-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IqaCSKDiiVRNXnHpfPmw9O1stfZQ8ifr4MqljNXJH2HyJ+H0/vrrfX1XCky5oqyL TJu9NmHA4rbz+zUdaNlOSw== 0000950133-02-000943.txt : 20020415 0000950133-02-000943.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950133-02-000943 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020131 FILED AS OF DATE: 20020315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAMPION INDUSTRIES INC CENTRAL INDEX KEY: 0000019149 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL PRINTING [2750] IRS NUMBER: 550717455 STATE OF INCORPORATION: WV FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21084 FILM NUMBER: 02576639 BUSINESS ADDRESS: STREET 1: 2450 FIRST AVE STREET 2: P O BOX 2968 CITY: HUNTINGTON STATE: WV ZIP: 25728 BUSINESS PHONE: 3045282791 MAIL ADDRESS: STREET 1: 2450 FIRST AVENUE STREET 2: P O BOX 2968 CITY: HUNTINGTON STATE: WV ZIP: 25728 10-Q 1 w58580e10-q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 2002 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.) 2450-90 1st Avenue P.O. Box 2968 Huntington, WV 25728 (Address of principal executive offices) (Zip Code) (304) 528-2700 (Registrant's telephone number, including area code) ----------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- 9,713,913 shares of common stock of the Registrant were outstanding at January 31, 2002. CHAMPION INDUSTRIES, INC. INDEX
PAGE NO. Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets.......................................................2 Consolidated Statements of Operations ............................................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 .................................................12 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K...........................................15 Signatures..................................................................................16
1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
ASSETS JANUARY 31, OCTOBER 31, 2002 2001 --------------------------------------- Current assets: Cash and cash equivalents $ 3,915,831 $ 5,764,716 Accounts receivable, net of allowance of $1,607,000 and $1,432,000 17,385,414 19,165,773 Inventories 11,480,752 11,764,195 Other current assets 1,205,997 769,034 Deferred income tax assets 1,111,018 1,111,018 Income tax receivable 122,889 279,271 --------------------------------------- Total current assets 35,221,901 38,854,007 Property and equipment, at cost: Land 1,028,372 825,220 Buildings and improvements 6,013,527 5,562,762 Machinery and equipment 34,501,948 34,421,518 Equipment under capital leases 2,583,407 2,583,407 Furniture and fixtures 2,508,340 2,480,050 Vehicles and other 3,995,563 3,031,861 --------------------------------------- 50,631,157 48,904,818 Less accumulated depreciation (28,716,679) (27,743,183) --------------------------------------- 21,914,478 21,161,635 Assets held for sale 1,057,216 1,057,216 Cash surrender value of officers' life insurance 891,852 885,852 Goodwill, net of accumulated amortization 1,334,452 1,334,183 Other assets 631,311 657,021 --------------------------------------- 3,914,831 3,934,272 --------------------------------------- Total assets $61,051,210 $63,949,914 =======================================
See notes to consolidated financial statements. 2 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY JANUARY 31, OCTOBER 31, 2002 2001 ------------------------------------ Current liabilities: Accounts payable $ 2,949,996 $ 4,343,291 Accrued payroll 1,585,696 2,107,377 Taxes accrued and withheld 1,376,622 1,289,560 Accrued expenses 1,152,689 1,218,575 Current portion of long-term debt: Notes payable 2,911,916 3,329,627 Capital lease obligations 434,695 524,316 ------------------------------------ Total current liabilities 10,411,614 12,812,746 Long-term debt, net of current portion: Notes payable 3,774,850 3,994,555 Capital lease obligations 505,970 554,514 Deferred income tax liability 3,554,169 3,554,169 Other liabilities 431,785 433,044 ------------------------------------ Total liabilities 18,678,388 21,349,028 Shareholders' equity: Common stock, $1 par value, 20,000,000 shares authorized; 9,713,913 shares issued and outstanding 9,713,913 9,713,913 Additional paid-in capital 22,242,047 22,242,047 Retained earnings 10,416,862 10,644,926 ------------------------------------ Total shareholders' equity 42,372,822 42,600,886 ------------------------------------ Total liabilities and shareholders' equity $61,051,210 $63,949,914 ====================================
See notes to consolidated financial statements. 3 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED JANUARY 31, 2002 2001 -------------------------------- Revenues: Printing $22,857,609 $24,688,278 Office products and office furniture 6,932,933 7,232,784 -------------------------------- Total revenues 29,790,542 31,921,062 Cost of sales: Printing 16,527,470 18,165,625 Office products and office furniture 4,959,980 5,025,798 -------------------------------- Total cost of sales 21,487,450 23,191,423 -------------------------------- Gross profit 8,303,092 8,729,639 Selling, general and administrative expenses 7,784,287 8,039,190 -------------------------------- Income from operations 518,805 690,449 Other income (expense): Interest income 6,513 25,036 Interest expense (112,454) (267,815) Other 30,120 27,407 -------------------------------- (75,821) (215,372) -------------------------------- Income before income taxes 442,984 475,077 Income tax expense (185,354) (195,866) -------------------------------- Net income $ 257,630 $ 279,211 ================================ Earnings per share Basic $0.03 $0.03 ================================ Diluted $0.03 $0.03 ================================ Weighted average shares outstanding: Basic 9,714,000 9,714,000 ================================ Diluted 9,725,000 9,714,000 ================================ Dividends per share $0.05 $0.05 ================================
See notes to consolidated financial statements. 4 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED JANUARY 31, 2002 2001 -------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 257,630 $ 279,211 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 1,048,161 1,136,393 Gain on sale of assets (5,055) (800) Increase in deferred comp 4,468 6,255 Bad debt expense 187,415 185,063 Changes in assets and liabilities: Accounts receivable 1,592,944 1,031,880 Inventories 283,443 (59,188) Other current assets (436,963) (340,594) Accounts payable (1,393,295) (462,786) Accrued payroll (521,681) (188,036) Taxes accrued and withheld 87,062 117,929 Income taxes 156,382 144,516 Accrued expenses (65,886) 61,444 Other liabilities (5,727) (5,522) -------------------------------------- Net cash provided by operating activities 1,188,898 1,905,765 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (762,352) (288,991) Deposit on asset purchase (875,000) -- Proceeds from sales of property 20,764 1,765 Business acquisitions, net of cash received -- (1,169,722) Decrease in cash surrender value life insurance 11,311 65,552 Other assets (6,269) (6,000) -------------------------------------- Net cash used in investing activities (1,611,546) (1,397,396) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on line of credit -- 1,500,000 Proceeds from term debt and leases -- 426,732 Principal payments on long-term debt (940,543) (1,096,756) Dividends paid (485,694) (485,697) -------------------------------------- Net cash (used in) provided by financing activities (1,426,237) 344,279 -------------------------------------- Net increase (decrease) in cash (1,848,885) 852,648 Cash and cash equivalents, beginning of period 5,764,716 3,173,587 -------------------------------------- Cash and cash equivalents, end of period $ 3,915,831 $ 4,026,235 ======================================
See notes to consolidated financial statements. 5 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JANUARY 31, 2002 1. BASIS OF PRESENTATION AND BUSINESS OPERATIONS The foregoing financial information has been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and rules and regulations of the Securities and Exchange Commission for interim financial reporting. The preparation of the financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. In the opinion of management, the financial information reflects all adjustments (consisting of items of a normal recurring nature) necessary for a fair presentation of financial position, results of operations and cash flows in conformity with GAAP. These interim financial statements should be read in conjunction with the consolidated financial statements for the year ended October 31, 2001, and related notes thereto contained in Champion Industries, Inc.'s Form 10-K dated January 25, 2002. The accompanying interim financial information is unaudited. The balance sheet information as of October 31, 2001 was derived from our audited financial statements. 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., Diez Business Machines and Transdata Systems, Inc. 2. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by the weighted average shares of common stock outstanding for the period and excludes any dilutive effects of stock options. Diluted earnings per share is computed by dividing net income by the weighted average shares of common stock outstanding for the period plus the shares that would be outstanding assuming the exercise of dilutive stock options. The dilutive effect of stock options was 11,000 shares for the three months ended January 31, 2002. Stock options outstanding for the three months ended January 31, 2001 were anti-dilutive. 3. INVENTORIES Inventories are principally stated at the lower of first-in, first-out cost or market. Manufactured finished goods and work in process inventories include material, direct labor and overhead based on standard costs, which approximate actual costs. The Company utilizes an estimated gross profit method for determining cost of sales in interim periods. 6 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) 3. INVENTORIES (CONTINUED) Inventories consisted of the following:
JANUARY 31, OCTOBER 31, 2002 2001 -------------------- -------------------- Printing: Raw materials $ 2,414,920 $ 2,460,218 Work in process 1,667,103 1,698,374 Finished goods 3,851,307 3,923,549 Office products and office furniture 3,547,422 3,682,054 -------------------- -------------------- $ 11,480,752 $ 11,764,195 ==================== ====================
4. LONG-TERM DEBT Long-term debt consisted of the following:
JANUARY 31, OCTOBER 31, 2002 2001 -------------------- ------------------- Unsecured term note payable $ 4,018,020 $ 4,464,449 Installment notes payable to banks 2,668,746 2,859,733 Capital lease obligations 940,665 1,078,830 ----------------------------------------- 7,627,431 8,403,012 Less current portion 3,346,611 3,853,943 ----------------------------------------- Long-term debt, net of current portion $ 4,280,820 $ 4,549,069 =========================================
The Company has an unsecured revolving line of credit with a bank for borrowings to a maximum of $10,000,000 with interest payable monthly at interest rates at LIBOR plus 1% to 1.5%. This line of credit expires in April 2002 and contains certain restrictive financial covenants. There were no borrowings outstanding under this facility at January 31, 2002. The Company has an unsecured revolving line of credit with a bank for borrowings to a maximum of $1,000,000 with interest payable monthly at the Wall Street Journal prime rate. The line of credit expires in October 2002 and contains certain financial covenants. There were no borrowings outstanding under this facility at January 31, 2002. The Company's non-cash activities for the three months ended January 31, 2002 and 2001 included vehicle purchases of approximately $165,000 and $73,000 which were financed by a bank. 7 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) 5. SHAREHOLDERS' EQUITY The Company paid a dividend of five cents per share on December 28, 2001 to stockholders of record on December 4, 2001. Also, the Company declared a dividend of five cents per share to be paid on March 25, 2002 to stockholders of record on March 8, 2002. 6. RELATED PARTY TRANSACTION In the first quarter of 2002, the Company made a deposit to purchase a fractional ownership in an aircraft from an entity controlled by its Chief Executive Officer for approximately $1.2 million of which $875,000 had been paid as of January 31, 2002. 7. COMMITMENTS AND CONTINGENCIES On February 16, 2002 a jury verdict was rendered against the Company in a civil action brought against the Company in state court in Jackson, Mississippi. The plaintiffs in this civil action asserted that the Company and its Dallas Printing Company, Inc. subsidiary had engaged in unfair competition and other wrongful acts in hiring certain of its employees. The jury awarded the plaintiffs $1,745,000 in actual damages and $750,000 in punitive damages. The Company has been advised that it has no insurance coverage for this award. The Company under Mississippi law has a guaranteed right to appeal. The Company intends to appeal this verdict and has been advised by counsel that it has multiple grounds for an appeal and a reasonable basis for believing that an appeal would be successful in eliminating the jury award. However, there can be no assurance that the jury award will be overturned upon appeal. If the verdict is not overturned, the impact on the operating results of the Company could be material. On March 1, 2002 the plaintiffs in the civil action filed a motion for attorney's fees and costs in the amount of $889,401. A fee award, if any, granted by the trial judge would be part of an appeal. 8. NEW ACCOUNTING PRONOUNCEMENTS AND SIGNIFICANT ACCOUNTING POLICY UPDATES Business Combinations, Goodwill and Other Intangible Assets In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets (FAS 142), effective for fiscal years beginning after December 15, 2001. The Company adopted these standards with its fiscal year beginning November 1, 2001 in accordance with the provisions of the standards. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements except in the year of adoption where companies are required to complete a two step process. The first step is a screen for potential impairment and is required to be completed within six months of adopting FAS 142. The second step measures the amount of impairment, if any. The Company plans on completing step 1 of the process during the 2nd quarter of 2002 and has not determined the financial statement impact, if any. 8 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) Other intangible assets will continue to be amortized over their useful lives. Application of the nonamortization provisions of the Statement will result in an increase in net income of $50,000 or approximately $0.01 per share per year. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company adopted FAS 144 as of November 1, 2001 and the adoption did not have a significant impact on the Company's financial position and results of operations. 9. RESTRUCTURING CHARGE, ASSET IMPAIRMENT CHARGE AND OTHER CHARGES In the third quarter of 2001, the Company recorded charges related to a restructuring and profitability enhancement plan. This plan was implemented to effectuate certain key initiatives including plant and office consolidations, headcount reductions, asset impairment issues and a general response to a deteriorating economic environment. The third quarter of 2001 pre-tax charge resulting from these actions was $6.1 million ($4.3 million after-tax or $0.44 per share on a basic and diluted basis.) The charge related to approximately $3.1 million from asset impairments including goodwill, facility and equipment write-downs. The Company recorded charges for restructuring and other special charges of $3.0 million comprised primarily of severance payments, charge-offs related to duplicative facility leases, increases in allowance for doubtful accounts and inventory obsolescence and valuation reserves, costs related to the impairment of the Company's information systems hardware and software, charges related to termination and related fees of a pension plan of an acquired Company, and other charges and expenses related to plant consolidations and restructuring. As a result of the Company's restructuring plan, approximately 35 employees were terminated from the Company primarily as a result of plant and office consolidations at the Company's Carolina Cut Sheets operation, Chapman Printing Lexington location and the Garrison Brewer division of Stationers. In addition, the Company anticipates the elimination of additional positions resulting from retirements and normal attrition within the next twelve to eighteen months. As of October 31, 2001 35 employees were notified of their termination and one retired position was eliminated. The cash and non-cash elements of the Company's restructuring charge, asset impairment charge, and other unusual charges approximated $1.5 million in cash and $4.6 million non-cash. The printing segment charges approximated $3.5 million and the office products and furniture segment charges approximated $2.6 million. Details of the approximated charges and the status of the related obligations are as follows as of January 31, 2002: 9 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
Utilized Ended balance Original accrual Cash Noncash January 31, 2002 ---------------- ------------ -------------- ---------------- Write-down of goodwill, $ 3,060,000 $ 168,000 $ 2,892,000 $ -- facilities and equipment Employee severance and 55,000 25,000 -- 30,000 termination benefits Inventory obsolescence and 978,000 -- 978,000 -- valuation reserves Restructuring and other 1,998,000 589,000 768,000 641,000 charges -------------------------------------------------------------------- Total $ 6,091,000 $ 782,000 $ 4,638,000 $ 671,000 ====================================================================
10. INDUSTRY SEGMENT INFORMATION The Company operates principally in two industry segments organized on the basis of product lines: the production, printing and sale, principally to commercial customers, of printed materials (including brochures, pamphlets, reports, tags, continuous and other forms), and the sale of office products and office furniture including interior design services. The table below presents information about reported segments for the three months ended January 31:
OFFICE PRODUCTS 2002 QUARTER 1 PRINTING & FURNITURE TOTAL - -------------- --------------------------------------------------------------- Revenues $ 25,086,308 $ 7,730,357 $ 32,816,665 Elimination of intersegment revenue (2,228,699) (797,424) (3,026,123) --------------------------------------------------------------- Consolidated revenues $ 22,857,609 $ 6,932,933 $ 29,790,542 =============================================================== Operating income 418,746 100,059 518,805 Depreciation & amortization 1,015,718 32,443 1,048,161 Capital expenditures 1,786,469 15,845 1,802,314 Identifiable assets 52,875,180 8,176,030 61,051,210
10 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
OFFICE PRODUCTS 2001 QUARTER 1 PRINTING & FURNITURE TOTAL - -------------- --------------------------------------------------------------- Revenues $ 26,992,229 $ 8,039,032 $ 35,031,261 Elimination of intersegment revenue (2,303,951) (806,248) (3,110,199) --------------------------------------------------------------- Consolidated revenues $ 24,688,278 $ 7,232,784 $ 31,921,062 =============================================================== Operating income 549,756 140,693 690,449 Depreciation & amortization 1,072,919 63,474 1,136,393 Capital expenditures 348,493 13,623 362,116 Identifiable assets 58,470,013 13,484,601 71,954,614
A reconciliation of total segment revenues and of total segment operating income to income before income taxes, for the three months ended January 31, 2002 and 2001, is as follows:
THREE MONTHS 2002 2001 --------------------------------------- Revenues: Total segment revenues $ 32,816,665 $ 35,031,261 Elimination of intersegment revenue (3,026,123) (3,110,199) --------------------------------------- Consolidated revenue $ 29,790,542 $ 31,921,062 ======================================= Operating Income: Total segment operating income $ 518,805 $ 690,449 Interest income 6,513 25,036 Interest expense (112,454) (267,815) Other income 30,120 27,407 --------------------------------------- Consolidated income before income taxes $ 442,984 $ 475,077 ======================================= Identifiable assets: Total segment identifiable assets $ 61,051,210 $ 71,954,614 Elimination of intersegment assets -- -- --------------------------------------- Total consolidated assets $ 61,051,210 $ 71,954,614 =======================================
11 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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.
THREE MONTHS ENDED JANUARY 31, 2002 2001 --------------------------------------------------------------- ($ in thousands) Revenues: Printing $ 22,858 76.7% $ 24,688 77.3% Office products and office furniture 6,933 23.3 7,233 22.7 --------------------------------------------------------------- Total revenues 29,791 100.0 31,921 100.0 Cost of sales: Printing 16,528 55.5 18,166 56.9 Office products and office furniture 4,960 16.6 5,026 15.8 --------------------------------------------------------------- Total cost of sales 21,488 72.1 23,192 72.7 --------------------------------------------------------------- Gross profit 8,303 27.9 8,729 27.3 Selling, general and administrative expenses 7,784 26.1 8,039 25.2 --------------------------------------------------------------- Income from operations 519 1.8 690 2.1 Interest income 6 0.0 25 0.1 Interest (expense) (112) (0.4) (267) (0.8) Other income 30 0.1 27 0.1 --------------------------------------------------------------- Income before taxes 443 1.5 475 1.5 Income taxes (185) 0.6 (196) 0.6 --------------------------------------------------------------- Net income $ 258 0.9% $ 279 0.9% ===============================================================
THREE MONTHS ENDED JANUARY 31, 2002 COMPARED TO THREE MONTHS ENDED JANUARY 31, 2001 Revenues Total revenues decreased 6.7% in the first quarter of 2002 compared to the same period in 2001 from $31.9 million to $29.8 million. Printing revenue decreased 7.4% in the first quarter of 2002 to $22.9 million from $24.7 million in the first quarter of 2001. Office products and office furniture revenue decreased 4.2% in the first quarter of 2002 to $6.9 million from $7.2 million in the first quarter of 2001. The revenues in the printing and office products and office furniture segments decreased primarily due to an overall sluggish economy in most of the geographic regions served by the Company. Cost of Sales Total cost of sales decreased 7.3% in the first quarter of 2002 to $21.5 million from $23.2 million in the first quarter of 2001. Printing cost of sales decreased 9.0% in the first quarter of 2002 to $16.5 million from $18.2 million in the first quarter of 2001, due primarily from lower sales and stronger margins. Office products and office furniture cost of sales decreased 1.3% or approximately $66,000 in 2002 from 2001. The decrease in office products and office furniture cost of sales is attributable to the lower sales discussed above partially offset by increased competition which compressed gross margins. 12 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Operating Expenses In the first quarter of 2002, selling, general and administrative expenses increased as a percentage of sales to 26.1% from 25.2% in 2001. Total selling, general and administrative expenses decreased $250,000 to $7.8 million in the first quarter of 2002 from $8.0 million in the first quarter of 2001. The reduction in selling, general and administrative expenses is primarily the result of cost saving initiatives resulting in part from the Company's corporate-wide restructuring and profitability enhancement plan which was adopted in the third quarter of 2001. Income from Operations and Other Income and Expenses Income from operations decreased 24.9% in the first quarter of 2002 to $519,000 from $690,000 in the first quarter of 2001. This decrease is primarily the result of decreased sales partially offset by a reduction in selling, general and administrative expenses. Other expense (net), decreased approximately $140,000 due to lower total interest expense resulting from a decrease in total interest bearing debt and interest rates. Income Taxes The Company's effective income tax rate was 41.8% for the first quarter of 2002, compared with 41.2% in the first quarter of 2001. 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 first quarter of 2002 was $258,000 compared to net income of $279,000 in the first quarter of 2001. Basic and diluted earnings per share for the three months ended January 31, 2002 and 2001 were $0.03. 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 three months ended January 31, 2002, was $1.2 million compared to $1.9 million during the same period in 2001. This change in net cash from operations is due primarily to timing changes in assets and liabilities. 13 CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net cash used in investing activities for the three months ended January 31, 2002 was $1.6 million compared to $1.4 million during the same period in 2001. The net cash used in investing activities during the first three months of 2002 primarily relates to equipment purchases including a deposit to purchase a fractional ownership of an aircraft from an entity controlled by its Chief Executive Officer of which $875,000 had been paid as of January 31, 2002. In 2001, the cash used in investing activities primarily related to the acquisitions of certain assets of Cordage. Net cash used in financing activities for the three months ended January 31, 2002 was $1.4 million compared to net cash provided by financing activities of $344,000 during the same period in 2001. This change is primarily due to $1.5 million in borrowings under the Company's revolving credit facility in 2001. Working capital on January 31, 2002 was $24.8 million, a decrease of $1.2 million from October 31, 2001. 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. 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. 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 16, 2002 a jury verdict was rendered against the Company in a civil action brought against the Company in state court in Jackson, Mississippi. The verdict was in connection with National Forms & Systems Group, Inc. v. Timothy V. Ross; Todd Ross and Champion Industries, Inc.; and Timothy V. Ross v. National Forms & Systems Group, Inc. and Mickey McCardle; Circuit Court of the First Judicial District of Hinds County, Mississippi; Case No. 251-00-942-CIV. The plaintiffs in this civil action asserted that the Company and its Dallas Printing Company, Inc. subsidiary had engaged in unfair competition and other wrongful acts in hiring certain of its employees. The jury awarded the plaintiffs $1,745,000 in actual damages and $750,000 in punitive damages. The Company has been advised that it has no insurance coverage for this award. The Company under Mississippi law has a guaranteed right to appeal. The Company intends to appeal this verdict and has been advised by counsel that it has multiple grounds for an appeal and a reasonable basis for believing that an appeal would be successful. On March 1, 2002 the plaintiffs in the civil action filed a motion for attorney's fees and costs in the amount of $889,401. A fee award, if any, granted by the trial judge would be part of an appeal. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) The following reports on Form 8-K were filed during the quarter for which this report is filed: None. 15 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHAMPION INDUSTRIES, INC. Date: March 13, 2002 /s/ Marshall T. Reynolds ------------------------------------------------ Marshall T. Reynolds Chief Executive Officer Date: March 13, 2002 /s/ Kirby J. Taylor ------------------------------------------------ Kirby J. Taylor President and Chief Operating Officer Date: March 13, 2002 /s/ Todd R. Fry ------------------------------------------------ Todd R. Fry Vice President and Chief Financial Officer 16 -----END PRIVACY-ENHANCED MESSAGE-----