,665 Elimination of intersegment revenue (6,861,164) (2,709,373) (9,570,537) ------------------------------------------------------- Consolidated revenues 71,727,385 22,353,743 94,081,128 Operating income 2,449,777 959,790 3,409,567 Depreciation & amortization 2,933,808 211,599 3,145,407 Capital expenditures 2,209,061 101,200 2,310,261 Identifiable assets 57,939,115 12,379,588 70,318,703 1999 YEAR TO DATE Revenues $ 74,528,318 $ 23,521,590 $ 98,049,908 Elimination of intersegment revenue (6,465,512) (1,442,410) (7,907,922) ------------------------------------------------------- Consolidated revenues 68,062,806 22,079,180 90,141,986 Operating income 3,514,522 945,425 4,459,947 Depreciation & amortization 2,666,073 262,294 2,928,367 Capital expenditures 3,430,918 115,149 3,546,067 Identifiable assets 58,816,758 12,854,123 71,670,881
9 11 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) A reconciliation of total segment revenues and of total segment operating income to income before income taxes, for the three and nine months ended July 31, 2000 and 1999 is as follows:
THREE MONTHS NINE MONTHS 2000 1999 2000 1999 ----------------------------------- ------------------------------------- REVENUES: Total segment revenues $ 33,551,039 $ 32,613,397 $ 103,651,665 $ 98,049,908 Elimination of intersegment revenue (3,136,241) (2,576,152) (9,570,537) (7,907,922) ----------------------------------- ------------------------------------- Consolidated revenue $ 30,414,798 $ 30,037,245 $ 94,081,128 $ 90,141,986 =================================== ===================================== OPERATING INCOME: Total segment operating income $ 1,022,681 $ 622,106 $ 3,409,567 $ 4,459,947 Interest income 14,791 25,334 37,516 116,331 Interest expense (287,648) (274,077) (770,374) (948,570) Other income 14,677 37,364 100,945 104,051 ----------------------------------- ------------------------------------- Consolidated income before income taxes $ 764,501 $ 410,727 $ 2,777,654 $ 3,731,759 =================================== ===================================== IDENTIFIABLE ASSETS: Total segment identifiable assets $ 70,318,703 $ 71,670,881 $ 70,318,703 $ 71,670,881 Elimination of intersegment assets - - - - ----------------------------------- ------------------------------------- Total consolidated assets $ 70,318,703 $ 71,670,881 $ 70,318,703 $ 71,670,881 =================================== =====================================
10 12 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a commercial printer, business forms manufacturer and office products and office furniture supplier in regional markets east of the Mississippi. The Company has grown through acquisitions and internal growth. As a result of this growth, the Company has realized economies of scale and operational efficiencies. The Company intends to continue its strategy of aggressively increasing its market share in areas it currently serves and expanding into new markets through acquisitions. The Company believes the printing and office products industries are highly fragmented and that it is well positioned to acquire desirable businesses in existing market areas, contiguous geographical regions, and new geographical markets. The consolidated financial statements, results of operations, and cash flows could be materially impacted depending on the timing and magnitude of acquisitions. The Company's revenues consist primarily of sales of commercial printing, business forms, tags, other printed products, office supplies, office furniture, data products, and office design services. The Company recognizes revenue when products are shipped or services are rendered to the customer. The Company's revenues are subject to quarterly fluctuations caused by variations in demand for its products. The Company's cost of sales primarily consist of raw materials, including paper, ink, pre-press and purchased office supplies, furniture and data products, and manufacturing costs including direct labor, indirect labor, and overhead. Significant factors affecting cost of sales include the cost of paper in both printing and office supplies, labor costs and other raw materials. The Company's operating costs consist of selling, general and administrative expenses. These costs include salaries and wages for sales, customer service, accounting, administrative and executive personnel, employee benefits, sales commissions, rent, utilities, and equipment maintenance. 11 13 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, information derived from the Consolidated Income Statements as a percentage of total revenues.
PERCENTAGE OF TOTAL REVENUES THREE MONTHS ENDED NINE MONTHS ENDED JULY 31, JULY 31, 2000 1999 2000 1999 ---------------------------------------------------- Revenues: Printing 76.5% 73.7% 76.3% 75.5% Office products and office furniture 23.5 26.3 23.7 24.5 ---------------------------------------------------- Total revenues 100.0 100.0 100.0 100.0 Cost of sales: Printing 53.5 52.2 54.4 53.2 Office products and office furniture 16.0 18.1 16.0 16.4 ---------------------------------------------------- Total cost of sales 69.5 70.3 70.4 69.6 ---------------------------------------------------- Gross profit 30.5 29.7 29.6 30.4 Selling, general and administrative expenses 27.1 27.6 26.0 25.4 ---------------------------------------------------- Income from operations 3.4 2.1 3.6 5.0 Interest income 0.1 0.1 0.0 0.1 Interest (expense) (1.0) (0.9) (0.8) (1.1) Other income 0.0 0.1 0.1 0.1 ---------------------------------------------------- Income before taxes 2.5 1.4 2.9 4.1 Income tax expense (1.0) (0.5) (1.2) (1.6) ---------------------------------------------------- Net income 1.5% 0.9% 1.7% 2.5% ====================================================
THREE MONTHS ENDED JULY 31, 2000 COMPARED TO THREE MONTHS ENDED JULY 31, 1999 Revenues Total revenues increased 1.3% in the third quarter of 2000 compared to the same period in 1999 from $30.0 million to $30.4 million. Printing revenue increased 5.1% in the third quarter of 2000 to $23.3 million from $22.1 million in the third quarter of 1999. Office products and office furniture revenue decreased 9.5% in the third quarter of 2000 to $7.1 million from $7.9 million in the third quarter of 1999. The increase in revenues for the printing segment was due to the impact of the Independent Printing Service acquisition in June 1999 and the AIM Printing acquisition in July 1999. The decrease in revenues for the office products and office furniture segment was attributable to lower sales in office furniture primarily at one division. 12 14 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Cost of Sales Total cost of sales remained constant at $21.1 million in the third quarter of 2000 and 1999. Printing cost of sales increased 3.9% in the third quarter of 2000 to $16.3 million from $15.7 million in the third quarter of 1999, due primarily to an increase in printing sales. Office products and office furniture cost of sales decreased 10.8% in the third quarter of 2000 to $4.9 million from $5.4 million in the third quarter of 1999. The reduction in office products and office furniture cost of sales is directly attributable to the lower sales discussed above. Operating Expenses In the third quarter of 2000, selling, general and administrative expenses decreased slightly as a percentage of sales to 27.1% from 27.6% reported in the third quarter of 1999 primarily due to an increase in revenues. Total selling, general and administrative expenses remained relatively constant at $8.2 million and $8.3 million for the three months ended July 31, 2000 and 1999. Income from Operations and Other Income and Expenses Income from operations increased 64.4% in the third quarter of 2000 to $1.0 million from $622,000 in the third quarter of 1999. This increase is primarily the result of the increased sales experienced in the printing division during the third quarter of 2000. Income Taxes The Company's effective income tax rate was 40.9% for the third quarter of 2000, up from 37.6% in the third quarter of 1999 as a result of adjusting the year to date effective tax rates to anticipated levels. The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate. Net Income Net income for the third quarter of 2000 increased 76.5% to $452,000 from $256,000 in the third quarter of 1999 due to the improved operating margins discussed above. Basic and diluted earnings per share for the three months ended July 31, 2000 and 1999 were $0.05 and $0.03. NINE MONTHS ENDED JULY 31, 2000 COMPARED TO NINE MONTHS ENDED JULY 31, 1999 Revenues Total revenues increased 4.4% in the first nine months of 2000 compared to the same period in 1999 to $94.1 million from $90.1 million. Printing revenue increased 5.4% in the nine month period ended July 31, 2000 to $71.7 million from $68.1 million in the same period of 1999. The increase in revenues for the printing segment was due to a mix of internal growth and the impact of the Independent Printing Service acquisition in June 1999 and the AIM Printing acquisition in July 1999. Office products and office furniture revenue increased 1.2% from the nine month period ended July 31, 2000 compared to the same period in 1999. This growth was primarily from the acquisition of Diez, which contributed 13 15 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) approximately $1.3 million in revenue to the first nine months of 2000 versus the same period in 1999. Core office products and office furniture revenue declined approximately $1.0 million during the same period. This decline occurred primarily in the third quarter of 2000 as discussed above. Cost of Sales Total cost of sales increased 5.4% in the nine months ended July 31, 2000 to $66.2 million from $62.8 million in the nine months ended July 31, 1999. Printing cost of sales increased 6.6% in the nine months ended July 31, 2000 to $51.1 million from $48.0 million in the nine months ended July 31, 1999, due primarily to the increase in printing sales noted above. Office products and office furniture cost of sales increased 1.6% in the nine months ended July 31, 2000 to $15.1 million from $14.8 million in the nine months ended July 31, 1999. The increase in office products and office furniture cost of sales is primarily attributable to the increase in sales noted above. Operating Expenses During the nine months ended July 31, 2000 compared to the same period in 1999, selling, general and administrative expenses increased as a percentage of sales to 26.0% from 25.4% primarily due to higher corporate overhead expenses, expenses related to acquisitions, higher health insurance costs, an increase in the allowance for doubtful accounts and costs related to an enterprise-wide software system and related hardware. Income from Operations and Other Income and Expenses Income from operations decreased 23.6% in the nine month period ended July 31, 2000 to $3.4 million from $4.5 million in the same period of 1999. This decrease is primarily the result of higher selling, general and administrative expenses coupled with a decrease in printing gross profit as a percentage of sales. Interest income decreased $79,000 as a result of lower investable funds. Interest expense on a comparative basis decreased $178,000 as a result of a reduction in debt. Income Taxes The Company's effective income tax rate was 40.8% for the nine months ended July 31, 2000, up from 39.8% in the same period of 1999. The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate. 14 16 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net Income Net income for the first nine months of 2000 decreased 26.9% to $1.6 million from $2.2 million in the same period of 1999 due to the reasons discussed above. Basic and diluted earnings per share for the nine months ended July 31, 2000 and 1999 were $0.17 and $0.23. INFLATION AND ECONOMIC CONDITIONS Management believes that the effect of inflation on the Company's operations has not been material and will continue to be immaterial for the foreseeable future. The Company does not have long-term sales and purchase contracts; therefore, to the extent permitted by competition, it has the ability to pass through to the customer most cost increases resulting from inflation, if any. SEASONALITY Historically, the Company has experienced a greater portion of its annual sales and net income in the second and fourth quarters than in the first and third quarters. The second quarter generally reflects increased orders for printing of corporate annual reports and proxy statements. A post-Labor Day increase in demand for printing services and office products coincides with the Company's fourth quarter. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operations for the nine months ended July 31, 2000 was $8.1 million compared to $4.0 million during the same period in 1999. This improvement in net cash from operations is due primarily to the collection of accounts receivable. Net cash used in investing activities for the nine months ended July 31, 2000 was $2.1 million compared to $3.9 million during the same period in 1999. The decrease in net cash used in investing activities during the first nine months of 2000 compared to 1999 is primarily the result of lower equipment purchases and less cash used in the acquisition of businesses. Net cash used in financing activities for the nine months ended July 31, 2000 was $3.9 million compared to $5.2 million during the same period in 1999. This change is primarily due to the proceeds from a debt financing of equipment in the third quarter of 2000. Working capital on July 31, 2000 was $29.2 million, a decrease of $1.3 million from October 31, 1999. The decrease in working capital was primarily from the use of available funds to reduce long-term debt, acquire property and equipment and fund the purchase of a business. Management believes that working capital and operating ratios remain at acceptable levels. The Company expects that the combination of funds available from working capital, borrowings available under the Company's credit facility and anticipated cash flows from operations will provide sufficient capital resources for the foreseeable future. In the event the Company seeks to accelerate internal growth or make acquisitions beyond these sources, additional financing would be necessary. 15 17 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ENVIRONMENTAL REGULATION The Company is subject to the environmental laws and regulations of the United States, and the states in which it operates, concerning emissions into the air, discharges into the waterways and the generation, handling and disposal of waste materials. The Company's past expenditures relating to environmental compliance have not had a material effect on the Company. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they may have upon the capital expenditures, earnings, and competitive position of the Company in the future. Based upon information currently available, management believes that expenditures relating to environmental compliance will not have a material impact on the financial position of the Company. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Form 10-Q, including without limitation statements including the word "believes," "anticipates," "intends," "expects" or words of similar import, constitute "forward-looking statements" within the meaning of section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, general economic conditions, changes in business strategy or development plans, and other factors referenced in this Form 10-Q. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 16 18 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) The exhibits listed on the Exhibit Index on page 18 of this Form 10-Q are filed herewith. b) The following reports on Form 8-K were filed during the quarter for which this report is filed: None. 17 19 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHAMPION INDUSTRIES, INC. Date: September 13, 2000 /s/ Marshall T. Reynolds -------------------------------- Marshall T. Reynolds Chief Executive Officer Date: September 13, 2000 /s/ Todd R. Fry -------------------------------- Todd R. Fry Chief Financial Officer 18