-----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, GjiUqfWLksK+x5K98FMg8of3hfzwqjhrQHdOmk/8ETqouxMxVUu5R1BPFPasXtRE pU2PtgLGpYuD/p9SEArU/w== 0001035802-98-000011.txt : 19980310 0001035802-98-000011.hdr.sgml : 19980310 ACCESSION NUMBER: 0001035802-98-000011 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19980309 SROS: NASD 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: 1231 FILING VALUES: FORM TYPE: S-2 SEC ACT: SEC FILE NUMBER: 333-47585 FILM NUMBER: 98560201 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 S-2 1 FORM S-2 - REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on March 9, 1998 Registration No. 333-_________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ______________________________ FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ______________________________ CHAMPION INDUSTRIES, INC. (Exact Name of Registrant as Specified in Its Charter) WEST VIRGINIA 55-0717455 (State or Other Jurisdiction (IRS Employer Identification Number) of Incorporation or Organization) 2450 FIRST AVENUE, P.O. BOX 2968 HUNTINGTON, WEST VIRGINIA 25728 (304) 528-2791 (Address, including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ______________________________ JOSEPH C. WORTH, III, CHIEF FINANCIAL OFFICER CHAMPION INDUSTRIES, INC. 2450 FIRST AVENUE, P. O. BOX 2968 HUNTINGTON, WEST VIRGINIA 25728 (304) 528-2791 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) ______________________________ Copies to: THOMAS J. MURRAY, ESQUIRE A. LYNNE PUCKETT, ESQUIRE HUDDLESTON, BOLEN, BEATTY, SHAPIRO AND OLANDER PORTER & COPEN 36 South Charles Street - 20th Floor 611 Third Avenue Baltimore, Maryland 21201-3147 Huntington, West Virginia 25701 (410) 385-0202 (304) 691-8398 ______________________________ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If the registrant elects to deliver its latest annual report to security holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1) of this form, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ]
CALCULATION OF REGISTRATION FEE ======================================================================================================================= Title of Each Class of | Amount to be | Proposed Maximum | Proposed Maximum | Amount of Securities to be Registered | Registered(1) | Offering Price Per Share | Aggregate Offering Price(2) | Registration Fee - ----------------------------------------------------------------------------------------------------------------------- Common Stock, par value | 1,150,000 | $15.125 | $17,393,750 | $5,131.16 $1.00 per share | shares | | | - -----------------------------------------------------------------------------------------------------------------------
(1) Includes 150,000 shares of Common Stock that the Underwriter has the option to purchase solely to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457 under the Securities Act of 1933, as amended. ______________________________ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED MARCH 9, 1998 1,000,000 SHARES [LOGO] CHAMPION INDUSTRIES, INC. COMMON STOCK ______________________________ All of the 1,000,000 shares of Common Stock, per value $1.00 per share (the "Common Stock"), of Champion Industries, Inc. (the "Company") offered hereby are being sold by the Company. The Common Stock is currently listed on The Nasdaq Stock Market's National Market System (the "Nasdaq National Market") under the symbol "CHMP." On March 6, 1998, the last reported closing price of the Common Stock on the Nasdaq National Market was $15.50. See "Price Range of Common Stock." ______________________________ SEE "INVESTMENT CONSIDERATIONS" FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK. ______________________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. =============================================================================== | Price | Underwriting | Proceeds | to | Discounts and | to | Public | Commissions(1) | Company(2) - ------------------------------------------------------------------------------- Per Share................. |$ |$ |$ - ------------------------------------------------------------------------------- Total(3).................. |$ |$ |$ =============================================================================== (1) The Company has agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company, which are estimated at $__________. (3) The Company has granted the Underwriter a 30-day option to purchase up to 150,000 additional shares of Common Stock on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be ________, ________ and ______ respectively. See "Underwriting." ______________________________ The shares of Common Stock are offered by the Underwriter, subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery and to acceptance by the Underwriter and to certain further conditions. It is expected that delivery of the certificates representing such shares will be made against payment therefor at the offices of Ferris, Baker Watts, Incorporated, 1720 Eye Street, N.W., Washington, D.C. or through the facilities of the Depository Trust Company, on or about March ___, 1998. ______________________________ FERRIS, BAKER WATTS Incorporated ______________________________ The date of this Prospectus is March __, 1998 Photo: Printing Press Photo: Office Products - Supplies, pens, pads Map: Eastern United States ______________________________ IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE MARKET PRICE OF COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR DESCRIPTION OF THE ACTIVITIES, SEE "UNDERWRITING." ______________________________ IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes that the Underwriter's over-allotment option will not be exercised. The offering of the shares of Common Stock pursuant to this Prospectus is referred to herein as the "Offering." Investors should carefully consider the information set forth under the heading "Investment Considerations." This Prospectus contains forward-looking statements that involve risks and uncertainties. See "Special Note Regarding Forward-Looking Statements." ______________________________ THE COMPANY 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. Since its initial public offering (the "IPO") in 1993, the Company has been a major consolidator within the fragmented printing and office products industries, having acquired 16 businesses. The Company provides state-of-the-art printing services ranging from the simplest to the most complex jobs, including business cards, books, brochures, posters, 4- to 6-color process printing and multi-part, continuous and snap-out business forms. The Company also offers a full line of office products and office furniture primarily in the budget and middle price ranges. As a result of its consolidating acquisitions and internal growth, the Company's revenues have increased from $33.6 million in the fiscal year ended October 31, 1993 to $108.4 million in fiscal 1997. For fiscal 1997, printing accounted for 81.2% of total revenues and office products and furniture sales accounted for 18.8% of total revenues. The Company's marketing strategy focuses on manufacturers, institutions, financial services companies and professional firms. The Company employs approximately 130 salespeople who sell a full range of printing services, office products and office furniture. The Company believes that its reputation for quality, service, convenience and selection allows it to enjoy significant customer loyalty and customer referrals. The Company's strategic objective is to grow its revenues and profits by continuing its emphasis on cross-sales of products and services by its highly competent and motivated sales force with additional industry consolidating acquisitions designed to enhance the Company's geographic coverage, market penetration, cross-selling opportunities and economies of scale. Key elements of the Company's strategy are as follows: o Strategic acquisitions: The Company intends to continue making strategic acquisitions to acquire new products and capabilities, acquire new markets for existing Company products and services and increase market share and revenues. The Company believes favorable acquisition opportunities are available as the fragmented printing and office products industries undergo further consolidation. Champion believes that its competitive and financial strengths and considerable experience in acquiring and integrating businesses will continue to provide significant growth opportunities. o Cross-selling of products and services: Management believes that printing and office products sales activities are complementary, since frequent customer sales calls required for one of its products or services provide opportunities to sell other products and services. o Expanded product and service lines: Certain of the Company's acquisitions have permitted it to provide new products to its existing customer base while providing new markets for its existing products and services, enhancing economies of scale, vertical integration and margins. As a result of the Company's expanded products and services, enhanced geographic market presence and reputation for quality, the Company has attracted customers in new markets and captured incremental sales from existing customers. o Low cost operating structure: The Company negotiates Company-wide paper purchasing agreements directly with paper manufacturers and is a member of a major office products buying group, which management believes provide the Company with a competitive advantage. Additionally, the Company's ability to integrate acquired businesses, and to perform work at the most advantageous location, contribute to cost reduction. 3 o Highly motivated sales force: Salespeople are compensated based on their individual profitability. The Company's acquisitions have provided its sales force with enhanced sales and compensation opportunities by expanding the number of available products and services, thereby contributing to the Company's ability to attract and maintain a highly motivated sales force. The Company was incorporated in West Virginia in 1992. The Company's principal executive offices are located at 2450 First Avenue, Huntington, West Virginia 25703. The Company's telephone number is (304) 528-2791. RECENT ACQUISITION On February 2, 1998, the Company acquired all outstanding capital stock of Rose City Press ("Rose City"), a full-line office products and office furniture supplier in Charleston, West Virginia in exchange for 75,722 shares of Company Common Stock. Rose City, with approximately $4 million in sales in its most recent calendar year, is a major competitive presence in the Charleston, West Virginia market and will operate as a division of Stationers, Inc. ("Stationers"). The acquisition of Rose City will not materially impact the Company's financial position, results of operations or cash flows as presented herein. THE OFFERING
Common Stock Offered by the Company................... 1,000,000 shares Common Stock to be Outstanding after the Offering..... 9,464,167 shares(1) Use of Proceeds....................................... To repay certain indebtedness and for general corporate purposes, including working capital and future acquisitions. See "Use of Proceeds." Nasdaq National Market Symbol......................... "CHMP"
- ----------------- (1) Excludes 218,017 shares of Common Stock issuable upon the exercise of outstanding stock options as of March 6, 1998, all of which were then exercisable. 4 SUMMARY FINANCIAL INFORMATION The following summary selected financial information should be read in conjunction with, and is qualified in its entirety by, the more detailed financial statements and notes thereto included elsewhere in this Prospectus. The summary income statement data of the Company for the years ended October 31, 1993, 1994, 1995, 1996, and 1997 and the summary balance sheet data as of October 31, 1997 have been derived from the Consolidated Financial Statements of the Company. This data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The historical financial data as of and for the three months ended January 31, 1997 and 1998 are derived from the Company's unaudited financial statements. It is management's opinion that the historical financial data as of and for the three months ended January 31, 1997 and 1998, contain all adjustments, consisting solely of normal recurring adjustments, which management considers necessary to fairly present the financial data set forth herein in conformity with generally accepted accounting principles. The results of operations for the three months ended January 31, 1997 and 1998 are not necessarily indicative of the results to be expected for future periods. In 1997, the Company acquired all the outstanding common stock of Blue Ridge Printing Co., Inc. ("Blue Ridge"). This combination has been accounted for as a pooling of interests. Accordingly, all financial information for the three months ended January 31, 1997 has been restated as though Blue Ridge and the Company had always been combined.
Three Months Ended Year Ended October 31, January 31, ----------------------------------------------------- --------------------- 1993 1994 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- ---- ---- (In thousands, except share and per share data) INCOME STATEMENT DATA: Revenues.............................. $ 33,590 $ 43,230 $ 49,903 $ 66,357 $ 108,385 $ 21,115 $ 29,634 Cost of sales......................... 20,314 26,360 31,921 44,092 73,139 15,111 21,267 --------- --------- --------- --------- --------- --------- --------- Selling, general and administrative expenses............................ 10,155 12,486 12,788 16,197 28,079 4,694 6,663 --------- --------- --------- --------- --------- --------- --------- Income from operations................ 3,121 4,384 5,194 6,068 7,167 1,310 1,704 Other income (expense)................ 58 147 (128) (444) (829) 224 (317) --------- --------- --------- --------- --------- --------- --------- Income before income taxes............ 3,179 4,531 5,066 5,624 6,338 1,534 1,387 Income taxes.......................... (1,278) (1,859) (2,060) (2,252) (2,571) (665) (590) --------- --------- --------- --------- --------- --------- --------- Net income............................ $ 1,901 $ 2,672 $ 3,006 $ 3,372 $ 3,767 $ 869 $ 797 ========= ========= ========= ========= ========= ========= ========= Earnings per share(1): Basic............................... $ 0.26 $ 0.33 $ 0.37 $ 0.41 $ 0.45 $ 0.10 $ 0.10 Diluted............................. $ 0.26 $ 0.33 $ 0.37 $ 0.40 $ 0.45 $ 0.10 $ 0.09 Weighted average common shares outstanding(1): Basic............................... 7,299,035 8,084,088 8,147,389 8,323,518 8,383,391 8,382,489 8,385,656 Diluted............................. 7,299,035 8,098,799 8,176,716 8,356,032 8,441,083 8,438,879 8,435,507
At January 31, 1998 ---------------------------- Actual As Adjusted(2) ------ -------------- BALANCE SHEET DATA: Working capital............................ $ 18,624 Total assets............................... 58,881 Short-term debt............................ 4,244 Long-term debt, net of current portion..... 14,300 Shareholders' equity....................... 27,277 (1) For each of the five years in the period ended October 31, 1997, and for the three months ended January 31, 1997, earnings per share and weighted average common shares outstanding amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share." (2) Adjusted to give effect to the Offering at an assumed price to the public of $_____ per share and after deducting estimated underwriting discounts and offering expenses. 5 INVESTMENT CONSIDERATIONS The following factors, in addition to other information in this Prospectus, should be carefully considered in evaluating the Company and its business before purchasing the shares of Common Stock offered hereby: Growth Through Acquisitions To expand its markets, diversify its business mix and take advantage of the fragmented printing and office products industries, the Company intends to grow through acquisitions. There can be no assurance that future acquisitions will be consummated on acceptable terms or that any newly acquired companies will be successfully integrated into the Company's operations. The Company may use Common Stock (which could result in dilution to the purchasers of the Common Stock offered hereby) or may incur additional indebtedness or a combination thereof for all or a portion of the consideration to be paid in future acquisitions. The Company continuously evaluates opportunities to make strategic acquisitions. Competition The printing, 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 the strength of its continuing customer relationships. See "Business - Competition." Technology Production technology in the printing industry has evolved and continues to evolve. Although the Company has invested in excess of $10.5 million in equipment since the beginning of fiscal 1993, it may be required to invest significant capital in additional production technology in order to remain competitive. The Company believes that its capital investments in state-of- the-art technology have allowed it to realize increased efficiencies. 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 50.1% of the Common Stock after giving effect to the Offering made hereby, Mr. Reynolds will continue to control the Company. 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. 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 condition of the Company. Geographic Concentration and Economic Conditions The Company's operations and the majority of its customers are located in West Virginia, Ohio, Pennsylvania, Kentucky, Indiana, Tennessee, Maryland, Louisiana, Mississippi, North Carolina and South Carolina. 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. Shares Eligible for Future Sale As of February 24, 1998, Marshall T. Reynolds and his affiliated entities, including The Harrah and Reynolds Corporation ("Harrah and Reynolds"), held 4,741,127 shares (56.0%) of the Common Stock of the Company. Assuming no change in these holdings between February 24, 1998 and the closing of this Offering, Mr. Reynolds will hold 50.1% 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. The Company and its officers and directors, including Mr. Reynolds, have agreed with the Underwriters not to sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of the Underwriter. 6 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,000,000 shares of Common Stock by the Company in this Offering (at an assumed offering price of $15.50 per share) are estimated to be approximately $__________ ($___________ if the Underwriter's over-allotment option is exercised in full), after deducting underwriting discounts and commissions and offering expenses payable by the Company. The Company will apply no more than 75% of the proceeds to reduction of indebtedness. The Company intends to use the balance of the net proceeds of the Offering for working capital and other general corporate purposes to fund the Company's continued growth. Pending the use of proceeds, the Company may invest in short-term money market, government and federal agency obligations, bank certificates of deposit and savings deposits. PRICE RANGE OF COMMON STOCK The Common Stock is currently listed on the Nasdaq National Market under the symbol "CHMP." The following table sets forth the high and low sales prices of the Common Stock for the periods indicated as reported by the Nasdaq National Market, and reflects two 25% stock dividends, accounted for as 5 for 4 stock splits, paid on January 22, 1996 and January 27, 1997: High Low ---- --- Fiscal 1996: First Quarter........................................... $15.52 $13.12 Second Quarter.......................................... 16.60 12.80 Third Quarter........................................... 15.40 13.60 Fourth Quarter.......................................... 18.00 13.60 Fiscal 1997: First Quarter........................................... 19.40 17.00 Second Quarter.......................................... 19.75 17.00 Third Quarter........................................... 19.50 16.13 Fourth Quarter.......................................... 19.25 18.00 Fiscal 1998: First Quarter........................................... 19.50 16.00 Second Quarter (through March 6, 1998).................. 17.00 14.75 The last reported closing price of the Common Stock as reported by the Nasdaq National Market on March 6, 1998, was $15.50. As of March 2, 1998, there were 547 holders of record of the Common Stock. 7 DIVIDEND POLICY The following table sets forth the quarterly dividends per share declared on Company Common Stock, and reflects three 25% stock dividends, accounted for as 5 for 4 stock splits, paid on January 23, 1995, January 22, 1996 and January 27, 1997. Fiscal 1995 Fiscal 1996 Fiscal 1997 Fiscal 1998 ----------- ----------- ----------- ----------- First Quarter $0.026 $0.032 $0.040 $0.050 Second Quarter 0.032 0.040 0.050 Third Quarter 0.032 0.040 0.050 Fourth Quarter 0.032 0.040 0.050 The Company's Board of Directors intends to continue the payment of regular quarterly cash dividends on its Common Stock, subject to the Company's need for those funds. The Company's ability to pay dividends is not currently restricted by any of its financing agreements. CAPITALIZATION The following table sets forth the capitalization of the Company at January 31, 1998, and as adjusted to give effect to the sale by the Company of 1,000,000 shares of Common Stock in the Offering (at an assumed price to the public of $15.50 per share), and the application of the estimated net proceeds therefrom, as if such transactions had occurred as of January 31, 1998. This table should be read in conjunction with the Company's financial statements and the notes thereto included elsewhere in this Prospectus.
As of January 31, 1998 ------------------------ Actual As Adjusted ------ ----------- (In thousands) Long-term debt and capital lease obligations, net of current portion.... $14,300 Shareholders' equity: Common Stock, par value $1.00 per share, 20,000,000 shares authorized, 8,388,445 shares issued and outstanding, actual; 9,388,445 shares issued and outstanding, as adjusted(1)............. 8,388 Additional paid-in capital............................................ 7,496 Retained earnings..................................................... 11,393 ======= Total shareholders' equity.......................................... 27,277 ======= Total capitalization.............................................. $41,577 =======
- ----------------- (1) Excludes 218,017 shares of Common Stock issuable upon the exercise of certain stock options outstanding on January 31, 1998, all of which were then exercisable. 8 SELECTED CONSOLIDATED FINANCIAL DATA The Consolidated Income Statement and Balance Sheet Data of the Company set forth below at and for the years ended October 31, 1993 through 1997 have been derived from the audited Consolidated Financial Statements of the Company. The information set forth below should be read in conjunction with the Consolidated Financial Statements of the Company (and notes thereto) appearing elsewhere herein and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations." The historical financial data as of and for the three months ended January 31, 1997 and 1998 are derived from the Company's unaudited financial statements. It is management's opinion that the historical financial data as of and for the three months ended January 31, 1997 and 1998 contain all adjustments, consisting solely of normal recurring adjustments, which management considers necessary to fairly present the financial data set forth herein in conformity with generally accepted accounting principles. The results of operations for the three months ended January 31, 1997 and 1998 are not necessarily indicative of the results to be expected for future periods. In 1997, the Company acquired all the outstanding common stock of Blue Ridge. This combination has been accounted for as a pooling of interests. Accordingly, all financial information for the three months ended January 31, 1997 has been restated as though Blue Ridge and the Company had always been combined.
Three Months Ended Year Ended October 31, January 31, ----------------------------------------------------- --------------------- 1993 1994 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- ---- ---- (In thousands, except share and per share data) INCOME STATEMENT DATA: Revenues: Printing............................ $ 22,899 $ 30,001 $ 35,371 $ 49,242 $ 87,979 $ 16,137 $ 23,956 Office products and office furniture......................... 10,691 13,229 14,532 17,115 20,406 4,978 5,678 --------- --------- --------- --------- --------- --------- --------- Total revenues........................ 33,590 43,230 49,903 66,357 108,385 21,115 29,634 Cost of sales: Printing............................ 13,478 17,755 22,251 33,015 59,850 11,779 17,508 Office products and office furniture......................... 6,836 8,605 9,670 11,077 13,289 3,332 3,759 --------- --------- --------- --------- --------- --------- --------- Total cost of sales................... 20,314 26,360 31,921 44,092 73,139 15,111 21,267 Selling, general and administrative expenses............................ 10,155 12,486 12,788 16,197 28,079 4,694 6,663 --------- --------- --------- --------- --------- --------- --------- Income from operations................ 3,121 4,384 5,194 6,068 7,167 1,310 1,704 Interest income..................... 129 67 11 25 20 7 - Interest expense.................... (140) (132) (252) (693) (1,586) (238) (427) Other income........................ 69 212 113 224 737 455 110 --------- --------- --------- --------- --------- --------- --------- Income before income taxes............ 3,179 4,531 5,066 5,624 6,338 1,534 1,387 Income taxes........................ (1,278) (1,859) (2,060) (2,252) (2,571) (665) (590) --------- --------- --------- --------- --------- --------- --------- Net income............................ $ 1,901 $ 2,672 $ 3,006 $ 3,372 $ 3,767 $ 869 $ 797 ========= ========= ========= ========= ========= ========= ========= Earnings per share(1): Basic............................... $ 0.26 $ 0.33 $ 0.37 $ 0.41 $ 0.45 $ 0.10 $ 0.10 Diluted............................. $ 0.26 $ 0.33 $ 0.37 $ 0.40 $ 0.45 $ 0.10 $ 0.09 Dividends per share................... $ 0.041 $ 0.098 $ 0.122 $ 0.152 $ 0.190 $ 0.040 $ 0.050 Weighted average common shares outstanding(1): Basic............................... 7,299,035 8,084,088 8,147,389 8,323,518 8,383,391 8,382,489 8,385,656 Diluted............................. 7,299,035 8,098,799 8,176,716 8,356,032 8,441,083 8,438,879 8,435,507
At October 31, At January 31, ----------------------------------------------------- --------------------- 1993 1994 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- ---- ---- BALANCE SHEET DATA: Working capital....................... $ 9,603 $ 10,040 $ 11,148 $ 13,579 $ 18,935 $ 17,490 $ 18,624 Total assets.......................... 21,050 25,690 28,643 44,063 60,346 57,255 58,881 Short-term debt....................... 484 538 1,077 2,437 4,244 3,369 4,244 Long-term debt, net of current portion............................. 1,131 1,124 2,405 7,561 15,156 15,614 14,300 Shareholders' equity.................. 15,027 17,739 19,794 24,641 26,850 25,178 27,277
- ----------------- (1) For each of the five years in the period ended October 31, 1997, and for the three months ended January 31, 1997, earnings per share and weighted average common shares outstanding amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share." 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company is a commercial printer, business form manufacturer and office products and office furniture supplier in regional markets east of the Mississippi River. The Company has grown through strategic acquisitions and internal growth. Through such growth, the Company has realized regional economies of scale and operational efficiencies. The Company's largest acquisition since the IPO was the purchase of Interform Corporation ("Interform") on December 31, 1996. The addition of Interform's sales in the business forms segment has increased the printing component of the Company's revenue mix. Through sales to independent distributors, and through its own distributor, Consolidated Graphic Communications, Interform provides the Company's manufacturing divisions access to the large northeastern markets of Pennsylvania, New Jersey and New York. Interform contributed significantly to revenues in the quarter ended January 31, 1998. The Company's 1997 acquisition of Blue Ridge, located in Asheville, North Carolina and Knoxville, Tennessee added a premier commercial color printer specializing in sales to and through advertising agencies. A portion of its sales utilize the proprietary QuadRaster(TM) technology which creates color printing of significantly higher resolution and impact than traditional color imaging methods. This technology provides the opportunity for increased sales of high-end color jobs throughout the Company. The Company's most recent acquisition was the addition of Rose City, located in Charleston, West Virginia. Rose City is a major competitor in the office products arena in the important Charleston market and has been in business since 1923. Rose City has now come full circle, having sold its printing assets to Champion's predecessor, Chapman Printing Company, in 1974. The combination of Rose City and Chapman Printing's Charleston division gives Champion a powerful presence in West Virginia's capital city. The acquisition of Rose City will not materially impact the Company's financial position, results of operations or cash flows as presented herein. The Company's net revenues consist primarily of sales of commercial printing, business forms, tags, other printed products, office supplies, office furniture, data products and office design services. Revenues are recognized by the Company 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 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 both printing and office supplies, the 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 and equipment maintenance. 10 Results of Operations The following table sets forth for the periods indicated information derived from the Company's Consolidated Income Statements, including certain information presented as a percentage of total revenues. In 1997, the Company acquired all of the outstanding common stock of Blue Ridge. This combination has been accounted for as a pooling of interests. Accordingly, financial information for the three months ended January 31, 1997 has been restated as though Blue Ridge and the Company had always been combined.
Year Ended October 31, Three Months Ended January 31, ------------------------------------------------- --------------------------------- 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- Revenues: (unaudited) (Dollars in thousands) Printing.................... $ 35,371 70.9% $ 49,242 74.2% $ 87,979 81.2% $ 16,137 76.4% $ 23,956 80.8% Office products and office furniture................. 14,532 29.1 17,115 25.8 20,406 18.8 4,978 23.6 5,678 19.2 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total revenues......... 49,903 100.0 66,357 100.0 108,385 100.0 21,115 100.0 29,634 100.0 Cost of sales: Printing.................... 22,251 44.6 33,015 49.8 59,850 55.2 11,779 55.8 17,508 59.0 Office products and office furniture................. 9,670 19.4 11,077 16.7 13,289 12.3 3,332 15.8 3,759 12.7 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total cost of sales.... 31,921 64.0 44,092 66.5 73,139 67.5 15,111 71.6 21,267 71.7 Selling, general and administrative expenses..... 12,788 25.6 16,197 24.4 28,079 25.9 4,694 22.2 6,663 22.5 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Income from operations........ 5,194 10.4 6,068 9.1 7,167 6.6 1,310 6.2 1,704 5.8 Other income (expense): Interest income........... 11 0.0 25 0.0 20 0.0 7 0.0 0.0 0.0 Interest expense.......... (252) (0.5) (693) (1.0) (1,586) (1.4) (238) (1.1) (427) (1.4) Other income.............. 113 0.2 224 0.4 737 0.7 455 2.2 110 0.3 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Income before income taxes.... 5,066 10.1 5,624 8.5 6,338 5.9 1,534 7.3 1,387 4.7 Income taxes................ (2,060) (4.1) (2,252) (3.4) (2,571) (2.4) (665) (3.2) (590) (2.0) -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Net income.................... $ 3,006 6.0% $ 3,372 5.1% $ 3,767 3.5% $ 869 4.1% $ 797 2.7% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
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 financial statements and notes thereto included elsewhere herein. Three Months Ended January 31, 1998 Compared to Three Months Ended January 31, 1997 Revenues Total revenues increased 40.3% in the first quarter of 1998 to $29.6 million from $21.1 million in the first quarter of 1997. Printing revenue increased 48.5% in the first quarter of 1998 to $24.0 million from $16.1 million in the first quarter of 1997. Office products and office furniture revenue increased 14.1% in the first quarter of 1998 to $5.7 million from $5.0 million in the first quarter of 1997. The increase in total revenues was primarily achieved through the acquisition of Interform, which contributed $6.4 million to this change. Revenues at existing printing divisions increased by approximately $1.4 million in the first quarter of 1998 due to increased sales efforts coupled with increased printing capabilities at various locations. Since the printing business is very capital and labor intensive, a key success factor is increasing revenues to a level exceeding fixed costs. The Company has been increasing volume through acquisitions and increased marketing activity to new and existing customers. The Company expects to realize the benefit of improved margins as volume increases. The existing office products and office furniture divisions also experienced a sales increase during the first quarter of 1998 of approximately $700,000 due to increased sales efforts. 11 Cost of Sales Total cost of sales increased 40.7% in the first quarter of 1998 to $21.3 million from $15.1 million in the first quarter of 1997. Printing cost of sales increased 48.6% in the first quarter of 1998 to $17.5 million from $11.8 million in the first quarter of 1997, due primarily to sales volume and the addition of newly acquired divisions with lower sales margins. As the Company has increased volume through the addition of acquired businesses, cost of sales as a percentage of revenues has increased because the additions have been lower margin businesses than the Company's original core operations. The first quarter gross margins are historically lower than complete year amounts, because the second and fourth quarters are typically the most profitable and absorb more overhead. The cost of sales for the first quarter of 1998 was lower than the year ago quarter due to the effect of Interform's lower margin sales. Office products and office furniture cost of sales increased 12.8% in the first quarter of 1998 to $3.8 million from $3.3 million in the first quarter of 1997, primarily due to growth in sales. The increase in cost of sales parallels the change in sales. The cost of office products sales as a percentage of office products sales has remained relatively stable. Operating Expenses and Income Selling, general and administrative expenses increased as a percentage of sales in first quarter of 1998 to 22.5% from 22.2% in the first quarter of 1997 due to increased overhead costs associated with acquired businesses. Selling, general and administrative expenses continue to fall on an annual basis as they are spread over an increasingly large sales base. For the reasons stated above, income from operations increased 30.1% in the first quarter of 1998 to $1.7 million from $1.3 million in the first quarter of 1997. Operating income as a percentage of sales has declined steadily over the last three years due to the addition of lower margin acquired businesses. The Company expects to realize the benefits of the increased volume from acquired businesses in the future as a result of cross selling, capital equipment improvements, broader product lines and corporate purchasing advantages. Other Income/Expense Interest expense increased $189,000 to $427,000 in the first quarter of 1998 from $238,000 in the first quarter of 1997 as a result of the debt assumed in the Interform acquisition and the financing of the purchase price. Other income decreased from $455,000 in the first quarter of 1997 to $110,000 in the first quarter of 1998 due primarily to the recognition of a nonrecurring deferred gain of $330,000 in the first quarter of 1997. Income Taxes The provision for income taxes as a percentage of income before income taxes was approximately 43% in the first quarters of 1998 and 1997, and is consistent with the rates for the years ended October 31, 1997 and 1996. The effective income tax rate was approximately the combined federal and state, net of federal benefit, statutory income tax rate. Net Income After adjusting for the nonrecurring gain, net core earnings increased 17.2% to $797,000 in the first quarter of 1998, compared to $681,000 in the first quarter of 1997. Net income for the first quarter of 1998 decreased 8.2% to $797,000 from $869,000 in the first quarter of 1997. Diluted earnings per share in the first quarter of 1998 were $0.09 compared to $0.10 in the first quarter of 1997. Net income as a percentage of sales has declined steadily over the last three years due to the addition of acquired businesses with lower margins as discussed above. The Company expects to realize the benefits of the increased volume from acquired businesses in the future as a result of cross selling, capital equipment improvements, broader product lines and corporate purchasing advantages. Year Ended October 31, 1997 Compared to Year Ended October 31, 1996 Revenues Total revenues increased 63.3% in fiscal 1997 to $108.4 million from $66.4 million in fiscal 1996. Printing revenue increased 78.7% in fiscal 1997 to $88.0 million from $49.2 million in 1996. Office products and office furniture revenue increased 19.2% in fiscal 1997 to $20.4 million from $17.1 million in fiscal 1996. This was achieved through new acquisitions which accounted for increased printing sales of $35.5 million and increased office products and office furniture sales of $3.6 million. The office products and office furniture change in sales was also impacted by a one-time furniture sale totaling approximately $500,000 in 1996. 12 Cost of Sales Total cost of sales increased 65.9% in fiscal 1997 to $73.1 million from $44.1 million in fiscal 1996. Printing cost of sales increased 81.3% in fiscal 1997 to $59.9 million from $33.0 million in fiscal 1996, due primarily to sales volume and the impact of newly acquired divisions with lower sales margins. Office products and office furniture cost of sales increased 20.0% in fiscal 1997 to $13.3 million from $11.1 million in fiscal 1996, primarily due to increased sales volume. Operating Expenses and Income Selling, general and administrative expenses increased as a percentage of sales in fiscal 1997 to 25.9% from 24.4% in fiscal 1996, due to increased costs associated with acquisitions. For the reasons stated above, income from operations increased 18.1% in fiscal 1997 to $7.2 million from $6.1 million in fiscal 1996. Other Income/Expense Interest expense increased $893,000 from $693,000 in fiscal 1996 to $1.6 million in fiscal 1997 as a result of the debt assumed in the Interform acquisition. Other income increased from $224,000 in fiscal 1996 to $737,000 in fiscal 1997, due to a $330,000 one-time recognition of deferred gain from the previous sale of Stationer's bookstore operations. Net Income Income taxes in fiscal 1997 increased slightly to 40.6% from 40.0% in fiscal 1996, due to the Company's expansion into states with higher tax rates. For the reasons stated above, net income for fiscal 1997 increased 11.7% to $3.8 million, or $0.45 per share (diluted), from $3.4 million, or $0.40 per share (diluted), in fiscal 1996. Year Ended October 31, 1996 Compared to Year Ended October 31, 1995 Revenues Total revenues increased 33.0% in fiscal 1996 to $66.4 million from $49.9 million in fiscal 1995. Printing revenue increased 39.2% in fiscal 1996 to $49.2 million from $35.4 million in 1995. Office products and office furniture revenue increased 17.8% in fiscal 1996 to $17.1 million from $14.5 million in fiscal 1995. This was achieved through new acquisitions which accounted for increased printing sales of $5.5 million and increased office products and office furniture sales of $1.6 million. The office products and office furniture divisions also experienced approximately $1.0 million of sales growth due to increased sales efforts and a one-time furniture sale totaling approximately $500,000. Cost of Sales Total cost of sales increased 38.1% in fiscal 1996 to $44.1 million from $31.9 million in fiscal 1995. Printing cost of sales increased 48.4% in fiscal 1996 to $33.0 million from $22.3 million in fiscal 1995, due primarily to sales volume and the addition of newly acquired divisions with lower sales margins. Office products and office furniture cost of sales increased 14.5% in fiscal 1996 to $11.1 million from $9.7 million in fiscal 1995, primarily due to sales volume. Operating Expenses and Income Selling, general and administrative expenses declined as a percentage of sales in fiscal 1996 to 24.4% from 25.6% in fiscal 1995, due to cost controls implemented by management and spreading overhead expenses over increasing revenues. For the reasons stated above, income from operations increased 16.8% in fiscal 1996 to $6.1 million from $5.2 million in fiscal 1995. Other Income/Expense Interest expense on a comparative basis increased $441,000 as a result of increased debt. Net Income Income taxes remained relatively constant at about 40%. For the reasons stated above, net income increased 12.2% to $3.4 million, or $0.40 per share (diluted), for fiscal 1996, from $3.0 million, or $0.37 per share (diluted), in fiscal 1995. 13 LIQUIDITY AND CAPITAL RESOURCES Cash provided from operating activities for the three months ended January 31, 1998, was $105,000, compared to cash used in operating activities of ($662,000) for the same period in 1997, and was positively impacted by controlled growth in inventories, improved collection of accounts receivable, and timing of payments of accrued income taxes and expenses. The Company continues to make significant investments in equipment. Capital expenditures for the three months ended January 31, 1998, were $596,000 versus the $543,000 expended in the first quarter of 1997. These expenditures primarily relate to the upgrading of printing equipment to meet the demands of production. Management plans to continue making such improvements and expects total capital expenditures to approximate $3 million in 1998. Included in these capital expenditures for 1998 is the initial phase of upgrading the Company's information systems. Management plans to develop and implement a centralized information system infrastructure. At January 31, 1998, working capital was $18.6 million compared to $18.9 million and $17.5 million at October 31, 1997 and January 31, 1997. Working capital continues to be adequate to meet current operating needs. The Company has historically financed its acquisitions, capital expenditures, and working capital needs from cash generated from its operations and bank borrowings. However, to fund the Company's plans to continue to expand its operations internally and through acquisitions and to upgrade its information systems, additional financing is necessary. The Company is currently evaluating financing alternatives such as the issuance of stock, obtaining additional debt or a combination thereof. These financing arrangements should be in place within the next three months. 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. 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. YEAR 2000 ASSESSMENT Management has initiated a Company-wide program to assess the need to modify or replace portions of its information systems enabling the proper processing of transactions relating to the Year 2000 and beyond. The Company primarily utilizes purchased software and management believes that there are adequate sources of Year 2000 compliant software available from vendors that will meet its needs. Management continues to evaluate appropriate courses of corrective action, including the cost/benefit of modifying existing software versus purchasing new software and hardware. However, until a complete cost/ benefit analysis of the various alternatives available to the Company is completed, an estimate of the total cost of its Year 2000 project cannot be made at this time. Management does not expect the Year 2000 project to materially impact results of operations based on the current status of the analysis. The Year 2000 project is expected to be completed no later than December 31, 1998. Management believes that with modifications to existing software and/or conversions to new software, the Year 2000 problem will not pose significant operational problems to the Company. However, if such modifications and/or conversions are not made, or are not completed timely, this issue could have a material impact on the Company's operations. The Company has initiated discussions with its significant suppliers, large customers and financial institutions to ensure that those parties have appropriate plans to remediate Year 2000 issues where their systems interface with the Company's systems or otherwise impact its operations. The Company is assessing the extent to which its operations are vulnerable should those organizations fail to properly remediate their computer systems. While management believes its planning efforts are adequate to address its Year 2000 concerns, there can be no guarantee that the systems of other companies on which the Company's systems and operations rely will be converted on a timely basis and will not have a material effect on the Company. 14 BUSINESS GENERAL Champion 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's sales force sells 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 a one-stop shopping approach. The Company's printing services range from the simplest to the most complex jobs, including business cards, books, tags, 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 laser scanner separations. The Company also offers complete bindery and letterpress services. The Company's segmented gross sales of printing services in fiscal 1997 consisted of approximately 41% sheet and tag printing, 29% business forms printing and 30% process color printing. The printing operations contributed $88.0 million, or 81.2%, of the Company's total revenues for fiscal 1997. The Company provides a full range of office products and office furniture primarily in the budget and middle price ranges. The Company publishes a catalog of high volume, frequently ordered items purchased directly from the manufacturer. 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 recently introduced an on-line ordering system through software available on a CD-ROM designed and published by the Company. 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 and office furniture operations contributed $20.4 million, or 18.8%, of the Company's total revenues for fiscal 1997. [Business Mix Pie Chart] Office Products 18.8% Printing 81.2% History The Company was chartered as a West Virginia corporation on July 1, 1992. Prior to the IPO in January 1993, the Company's business was operated by Harrah and Reynolds doing business as Chapman Printing Company ("Chapman Printing"), together with its wholly-owned subsidiaries, The Chapman Printing Company, Inc. and Stationers. 15 Since the IPO the Company has grown through internal growth and acquisitions, and has made 16 acquisitions, summarized below.
Approximate Business Strategic Revenues Business Acquired Date Capabilities Benefits (at acquisition) - ----------------- ---- ------------ -------- ---------------- Bourque Printing, Inc. 1993 Commercial printer Access to large, rapidly $ 2,000,000 growing Baton Rouge, LA market Garrison Brewer 1993 Full-line office Cross-selling to $ 3,700,000 products, furniture Parkersburg printing division; increase purchasing volume and discounts Dallas Printing Company, Inc. 1993 Commercial printer Access to large, rapidly $ 1,000,000 growing Jackson, MS market Strother Forms/Printing (combined 1993 Business form Business form cross- $ 1,000,000 with Bourque Printing) manufacturer selling for Bourque Printing Carolina Cut Sheets, Inc. 1993 Specialty cut sheet Cost-effective, in-house $ 400,000 manufacturer manufacturing Spectrum Press, Inc. (combined 1994 Pre-press operation Augments Bourque $ 1,800,000 with Bourque Printing) Printing pre-press capabilities Premier Data Graphics (now 1994 Printing broker Access to northern $ 500,000 Champion Clarksburg) West Virginia market for office products and commercial printing Premier Printing Company 1994 Commercial printer Increase customer $ 1,000,000 (combined with Dallas Printing) base and production capacity in Jackson, MS U.S. Tag & Ticket Company, Inc. 1995 Stock and custom In-house manufacturing $ 2,500,000 tag manufacturing capability, access to Baltimore, MD market Donihe Graphics, Inc. 1995 High-volume color In-house manufacturing $ 6,500,000 printing capability and cross- sales Upton Printing (Bourque Printing's 1996 Full-color 4-color printing for $ 2,500,000 New Orleans operation) commercial printer Bourque Printing; access to large, rapidly growing New Orleans, LA market Smith & Butterfield Co., Inc. 1996 Full-line office Access to Indiana/ $ 5,300,000 products, furniture Kentucky markets; increase purchasing volume and discounts The Merten Company 1996 Full-color Access to Cincinnati, $ 6,400,000 commercial printer OH market; 4-color printing for Lexington, KY operation Interform 1996 Medium- and high- Access to northeastern $33,000,000 volume business U.S. market, addition form manufacturer of high-volume business form capacity Blue Ridge 1997 Full-color Access to markets $ 6,000,000 commercial printer served by advertising agencies, high resolution QuadRaster(TM) color printing Rose City 1998 Full-line office Increase office color $ 4,000,000 products, furniture printing products market share in Charleston, WV
16 BUSINESS STRATEGY The Company's business strategy combines continuing its emphasis on cross-sales of products and services by its highly competent and motivated sales force with additional industry consolidating acquisitions designed to enhance the Company's geographic coverage, market penetration, cross-selling opportunities and economies of scale. Consolidating Acquisitions. The Company intends to continue its strategy of aggressively increasing its market share in areas it currently serves and expanding into new markets through consolidating 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 geographic regions, and new geographic markets. As a result of its competitive and financial strengths, considerable experience in integrating acquired businesses, and its reputation for retaining management and employees of acquired companies, the Company believes it is perceived as an attractive partner in consolidating acquisitions. Cross-Sales of an Expanding Line of Products and Services. Printing and office products sales activities are complementary. Frequent customer sales calls for one of its products or services provide opportunities to sell other products and services. Expanded products and services, a growing geographic market, and the Company's reputation for quality, have enabled the Company to expand the products and services sold to its customer base. Further, many of the Company's acquisitions have enabled it to do the following: o add new products and services; o enhance economies of scale through, among others, centralized management, purchasing, and accounting; o maximize vertical integration opportunities (such as the Company's purchase of U.S. Tag & Ticket Co., Inc. ("U.S. Tag") which manufactures a product the Company previously purchased from third party vendors), and maximize lower cost bulk purchasing opportunities; and o increase the Company's profit margins by successfully integrating acquired businesses, with attendant reductions in overhead. Maintaining a Highly Competent and Motivated Sales Force. The Company's salespeople are compensated based on their individual profitability. The Company's acquisitions, and resulting increase in the number of products and services available to its customers, provide the Company's sales force with enhanced sales opportunities and income potential. These factors contribute to the Company's ability to attract and maintain highly competent and motivated salespeople. COMPANY STRUCTURE Champion is organized into sixteen divisions, twelve of which are wholly owned subsidiaries. The Huntington headquarters provides centralized financial management and administrative services to all divisions. Each division is managed by a division manager who has profit responsibility for the sales and production operations of the division. Division managers report directly to the President of the Company. Their compensation depends primarily on the volume and profit results of their individual operations. Commercial Printing Ten commercial printing divisions are located in Huntington, Charleston and Parkersburg, West Virginia; Lexington, Kentucky; Baton Rouge and New Orleans, Louisiana; Jackson, Mississippi; 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. Business Forms Interform, 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, and directly through its own distributor, the Consolidated Graphics Communications division in Pittsburgh, Pennsylvania. 17 Carolina Cut Sheets, Inc. ("Carolina Cut Sheets"), located in Timmonsville, South Carolina, 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 manufactures single sheet and multi-part snap-out and continuous business forms for sale through many of the Company's commercial printing divisions. Tags U.S. Tag, located in Baltimore, Maryland, 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. Office Products and Office Furniture Stationers, located in Huntington, Charleston (doing business as "Rose City Press") and Clarksburg (doing business as "Champion Clarksburg"), West Virginia and Belpre, Ohio (doing business as "Garrison Brewer"), 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 salespeople and delivered in bulk daily to each division, or shipped directly to customers. Smith & Butterfield Co., Inc. ("Smith & Butterfield"), located in Evansville, Indiana and Owensboro, Kentucky, 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. 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 manufacturing; and (vii) high volume process color web printing of brochures and catalogs. The capabilities of the Company's printing divisions are stated below:
High Sales & Volume Continuous Cut Customer Sheet Full Full and Snap-out Sheet Division Service Pre-Press Printing Color Color Forms Forms Tags - --------------------- -------- --------- -------- ----- ------- ------------ ----- ---- Chapman Printing/ o o o o o Huntington - -------------------------------------------------------------------------------------------------------- Chapman Printing/ o o Charleston - -------------------------------------------------------------------------------------------------------- Chapman Printing/ o o o o Parkersburg - -------------------------------------------------------------------------------------------------------- Chapman Printing/ o o o Lexington - -------------------------------------------------------------------------------------------------------- Bourque Printing, Inc. o o o o - -------------------------------------------------------------------------------------------------------- Dallas Printing o o o Company, Inc. - -------------------------------------------------------------------------------------------------------- Carolina Cut Sheets o o o - -------------------------------------------------------------------------------------------------------- U.S. Tag o o o o - -------------------------------------------------------------------------------------------------------- Donihe Graphics, Inc. o o o - -------------------------------------------------------------------------------------------------------- Upton Printing o o o o - -------------------------------------------------------------------------------------------------------- The Merten Company o o o o - -------------------------------------------------------------------------------------------------------- Interform o o o o o - -------------------------------------------------------------------------------------------------------- Blue Ridge o o o o - --------------------------------------------------------------------------------------------------------
18 Office Products and Office Furniture 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. Most office furniture is sold from catalogs and supplied from in-house stock. Special orders and design projects constitute a small portion of sales. MANUFACTURING AND DISTRIBUTION The Company's pre-press facilities have desktop publishing, typesetting, laser imagesetting and scanning/retouching equipment, and complete layout, design, stripping and plate processing operations. Sheet printing equipment (for printing onto pre-cut, individual sheets) includes single-color duplicators, single to 6-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 60% of the office product items the Company sells in stock. Another 30% are ordered on a daily basis and received overnight. The remaining 10% are items that come direct from manufacturers and may take one week from placement of order to delivery to customer. Office furniture sales are made primarily from the Company's in-house stock. However, special orders from manufacturers may require up to 90 days for delivery. SALES AND MARKETING The Company's commercial printing operations currently utilize a sales force of approximately 130 salespeople. Each of the Company's salespeople market printing services, business forms and office products and office furniture. The ability of the sales force to sell all the Company's products and services constitutes an important part of the Company's marketing strategy, with the sale of any one product or service providing a basis for frequent customer visits, creating opportunities to sell additional products and services. The Company's sales philosophy stresses frequent sales calls on existing customers, constant marketing for new customers, cross-selling of all Company products and services and target account marketing programs focusing on priority customers. Champion communicates to its customers the breadth and sophistication of its products, the speed and quality of its service and personal attention offered by the Company's salespeople. The sales force currently has an average of approximately 17 years industry experience and reflects a blend of seasoned and newer salespeople. The Company requires new salespeople to participate in a training program which focuses on sales techniques and the Company's printing production processes. Salespeople receive a base salary each month and commissions based on their individual profitability. The Company's acquisitions, and resulting increase in product diversification, provide the Company's salespeople with enhanced earnings opportunities. The sales program's emphasis on profitability, substantial rewards for profitable performance and increase in product diversification contribute to the Company's ability to attract and maintain highly competent and motivated salespeople. 19 Champion's office product operations regularly conduct sales promotions of selected office products. Management believes that this strategy encourages higher aggregate orders by customers who purchase the specially advertised products. The Company distributes a variety of brochures, price lists and other promotional matter to its customers and prospective customers. The Company publishes a catalog of high volume, frequently ordered items purchased directly from the manufacturer. These catalog sales afford sales personnel flexibility in product selection and pricing. The Company recently introduced an on-line ordering system through software available on a CD-ROM designed and published by the Company. The Company uses very little media advertising, relying instead on frequent sales calls as its primary marketing tool. Several of the Company's acquisitions have added new dimensions and a broader scope to its marketing capabilities. The Donihe Graphics, Inc. ("Donihe") subsidiary specializing in high-speed, high-volume color printing, uses an in-house telemarketing force for sales of its specialty high-speed products and other divisions' printing products. Interform sells a significant portion of its business forms through independent distributors and its own distributor, Consolidated Graphic Communications, in the Pennsylvania, New York and New Jersey markets. The U.S. Tag and Carolina Cut Sheets operations, in addition to providing products for Company retail sales, primarily sell to third party dealers and printers. 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 year ended October 31, 1997, no single customer accounted for more than 1% of total revenues. Due to the project-oriented nature of customers' printing 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. 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. 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, 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. 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. 20 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. EMPLOYEES On October 31, 1997, the Company had 897 full-time employees. The Company's Interform subsidiary 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 (currently numbering 96) at its Bridgeville, Pennsylvania facility. The Company believes relations with the union and covered employees are good. PROPERTIES The Company's corporate office is located in leased facilities in Huntington, West Virginia. Operating facilities are located throughout the eastern portion of the United States, as set forth below.
Leased or Location and Division Use Owned Footage - --------------------- --- ------ ------- Champion/Chapman Printing- Headquarters/Printing Plant Leased 85,000(1) Huntington, WV Stationers- Office Products Leased 60,000(1) Huntington, WV Stationers- Office Products Leased 21,600(1) Huntington, WV Chapman Printing- Printing Plant Leased 36,614(1) Parkersburg, WV Chapman Printing- Printing Plant Leased 21,360(1) Charleston, WV Rose City- Office Products Owned 63,400 Charleston, WV Champion Clarksburg- Printing and Office Products Owned 20,800 Clarksburg, WV Chapman Printing- Printing Plant Leased 20,135(1) Lexington, KY Smith & Butterfield- Office Products Leased 8,500 Owensboro, KY Smith & Butterfield- Office Products Leased 42,375 Evansville, IN Stationers (Garrison Brewer)- Office Products Leased 15,146 Belpre, OH The Merten Company- Printing Plant Leased 40,000 Cincinnati, OH U.S. Tag- Printing Plant Leased 26,000 Baltimore, MD Interform- Printing Plant Leased 120,000 Bridgeville, PA
21
Leased or Location and Division Use Owned Footage - --------------------- --- ------ ------- Donihe- Printing Plant Owned 38,500 Kingsport, TN Blue Ridge- Printing Plant Owned 12,500 Knoxville, TN Blue Ridge- Printing Plant Owned 10,758 Asheville, NC Carolina Cut Sheets- Printing Plant Leased 16,200 Timmonsville, SC Bourque Printing, Inc.- Printing Plant Owned 18,501 Baton Rouge, LA Upton Printing- Printing Plant Leased 15,000 New Orleans, LA Dallas Printing Company, Inc.- Printing Plant Owned 19,600 Jackson, MS
- ----------------- (1) These properties are leased from Harrah and Reynolds, Marshall T. Reynolds and affiliated entities or Company officers. The Company believes that these properties are leased on terms no less favorable to Company than those available from unaffiliated parties. LEGAL PROCEEDINGS The Company is not currently party to any legal proceedings of a material nature. 22 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows:
Years with Name Age Company Position with Company - ---- --- ---------- --------------------- Marshall T. Reynolds 61 40 President, Chief Executive Officer and Chairman of the Board of Directors Joseph C. Worth, III 48 5 Vice President and Chief Financial Officer of Company Michael D. McKinney 44 21 Vice President and General Sales Manager of Company William M. Campbell 62 21 Vice President of Company and Division Manager - Parkersburg Ronald W. Taylor 40 12 Vice President of Company and Division Manager - Lexington J. Mac Aldridge 56 14 Vice President of Company; President and Division Manager - Stationers Gary A. Blackshire 45 22 Vice President of Company and Division Manager - Charleston R. Douglas McElwain 50 12 Vice President of Company and Division Manager - Bourque Printing David G. Pilcher 55 1 Vice President of Company and Division Manager - Interform L. David Brumfield 60 28 Vice President of Company and Division Manager - Dallas Printing Toney K. Adkins 48 10 Vice President of the Company Walter R. Sansom 68 28 Secretary of Company Robert H. Beymer 70 5 Director Philip E. Cline 64 5 Director Harley F. Mooney, Jr. 69 5 Director Todd L. Parchman 43 5 Director A. Michael Perry 61 5 Director Neal W. Scaggs 61 5 Director Glenn W. Wilcox, Sr. 66 1 Director
Marshall T. Reynolds was the President and General Manager of Harrah and Reynolds, predecessor of the Company, from 1964, and sole shareholder from 1972, until the Company's IPO in 1993. He has served as President, Chief Executive Officer and Chairman of the Board of Directors since the IPO. Joseph C. Worth, III has served as Chief Financial Officer of the Company since June 1992. Michael D. McKinney has served as Vice President and General Sales Manager of the Company since 1995. He was Division Manager of the Company's Huntington Division from 1992 to 1995. He served as Division Manager of the Huntington Division of Harrah and Reynolds from October 1991. He served as Division Manager of the Lexington Division of Harrah and Reynolds from August 1982 to October 1991. He served as a sales representative for Harrah and Reynolds in eastern Kentucky from February 1976 to August 1982. William M. Campbell has served as Division Manager of the Parkersburg Division of the Company, and of Harrah and Reynolds, since June 1977. Ronald W. Taylor has served as Division Manager of the Lexington Division of the Company, and of Harrah and Reynolds since January 1992. He served as sales representative in the Lexington Division from 1986 to January 1992. J. Mac Aldridge has served as President and Division Manager of Stationers since November 1989, Vice President of the Company since 1993, and served as Division Manager of the Huntington Division from 1995 through 1997. He served as a sales representative of the Huntington Division of Harrah and Reynolds from 1983 to 1989. 23 Gary A. Blackshire has served as Division Manager of the Charleston Division of the Company, and of Harrah and Reynolds, since April 1992. He served as a sales representative of the Charleston Division of Harrah and Reynolds from 1975 until April 1992. R. Douglas McElwain has served as Vice President and Division Manager of Bourque Printing, Inc. since 1993, and was a sales representative of the Charleston Division of the Company and Harrah and Reynolds from 1986 until 1993. David G. Pilcher has served as Vice President of Company since April 1997 and as President of Interform since January 1995. He was President of Printing Center Media (Fort Worth, Texas) from 1989 to 1995. L. David Brumfield has served as Vice President and Division Manager of Dallas Printing Company, Inc. since May 1997. He was the President and General Manager, Radisson Hotel, Huntington, West Virginia, from 1992 to 1997. He served as Division Manager of the Charleston Division of Harrah and Reynolds from 1978 until 1992. Toney K. Adkins has served as Vice President of the Company since 1995. He was President of KYOWVA Corrugated Container Company, Inc. from 1991 to 1996. He served as Treasurer of Harrah and Reynolds from 1982 to 1991. Walter R. Sansom has served as Secretary of the Company since December 1992. He has been the Production Coordinator of the Company since 1992, and served in that capacity for Harrah and Reynolds from 1968 until 1992. Robert H. Beymer has served as President of First Sentry Bank (Huntington, West Virginia) since 1996, and was President of First Guaranty Bank (Hammond, Louisiana) from 1992 to 1994. Philip E. Cline has served as President and Chief Executive Officer of Broughton Foods Company since November 1996 and was employed in various capacities (Vice President and Treasurer, Executive Vice President and consultant) by J.H. Fletcher & Co., a manufacturer of underground mining equipment in Huntington, West Virginia from 1968 to 1996. Harley F. Mooney, Jr., Brig. Gen. U.S. Army (Ret.), is Managing Partner of Mooney-Osborne & Associates, a management consulting firm. He has served as a director of Stationers, Inc. since 1989, and served as a consultant to Stationers, Inc. from 1988 to 1990. Todd L. Parchman has been a partner of Parchman, Vaughn & Company (investment bankers) since 1996 and was a Senior Vice President from 1990 to 1996 and Director from 1994 until 1996 of Ferris, Baker Watts, Incorporated. A. Michael Perry has served as President from 1983 to 1993 and Chief Executive Officer from 1983 to present of Banc One West Virginia Corporation and its predecessor, Key Centurion Bancshares, Inc. Neal W. Scaggs has served as President of Baisden Brothers, Inc., a retail and wholesale hardware company, since 1963. Glenn W. Wilcox, Sr. has served as Chairman of the Board of Wilcox Travel Agency, Inc. since 1953, and as Chairman of the Board of Directors since 1974 and President from 1974 to 1997 of Blue Ridge. PRINCIPAL SHAREHOLDER To the Company's knowledge, Marshall T. Reynolds is the only beneficial owner of more than 5% of the Company's Common Stock, owning 4,741,127 shares, or 56.0% of all outstanding Common Stock, through Harrah and Reynolds, a corporation he controls, and his spouse. Assuming no change in Mr. Reynolds' beneficial ownership, after giving effect to the Offering, Mr. Reynolds will beneficially own 50.1% of all Common Stock of the Company. 24 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized stock of the Company consists of 20,000,000 shares of Common Stock, par value $1.00 per share referred to as, the "Common Stock." As of March 5, 1998, 8,464,167 shares of Common Stock were outstanding. The rights of holders of the Company's Common Stock are defined by the Company's Articles of Incorporation, as amended from time to time (the "Articles"), as well as by the Company's Bylaws, as amended from time to time (the "Bylaws"), and the West Virginia Corporation Act, as amended from time to time (the "WVCA"). The following summary of certain provisions of the Common Stock of the Company does not purport to be complete and is subject to, and qualified in its entirety by reference to the provisions of the Articles and Bylaws, which are included as exhibits to the Registration Statement of which this Prospectus forms a part, and by provisions of applicable law, including the WVCA. COMMON STOCK Upon completion of the Offering, 9,464,167 shares of Common Stock will be issued and outstanding. Holders of Common Stock have no preemptive or other rights to subscribe for additional shares of the Company's capital stock. If the Company should decide to issue any or all of its authorized but unissued shares of Common Stock, the effect would be to dilute the percentage of ownership of then current Company shareholders who do not purchase a pro rata portion of shares issued. Under the WVCA, in the election of directors, holders of Common Stock possess cumulative voting rights: they have as many votes as the number of shares owned, multiplied by the number of directors to be elected, and may either accumulate all votes for one candidate or distribute those votes among as many candidates as the shareholder may choose. For all other purposes, each share of Common Stock is entitled to one vote. Cumulative voting is a form of proportional representation which can provide a significant group of shareholders, though a minority, the ability to elect one or more directors. Under straight voting, a majority (over 50%) shareholder can elect all directors. Because cumulative voting applies to the election of Company directors, depending upon the total number of shares represented at a shareholders meeting and the number of directors to be elected, despite Mr. Reynolds' beneficial ownership, after giving effect to the Offering, of over 50% of the outstanding Common Stock of the Company, he cannot be assured of electing all directors (currently eight) of the Company. Holders of Common Stock are entitled to such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." Upon liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive pro rata the net assets of the Company remaining after the payment of all creditors. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is Wachovia Bank of North Carolina, N.A. UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement, the form of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part (the "Underwriting Agreement"), the Company has agreed to sell the number of shares of Common Stock to Ferris, Baker Watts, Incorporated (the "Underwriter"), and the Underwriter has agreed to purchase the aggregate number of shares of Common Stock set forth opposite its name below: Underwriter Number of Shares ----------- ---------------- Ferris, Baker Watts, Incorporated............ 1,000,000 Total........................................ 1,000,000 ========= 25 The nature of the Underwriter's obligations under the Underwriting Agreement is such that all shares of Common Stock offered hereby, excluding shares covered by the over-allotment option granted to the Underwriter, must be purchased if any are purchased. The Underwriting Agreement provides that the obligations of the Underwriter to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by counsel and to certain other conditions. The Company has been advised by the Underwriter that the Underwriter proposes to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus, and to certain dealers at such public offering price less a selling concession not in excess of ____ per share. The Underwriter may allow, and such dealers may reallow, a concession not in excess of ____ per share to certain other underwriters or to certain other brokers or dealers. The Company has granted the Underwriter an option, exercisable within 30 days after the date of this Prospectus, to purchase up to an additional 150,000 shares of Common Stock to cover over-allotments, at the same price per share to be paid by the Underwriter for the other shares offered hereby. The Underwriter may purchase such shares only to cover over-allotments, if any, in connection with the Offering made hereby. The executive officers, directors and certain stockholders of the Company have agreed that they will not offer, sell, contract to sell or grant an option to purchase or otherwise dispose of any shares of Common Stock, options to acquire shares of Common Stock or any securities exercisable for or convertible into Common Stock owned by them, in the open market, for a period of 180 days from the date of this Prospectus, without the prior written consent of the Underwriter. The Company has agreed not to offer, sell or issue any shares of Common Stock, options to acquire Common Stock or securities exercisable for or convertible into shares of Common Stock for a period of 180 days after the date of this Prospectus, without the prior written consent of the Underwriter, except that the Company may issue securities pursuant to the Company's stock option plans and upon the exercise of all outstanding stock options. The Company and the Underwriter have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act, which may arise out of or be based upon any untrue statement or alleged untrue statement of any material fact made by the indemnifying party and contained in this Prospectus, the Registration Statement, any supplement or amendment thereto, or any documents filed with state securities authorities, or any omission or alleged omission of the indemnifying party to state a material fact required to be stated in any such document or required to make the statements in any such document, in light of the circumstances in which they are made, not misleading. The Underwriter intends to make a market in the securities of the Company, as permitted by applicable laws and regulations. The Underwriter, however, is not obligated to make a market in such securities and any such market making may be discontinued at any time at the sole discretion of the Underwriter. The Underwriter has informed the Company that it does not intend to confirm any sales to accounts over which it exercises discretionary authority. Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriter and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the Underwriter is permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriter creates a short position in the Common Stock in connection with the Offering, i.e., if it sells more shares of Common Stock than are set forth on the cover page of this Prospectus, the Underwriter may reduce that short position by purchasing Common Stock in the open market. The Underwriter may also elect to reduce any short position by exercising all or part of the over allotment option described above. The Underwriter may also impose a penalty bid on certain selling group members. This means that if the Underwriter purchases shares of Common Stock in the open market to reduce the Underwriter's short position or to stabilize the price of the Common Stock, it may reclaim the amount of the selling concession from the selling group members who sold those shares as part of the Offering. 26 In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Company nor the Underwriter makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above might have on the price of the Common Stock. In addition, neither the Company nor the Underwriter makes any representation that the Underwriter will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered by this Prospectus will be passed upon for the Company by Huddleston, Bolen, Beatty, Porter & Copen, Huntington, West Virginia. Certain legal matters related to the Offering will be passed upon for the Underwriter by Shapiro and Olander, Baltimore, Maryland. EXPERTS The consolidated financial statements of Champion Industries, Inc. and subsidiaries at October 31, 1997 and 1996, and for each of the three years in the period ended October 31, 1997, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Prospectus 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 27A of the Securities Act of 1933, as amended (the "Securities Act"), and section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, general economic and business conditions, changes in business strategy or development plans, and other factors referenced in this Prospectus, including without limitation under the captions: "Investment Considerations," "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. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act and, in accordance therewith, files reports, proxy statements, and other information with the Securities and Exchange Commission (the "Commission"). This Prospectus, which constitutes a part of a registration statement on Form S-2 (the "Registration Statement") filed by the Company with the Commission under the Securities Act, omits certain of the information set forth in the Registration Statement and the exhibits thereto, as permitted by the rules and regulations of the Commission. Reference is hereby made to the Registration Statement and the exhibits thereto for further information with respect to the Company. Statements contained herein as to the content of any contract or other document are necessarily summaries of such documents, and each such statement is qualified in its entirety by reference to a copy of the applicable document filed with the Commission. The Registration Statement, including the exhibits and schedules filed thereto, and the reports, proxy statements and other information filed by the Company with the Commission, can be inspected and copied at the public reference facilities maintained by the Commission at its principal office at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material also can be obtained from the Public Reference Section of the Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, registration statements, reports, proxy and information statements and other information regarding registrants that file elec- 27 tronically with the Commission (such as the Company) through the Commission's Electric Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly available through the Commission's site on the World Wide Web, located at http://www.sec.gov. Copies of certain reports, proxy statements and other information filed by the Company can be inspected at the offices of National Association of Securities Dealers, 1735 K Street, N.W., Washington, D.C. 20006-1500. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE This Prospectus incorporates by reference documents which are not presented herein or delivered herewith. These documents (without exhibits, unless such exhibits are specifically incorporated by reference) are available without charge and upon request. Requests for documents should be directed to Champion Industries, Inc., Attention: Joseph C. Worth, III (Telephone: (304) 528-2791). The following documents are incorporated by reference in this Prospectus: 1. The Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1997. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document that also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. 28 Champion Industries, Inc. and Subsidiaries Consolidated Financial Statements TABLE OF CONTENTS Consolidated Financial Statements (Audited) Report of Independent Auditors...........................................F-2 Consolidated Balance Sheet...............................................F-3 Consolidated Income Statements...........................................F-5 Consolidated Statements of Shareholders' Equity..........................F-6 Consolidated Statements of Cash Flows....................................F-7 Notes to Consolidated Financial Statements...............................F-8 Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets..............................................F-20 Consolidated Income Statements...........................................F-22 Consolidated Statements of Cash Flows....................................F-23 Notes to Consolidated Financial Statements...............................F-24 F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Champion Industries, Inc. We have audited the accompanying consolidated balance sheets of Champion Industries, Inc. and Subsidiaries as of October 31, 1997 and 1996, and the related consolidated income statements, statements of shareholders' equity, and cash flows for each of the three years in the period ended October 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 consolidated financial position of Champion Industries, Inc. and Subsidiaries at October 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Charleston, West Virginia January 23, 1998, except for Note 10, as to which the date is March 2, 1998 F-2 Champion Industries, Inc. and Subsidiaries Consolidated Balance Sheets
OCTOBER 31, 1997 1996 ------------------------------- ASSETS Current assets: Cash and cash equivalents $ 912,290 $ 2,460,879 Accounts receivable, net of allowance of $1,140,000 and $548,000 19,075,180 11,683,573 Inventories 11,576,651 7,446,025 Property held for sale 300,000 - Other current assets 283,642 410,706 Deferred income tax assets 981,619 560,511 ------------------------------- Total current assets 33,129,382 22,561,694 Property and equipment, at cost: Land 784,889 795,336 Buildings and improvements 4,144,472 4,124,217 Machinery and equipment 22,852,103 16,716,660 Equipment under capital leases 5,720,594 4,401,928 Furniture and fixtures 1,684,275 1,329,459 Vehicles 1,914,362 1,318,437 ------------------------------- 37,100,695 28,686,037 Less accumulated depreciation (13,825,053) (10,852,764) ------------------------------- 23,275,642 17,833,273 Cash surrender value of officers' life insurance 921,213 784,089 Goodwill, net of accumulated amortization 2,558,356 2,565,287 Other assets 461,120 318,233 ------------------------------- 3,940,689 3,667,609 ------------------------------- Total assets $60,345,713 $44,062,576 ===============================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3 Champion Industries, Inc. and Subsidiaries Consolidated Balance Sheets (continued) OCTOBER 31, 1997 1996 ------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,657,365 $ 1,667,705 Notes payable 2,425,000 1,300,000 Accrued payroll and commissions 2,052,130 1,065,721 Taxes accrued and withheld 571,477 806,638 Accrued income taxes 450,027 1,311,437 Accrued expenses 793,848 394,617 Current portion of long-term debt: Notes payable 2,842,844 1,690,078 Capital lease obligations 1,401,519 746,708 ------------------------------ Total current liabilities 14,194,210 8,982,904 Long-term debt, net of current portion: Notes payable 11,328,588 4,447,934 Capital lease obligations 3,827,368 3,113,083 Deferred income tax liability 3,589,889 2,073,891 Deferred compensation 555,886 473,601 Deferred gain - 330,443 ------------------------------ Total liabilities 33,495,941 19,421,856 Commitments and contingencies - - Shareholders' equity: Common stock, $1 par value, 20,000,000 shares authorized; 8,384,930 and 8,382,682 shares issued and outstanding 8,384,930 8,382,682 Additional paid-in capital 7,450,328 7,442,502 Retained earnings 11,014,514 8,815,536 ------------------------------ Total shareholders' equity 26,849,772 24,640,720 ------------------------------ Total liabilities and shareholders' equity $60,345,713 $44,062,576 ============================== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 Champion Industries, Inc. and Subsidiaries Consolidated Income Statements
YEAR ENDED OCTOBER 31, 1997 1996 1995 ----------------------------------------------------- Revenues: Printing $ 87,978,709 $ 49,242,232 $ 35,370,827 Office products and office furniture 20,405,929 17,114,644 14,532,229 ----------------------------------------------------- Total revenues 108,384,638 66,356,876 49,903,056 Cost of sales: Printing 59,849,596 33,014,938 22,250,920 Office products and office furniture 13,289,403 11,076,854 9,670,370 ----------------------------------------------------- Total cost of sales 73,138,999 44,091,792 31,921,290 Selling, general and administrative expenses 28,079,009 16,197,359 12,787,876 ----------------------------------------------------- Income from operations 7,166,630 6,067,725 5,193,890 Other income (expense): Interest income 20,116 25,287 10,705 Interest expense (1,586,418) (692,914) (252,368) Other 737,097 223,589 113,505 ----------------------------------------------------- (829,205) (444,038) (128,158) ----------------------------------------------------- Income before income taxes 6,337,425 5,623,687 5,065,732 Income taxes (2,570,644) (2,251,319) (2,059,447) ----------------------------------------------------- Net income $ 3,766,781 $ 3,372,368 $ 3,006,285 Earnings per share: Basic $ 0.45 $ 0.41 $ 0.37 Diluted $ 0.45 $ 0.40 $ 0.37 Weighted-average shares outstanding: Basic 8,383,391 8,323,518 8,147,389 Diluted 8,441,083 8,356,032 8,176,716
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 Champion Industries, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity
COMMON STOCK ADDITIONAL ------------------------ PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ------------------------------------------------------------------------- Balance, October 31, 1994 5,292,717 $5,292,717 $7,829,209 $ 4,617,564 $17,739,490 Net income for 1995 - - - 3,006,285 3,006,285 Dividends ($0.122 per share) - - - (958,060) (958,060) Stock issued in acquisitions 52,383 52,383 (42,808) - 9,575 Cash paid in lieu of fractional shares (168) (168) (3,413) - (3,581) Stock split (five shares for four) 1,266,789 1,266,789 (1,266,789) - - -------------------------------------------------------------------------- Balance, October 31, 1995 6,611,721 6,611,721 6,516,199 6,665,789 19,793,709 Net income for 1996 - - - 3,372,368 3,372,368 Dividends ($0.152 per share) - - - (1,222,621) (1,222,621) Stock issued in acquisition 150,126 150,126 (2,549,874) - 2,700,000 Cash paid in lieu of fractional shares (146) (146) (2,590) - (2,736) Stock split (five shares for four) 1,620,981 1,620,981 (1,620,981) - - -------------------------------------------------------------------------- Balance, October 31, 1996 8,382,682 8,382,682 7,442,502 8,815,536 24,640,720 Net income for 1997 - - - 3,766,781 3,766,781 Dividends ($0.19 per share) - - - (1,567,803) (1,567,803) Stock options exercised (2,441 shares) 2,441 2,441 11,310 - 13,751 Cash paid in lieu of fractional shares (193) (193) (3,484) - (3,677) -------------------------------------------------------------------------- Balance, October 31, 1997 8,384,930 $8,384,930 $7,450,328 $11,014,514 $26,849,772 ==========================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 Champion Industries, Inc. and Subsidiaries Consolidated Statements of Cash Flows
YEAR ENDED OCTOBER 31, 1997 1996 1995 --------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,766,781 $ 3,372,368 $ 3,006,285 Adjustments to reconcile net income to cash provided by operating activities: Depreciation, amortization and accretion 3,179,515 2,002,480 1,314,937 Deferred gain on sale of assets (371,041) (23,260) (19,128) Deferred income taxes (benefit) 334,409 236,860 (65,135) Deferred compensation 82,285 92,933 109,911 Changes in assets and liabilities: Accounts receivable (1,690,650) (1,579,298) (923,706) Inventories (1,758,510) (88,812) (1,487,066) Other current assets 152,345 (232,237) (35,769) Accounts payable 236,195 (902,376) (85,317) Accrued payroll 616,772 (222,450) 71,751 Taxes accrued and withheld (235,161) 255,134 (44,280) Accrued income taxes (946,031) 650,031 (1,298,839) Accrued expenses (1,383,537) (255,416) (24,119) ---------------------------------------------------- Net cash provided by operating activities 1,983,372 3,305,957 519,525 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (2,163,775) (2,538,459) (3,409,124) Proceeds from sale of assets 163,103 34,745 - Businesses acquired, net of cash received 254,676 1,118,792 18,206 Increase in other assets (297,364) (137,655) (88,796) ---------------------------------------------------- Net cash (used in) investing activities (2,043,360) (3,760,161) (3,479,714) CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings on notes payable 1,575,000 1,300,000 - Proceeds from long-term debt and capital leases 1,306,919 3,122,343 2,393,559 Principal payments on long-term debt and capital leases (2,812,791) (1,672,249) (815,506) Dividends paid (1,567,803) (1,222,621) (958,060) Proceeds from exercise of stock options 13,751 - - Cash paid in lieu of fractional shares (3,677) (2,736) (3,581) ---------------------------------------------------- Net cash (used in) provided by financing activities (1,488,601) 1,524,737 616,412 ---------------------------------------------------- Net (decrease) increase in cash (1,548,589) 1,070,533 (2,343,777) Cash and cash equivalents at beginning of year 2,460,879 1,390,346 3,734,123 ---------------------------------------------------- Cash and cash equivalents at end of year $ 912,290 $2,460,879 $1,390,346 ====================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7 Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements October 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Champion conform to generally accepted accounting principles. The preparation of the financial statements in conformity 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. The following is a summary of the more significant accounting and reporting policies. 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 Company, Inc., Donihe Graphics, Inc., Smith and Butterfield Co., Inc., The Merten Company, Interform Corporation, and Blue Ridge Printing Company, Inc. Significant intercompany transactions have been eliminated in consolidation. CASH EQUIVALENTS The Company considers all highly liquid investments, with an original maturity of three months or less, to be cash equivalents. Cash and cash equivalents consist principally of cash on deposit with banks and repurchase agreements for government securities held in one bank. At October 31, 1997 and 1996, the Company held overnight repurchase agreements for $50,621 and $119,393 of Federal National Mortgage Association securities with stated interest rates of 4.0% and 4.06%. 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. 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 5-10 years Furniture and fixtures 5-10 years Vehicles 3-5 years F-8 Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) The Company leases certain equipment under financing agreements which are classified as capital leases. These leases are for a term of five years and contain purchase options at the end of the original lease term. Amortization of assets recorded under capital lease agreements is included in depreciation expense. 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 $3,021,000, $1,905,000 and $1,183,000 for the years ended October 31, 1997, 1996, and 1995. GOODWILL The excess cost over fair value of net assets of acquired businesses, goodwill, is being amortized by the straight-line method over 10 to 30 years. The carrying value of goodwill is evaluated periodically for impairment. This evaluation includes the review of operating performance and future undiscounted cash flows of the underlying businesses. Any impairment loss is recognized in the period when it is determined that the carrying value of the goodwill may not be recoverable. Accumulated amortization at October 31, 1997 and 1996, approximated $956,000 and $824,000. Amortization expense approximated $132,000, $98,000 and $132,000 for the years ended October 31, 1997, 1996, and 1995. 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 bases 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. ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising expense for the years ended October 31, 1997, 1996, and 1995 approximated $646,000, $378,000 and $346,000. 2. INVENTORIES Inventories consisted of the following: OCTOBER 31, 1997 1996 ------------------------- Printing: Raw materials $ 3,030,425 $2,507,717 Work in process 2,867,270 1,530,933 Finished goods 2,806,475 572,228 Office products and office furniture 2,872,481 2,835,147 ------------------------- $11,576,651 $7,446,025 ========================= F-9 Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. CREDIT ARRANGEMENTS The Company has an unsecured line of credit with a bank for borrowings to a maximum of $2,000,000 with interest payable quarterly at the prime rate plus 0.5%. This line of credit, which expires on May 31, 1998, contains certain restrictive financial covenants. There was $2,000,000 outstanding under this facility at October 31, 1997 and $1,100,000 outstanding at October 31, 1996. The Company also has an unsecured line of credit with a bank for borrowings to a maximum of $800,000 with interest payable quarterly at the bank's prime rate. This line of credit expires on March 11, 1998, and is guaranteed by the President of the Company. There was $425,000 outstanding under this facility at October 31, 1997 and 1996. 4. LONG-TERM DEBT Long-term debt consisted of the following:
OCTOBER 31, 1997 1996 ----------------------------- Unsecured term note payable to a bank, due in monthly principal installments of $149,000 plus interest at the prime rate with the note maturing April 2004 $11,600,431 $ - Installment notes payable to banks, due in monthly installments totaling $103,000 with interest rates approximating the bank's prime rate and the last note maturing October 2002, collateralized by equipment, vehicles, inventory, accounts receivable, and, on certain notes, the personal guarantee of the President of the Company 2,122,215 3,987,464 Unsecured installment notes payable to banks, due in monthly installments totaling $27,000, with interest rates approximating the bank's prime rate, with the last note maturing August 1999 448,786 2,150,548 Capital lease obligations, due in monthly installments totaling $177,000, including interest at the bank's prime rate, less .50% to 1%, through March 2004 5,228,887 3,859,791 ----------------------------- 19,400,319 9,997,803 Less current portion 4,244,363 2,436,786 ----------------------------- Long-term debt, net of current portion $15,155,956 $7,561,017 ==============================
The unsecured term note agreement contains restrictive financial covenants requiring the Company to maintain certain financial ratios. F-10 Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) Maturities of long-term debt for each of the next five years follows: NOTES CAPITAL PAYABLE LEASES TOTAL ---------------------------------------- 1998 $2,842,844 $1,401,519 $4,244,363 1999 2,368,790 1,346,313 3,715,103 2000 2,174,840 1,004,298 3,179,138 2001 2,065,791 836,592 2,902,383 2002 1,963,494 435,668 2,399,162 Thereafter 2,755,673 204,497 2,960,170 ---------------------------------------- $14,171,432 $5,228,887 $19,400,319 ========================================= The prime rate, the base interest rate on the above loans, approximated 8.0% and 8.25% at October 31, 1997 and 1996. Interest paid during the years ended October 31, 1997, 1996, and 1995 approximated $1,511,000, $632,000 and $240,000. The Company's non-cash activities included equipment purchases of approximately $1,733,000, which were financed by a bank. 5. INCOME TAXES Income taxes consisted of the following: Year Ended October 31, 1997 1996 1995 ---------------------------------------- Current expense: Federal $1,783,878 $1,620,319 $1,709,746 State 452,357 394,000 415,000 Deferred expense (benefit) 334,409 237,000 (65,299) ---------------------------------------- $2,570,644 $2,251,319 $2,059,447 ======================================== F-11 Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) Deferred tax assets and liabilities are as follows: October 31, 1997 1996 ------------------------ Assets: Allowance for doubtful accounts $ 455,940 $ 218,977 Deferred compensation 222,354 184,704 Net operating loss carryforward of acquired companies 307,035 198,663 Accrued vacation 217,980 - Other accrued liabilities 238,244 156,829 ------------------------ Gross deferred tax assets 1,441,553 759,173 Liabilities: Property and equipment 4,049,824 2,272,554 ------------------------ Gross deferred liability 4,049,824 2,272,554 ------------------------ Net deferred tax liabilities $2,608,271 $1,513,381 ======================== A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows: Year Ended October 31, 1997 1996 1995 ------------------------------- Statutory federal income tax rate 34% 34% 34% State taxes, net of federal benefit 5 5 6 Other 2 1 1 ------------------------------ Effective tax rate 41% 40% 41% ============================== Income taxes paid during the years ended October 31, 1997, 1996 and 1995 approximated $3,024,000, $1,437,000 and $3,414,000. The Company has available, for income tax purposes, net operating loss carryforwards from acquired companies of approximately $464,000, of which $122,000 expires in 2010 and $342,000 in 2011. 6. RELATED PARTY TRANSACTIONS AND OPERATING LEASE COMMITMENTS The Company leases operating facilities from entities controlled by its President, his family and affiliates. The terms of these leases, which are accounted for as operating leases, range from five to fifteen years. The Company also leases vehicles from an entity controlled by its President. Vehicle leases are for an initial term of twenty-four months and month-to- month thereafter. Lease payments average $350 per month. F-12 Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) A summary of significant related party transactions follows:
Year Ended October 31, 1997 1996 1995 --------------------------------------- Rent expense paid to affiliated entities for: Vehicles $ 7,920 $ 13,130 $ 86,559 Operating facilities 363,100 363,100 363,100 Purchases of materials and supplies from affiliated entities 95,616 181,113 197,963 Sales of office products, office furniture and printing services to affiliated entities 461,674 840,482 984,132
When a new vehicle is required, the Company either purchases a new vehicle or enters into a new vehicle lease with unrelated entities. These leases are on a month-to-month basis. Other vehicle rent expense to unrelated entities totaled $334,000, $265,000 and $368,000 for the years ended October 31, 1997, 1996 and 1995. In addition, the Company leases property and equipment from unrelated entities under operating leases. Rent expense amounted to $489,000, $321,000 and $125,000 for the years ended October 31, 1997, 1996, and 1995. Under the terms and conditions of the above-mentioned leases, the Company pays all taxes, assessments, maintenance, repairs or replacements, utilities and insurance. Future minimum rental commitments for all noncancelable operating leases with initial terms of one year or more consisted of the following at October 31, 1997: 1997 $738,000 1998 718,000 1999 502,000 2000 379,000 2001 292,000 Thereafter 893,000 ---------- $3,522,000 ========== Accounts receivable from affiliated entities resulting from sales transactions approximated $32,000 and $54,000 at October 31, 1997 and 1996. In order to minimize premium costs, the Company participates in a self-insurance program for employee health care benefits with affiliates controlled by its President. The Company is allocated costs 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, 1997, 1996 and 1995 was approximately $1,456,000, $733,000 and $652,000. F-13 Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. EMPLOYEE BENEFIT PLANS The Company has a Profit Sharing Plan (the "Plan") which covers all eligible employees and qualifies as a Savings Plan under Section 401(k) of the Internal Revenue Code. The Company may make discretionary contributions to the Plan. In addition to the Company's contribution, the participants may make voluntary contributions up to 2% of their salary not to exceed $300. The Company's expense under the Plan was approximately $158,000, $97,000 and $66,000 for the years ended October 31, 1997, 1996 and 1995. 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 610,351 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. 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 2.4 years. A summary of the Company's stock option activity and related information for the years ended October 31 follows: Weighted Weighted Average Average Exercise Exercise 1997 Price 1996 Price ------------------------------------------- Outstanding-beginning of year 146,973 $11.12 100,098 $ 9.28 Granted 35,000 17.90 46,875 15.04 Exercised (2,441) 5.63 - - -------- -------- Outstanding-end of year 179,532 12.52 146,973 11.12 ======== ======== Weighted average fair value of options granted during the year $4.63 $3.62 ======== ======== The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. F-14 Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) Pro forma information regarding net income and earnings per share has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997 and 1996, respectively: risk-free interest rates of 6.04% and 5.63%; dividend yields of 1.10% and 1.37%; volatility factors of the expected market price of the Company's common stock of .236 and .230; and a weighted-average expected life of the option of 4 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is expensed in the year granted since the options vest immediately. The Company's pro forma information for the years ended October 31 follows: 1997 1996 -------------------------------------- Pro forma net income $3,605,000 $3,203,000 ====================================== Pro forma basic and diluted earnings per share $0.41 $0.38 ====================================== The Company has deferred compensation agreements with two employees of Blue Ridge Printing Co., Inc. providing for payments totaling approximately $1,000,000 over a ten year period after retirement. The Company had accrued approximately $556,000 and $474,000 at October 31, 1997 and 1996, relating to these agreements. The amount expensed for these agreements for the years ended October 31, 1997, 1996, and 1995 approximated $82,000, $93,000, and $110,000. To assist in funding the deferred compensation agreements, the Company has invested in life insurance policies which had cash surrender values of $404,000 and $359,000 at October 31, 1997 and 1996. 8. DEFERRED GAIN On August 30, 1991, Stationers, Inc. sold assets of its retail bookstore consisting primarily of inventory and fixtures. The assets sold represented a separate area of Stationer's retail location and thus the transaction was considered to be a disposal of a portion of a product line incident to the evolution of its overall business. Stationers, Inc. unconditionally guaranteed a bank loan of the purchaser amounting to $600,000. Accordingly, the gain from the sale of $591,835 was deferred and recognized as the purchaser made payments on the purchaser's bank loan and the note receivable. In 1997, Stationer's was released from this guarantee, and the remaining gain was recognized. The gain recognized for the years ended October 31, 1997, 1996, and 1995 amounted to $330,000, $23,000 and $19,000. F-15 Champion industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. 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. 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. 10. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued statement No. 128, "Earnings Per Share," which requires the reporting of basic and diluted earnings per share. The Company adopted Statement 128 in the first quarter of 1998, as required. Earnings per share and weighted average shares outstanding for all periods presented have been restated to conform to Statement 128. Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding for the respective period. Diluted earnings per share is computed by dividing net income by weighted average number of shares outstanding for the respective period plus the number of shares which would be issued assuming the exercise of dilutive stock options. The dilutive effect of stock options approximated 57,692, 32,514 and 29,327 shares in 1997, 1996 and 1995, respectively. 11. ACQUISITIONS On December 31, 1996, the Company acquired all of the outstanding common stock of Interform Corporation in exchange for cash of $2,500,000, obtained through bank financing. This acquisition was accounted for under the purchase method. At December 31, 1996, Interform held for sale one of its former facilities which was recorded at its estimated fair value. This facility was sold in December 1997 for its estimated fair market value. On August 21, 1996, the Company acquired various assets with a fair value of approximately $2,500,000 and assumed certain liabilities of approximately $2,500,000 of The Merten Company. The Company refinanced $2,000,000 of the assumed liabilities through a loan from a bank. On July 1, 1996, the Company acquired all of the outstanding common stock of Smith and Butterfield Co., Inc. in exchange for 66,666 shares of its common stock with a fair value of $1,200,000. F-16 Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) On February 2, 1996, the Company acquired various assets and assumed certain liabilities of E.S. Upton Printing Company, Inc. for approximately $750,000 in cash. The Company obtained a loan from a bank of $750,000 to finance this acquisition. These acquisitions have been accounted for under the purchase method of accounting. Accordingly, the purchase prices have been allocated to the assets acquired and liabilities assumed based upon their fair values at the respective acquisition date. The operating results of these businesses are included in the Consolidated Income Statements since their respective acquisition dates. The following summarizes the unaudited consolidated pro forma results of operations for the years ended October 31, 1997 and 1996, assuming all of the acquisitions, including Interform Corporation, accounted for under the purchase method had been consummated at the beginning of each year presented. 1997 1996 ----------- ----------- Revenues $113,710,000 $104,054,000 Net income $3,661,000 $2,410,000 Diluted earnings per share $0.43 $0.29 Diluted weighted average shares outstanding 8,441,083 8,414,548 In April 1997, the Company acquired all of the outstanding common stock of Blue Ridge Printing Co., Inc. (Blue Ridge) in exchange for 277,775 shares of the Company's common stock. This combination has been accounted for as a pooling of interests. Accordingly, all prior period financial information has been restated as though they had always been combined. Following is an analysis presenting the results of operations for 1997 and 1996 of the separate companies. Diluted Net Earnings Revenues Income Per Share --------------- --------------- ------------ 1997 ---- Champion $101,233,702 $3,400,266 $0.42 Blue Ridge 7,150,936 366,515 ----------------------------- Consolidated $108,384,638 $3,766,781 $0.45 ============================ 1996 ---- Champion $ 59,884,599 $3,252,476 $0.40 Blue Ridge 6,472,277 119,892 ----------------------------- Consolidated $ 66,356,876 $3,372,368 $0.40 ============================ F-17 Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. INDUSTRY SEGMENT INFORMATION The Company operates principally in two industry segments: 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. The Company employs approximately 900 people, approximately 100 of whom are covered by a collective bargaining agreement which expires on May 31, 2004. The Company believes its relations with employees is satisfactory. The Company operates entirely in the United States. Inter-segment sales are not significant. Revenues and operating income for the years ended October 31, 1997, 1996, and 1995, and identifiable assets at the end of each of those years, were as follows:
1997 1996 1995 --------------------------------------- Revenues: Printing $87,978,709 $49,242,232 $35,370,827 Office products and furniture 20,405,929 17,114,644 14,532,229 Operating income: Printing 6,065,034 4,768,676 3,991,652 Office products and furniture 1,101,596 1,299,049 1,202,238 Depreciation and amortization: Printing 2,955,739 1,843,309 1,203,135 Office products and furniture 223,776 159,171 111,802 Capital expenditures: Printing 1,812,896 2,375,301 3,322,984 Office products and furniture 350,879 163,158 86,140 Identifiable assets: Printing 52,577,247 36,498,504 23,863,639 Office products and furniture 7,768,466 7,564,072 4,779,198
13. 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 short-term revolving credit agreements and long-term debt was estimated using discounted cash flows and it approximates their carrying value. F-18 Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended October 31, 1997 and 1996. Earnings per share and weighted average shares outstanding amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------------------------------------------------------- REVENUES 1997 $21,116,000 $29,260,000 $27,867,000 $30,142,000 1996 15,718,000 15,941,000 15,664,000 19,034,000 COST OF SALES 1997 15,111,000 19,331,000 19,129,000 19,568,000 1996 10,904,000 10,412,000 10,177,000 12,599,000 NET INCOME 1997 869,000 971,000 781,000 1,146,000 1996 630,000 895,000 776,000 1,071,000 BASIC AND DILUTED EARNINGS PER SHARE 1997 .10 .12 .09 .14 1996 .08 .11 .09 .13 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 1997 8,382,489 8,382,489 8,383,656 8,384,930 1996 8,284,608 8,299,350 8,327,429 8,382,683 Diluted: 1997 8,438,879 8,442,243 8,435,827 8,447,106 1996 8,317,269 8,329,445 8,360,283 8,417,132 F-19 Champion Industries, Inc. and Subsidiaries Consolidated Balance Sheets (Unaudited) Assets
JANUARY 31, OCTOBER 31, 1998 1997 -------------------------------- Current assets: Cash and cash equivalents $ (77,007) $ 912,290 Accounts receivable, net of allowance of $1,221,000 and $1,140,000 18,634,981 19,075,180 Inventories 11,727,541 11,576,651 Property held for sale --- 300,000 Other current assets 501,271 283,642 Deferred income tax assets 981,619 981,619 -------------------------------- Total current assets 31,768,405 33,129,382 Property and equipment, at cost: Land 784,889 784,889 Buildings and improvements 4,180,269 4,144,472 Machinery and equipment 23,464,881 22,852,103 Equipment under capital leases 5,720,594 5,720,594 Furniture and fixtures 1,652,194 1,684,275 Vehicles 1,986,223 1,914,362 -------------------------------- 37,789,050 37,100,695 Less accumulated depreciation (14,596,448) (13,825,053) -------------------------------- 23,192,602 23,275,642 Cash surrender value of officers' life insurance 972,424 921,213 Goodwill, net of accumulated amortization 2,543,153 2,558,356 Other assets 404,037 461,120 -------------------------------- 3,919,614 3,940,689 -------------------------------- Total assets $58,880,621 $60,345,713 ===============================
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. F-20
Champion Industries, Inc. and Subsidiaries Consolidated Balance Sheets (Unaudited) Liabilities And Shareholders' Equity JANUARY 31, OCTOBER 31, 1998 1997 -------------------------------- Current liabilities: Notes payable $ 2,900,000 $ 2,425,000 Accounts payable 2,423,898 3,657,365 Accrued payroll 1,731,298 2,052,130 Taxes accrued and withheld 547,387 571,477 Accrued income taxes 478,218 450,027 Accrued expenses 819,386 793,848 Current portion of long-term debt Notes payable 2,842,844 2,842,844 Capital lease obligations 1,401,519 1,401,519 --------------------------------- Total current liabilities 13,144,550 14,194,210 Long-term debt, net of current portion Notes payable 10,796,498 11,328,588 Capital lease obligations 3,503,618 3,827,368 Deferred compensation 569,047 555,886 Deferred income tax liability 3,589,889 3,589,889 Deferred gain --- --- -------------------------------- Total liabilities 31,603,602 33,495,941 Commitments and contingencies --- --- Shareholders' equity: Common stock, $1 par value, 20,000,000 shares authorized; 8,388,445 and 8,384,930 shares issued and outstanding 8,388,445 8,384,930 Additional paid-in capital 7,495,930 7,450,328 Retained earnings 11,392,644 11,014,514 ------------------------------- Total shareholders' equity 27,277,019 26,849,772 ------------------------------- Total liabilities and shareholders' equity $58,880,621 $60,345,713 ===============================
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. F-21
Champion Industries, Inc. and Subsidiaries Consolidated Income Statements (Unaudited) Three Months Ended January 31, 1998 1997 -------------------------------- Revenues: Printing $ 23,955,963 $ 16,137,366 Office products and office furniture 5,678,515 4,978,470 --------------------------------- Total revenues 29,634,478 21,115,836 Cost of sales: Printing 17,508,471 11,778,980 Office products and office furniture 3,759,136 3,332,299 --------------------------------- Total cost of sales 21,267,607 15,111,279 --------------------------------- Gross profit 8,366,871 6,004,557 --------------------------------- Selling, general and administrative expenses 6,662,752 4,694,266 --------------------------------- Income from operations 1,704,119 1,310,291 --------------------------------- Other income (expense): Interest income 157 7,396 Interest expense (427,415) (238,070) Other 110,208 454,846 --------------------------------- (317,050) 224,172 --------------------------------- Income before income taxes 1,387,069 1,534,463 Income taxes (589,691) (665,466) --------------------------------- Net income $ 797,378 $ 868,997 ================================ Earnings per share: Basic $.10 $.10 Diluted .09 .10 Dividends per share: $.05 $.04 Weighted average shares outstanding: Basic 8,385,656 8,382,489 Diluted 8,435,507 8,438,879
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. F-22
Champion Industries, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Three Months Ended January 31, 1998 1997 -------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 797,377 $ 868,998 Adjustments to reconcile net income to cash provided by operating activities: Depreciation, amortization and accretion 786,597 636,486 Gain on sale of property (39,000) -- Deferred gain on sale of assets -- (330,443) Deferred income taxes -- 36,031 Deferred compensation 13,161 18,988 Changes in assets and liabilities: Accounts receivable 440,199 1,371,015 Inventories (150,889) (836,877) Other current assets (217,629) (187,678) Accounts payable (1,233,467) (461,614) Accrued payroll (320,832) (88,130) Taxes accrued and withheld (24,090) (139,617) Accrued income taxes 28,191 (678,302) Accrued expenses 25,538 (871,228) -------------------------------- Net cash provided by (used in) operations 105,156 (662,371) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (596,101) (543,192) Proceeds from sale of assets 339,000 -- Business acquired, net of cash received -- 254,676 Increase in cash surrender value of officer's life insurance (51,211) (46,673) Decrease in other assets 57,084 9,296 -------------------------------- Net cash (used in) provided by investing activities (251,228) (325,893) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on notes payable 475,000 950,000 Proceeds from long-term debt and capital leases 104,000 282,433 Principal payments on long-term debt and capital leases (1,052,093) (749,442) Proceeds from exercise of stock options 49,115 -- Cash paid in lieu of fractional shares -- (3,677) Dividends paid (419,247) (324,195) -------------------------------- Net cash (used in) provided by financing activities (843,225) 155,119 -------------------------------- Net (decrease) increase in cash (989,297) (833,145) Cash and cash equivalents, beginning of period 912,290 2,460,879 -------------------------------- Cash and cash equivalents, end of period $ (77,007) $1,627,734 ================================
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. F-23 Champion Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BUSINESS OPERATIONS AND BASIS OF PRESENTATION The foregoing financial information is unaudited and has been prepared from the records of Champion Industries, Inc., and subsidiaries ("Champion" or the "Company"). In the opinion of management, the financial information reflects all adjustments (consisting only of normal recurring adjustments) 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 financial statements for the year ended October 31, 1997 and related notes thereto contained in the Company's Form 10-K dated January 29, 1998. The accompanying unaudited financial statements are presented in accordance with generally accepted accounting principles and instructions to the Securities and Exchange Commission Form 10-Q. 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 and Blue Ridge Printing Co., Inc. 2. INVENTORIES Inventories are principally stated at the lower of first-in, first-out cost or market. Manufactured finished goods and work in process inventories include material, direct labor and overhead based on standard costs, which approximate actual costs. The Company utilizes an estimated gross profit method for determining cost of sales in interim periods. Inventories consisted of the following: JANUARY 31, OCTOBER 31, 1998 1997 ------------------------- Printing: Raw materials $ 3,049,180 $ 3,030,425 Work in process 2,885,015 2,867,270 Finished goods 2,823,844 2,806,475 Office products and office furniture 2,969,502 2,872,481 ------------------------- $11,727,541 $11,576,651 ========================= 3. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, Earnings per Share, which requires the reporting of basic and diluted earnings per share. The Company adopted Statement 128 in the first quarter of 1998 as required. Earnings per share and weighted average shares outstanding for all periods presented have been restated to conform to Statement 128. Basic earnings per share excludes any dilutive effects of stock options and is computed by dividing net income by the weighted average shares of common stock outstanding for the period. 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 on weighted average shares outstanding was 49,851 and 56,390 for the quarters ended January 31, 1998 and 1997. F-24 Champion Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), continued 4. DIVIDENDS The Company declared a dividend of five cents to be paid on March 27, 1998, to stockholders of record on March 9, 1998. 5. ACQUISITIONS On December 31, 1996, the Company acquired all the issued and outstanding common shares of Interform Corporation ("Interform"), a business forms printer located in Bridgeville, Pennsylvania, in exchange for cash of $2.5 million. Champion utilized the proceeds of a loan from a bank to provide the cash consideration and to refinance the existing long-term debt of Interform. The transaction was accounted for under the purchase method of accounting. The following summarizes the unaudited consolidated pro forma results of operations for the quarter ended January 31, 1997, assuming the acquisition had been consummated at the beginning of the quarter. 1997 ----------- Revenues $26,441,000 Net income $691,000 Diluted earnings per share $.08 Diluted weighted average shares outstanding 8,438,879 6. NEW ACCOUNTING PRONOUNCEMENTS In June, 1997, the FASB issued Statement No. 130 "Reporting Comprehensive Income" and Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information." The Company does not expect that the adoption of these statements will have a material impact on the consolidated financial statements. F-25
======================================================= ======================================================= No dealer, salesperson or other individual has been authorized to give any information or make any representations in connection with this Offering other than those contained in this Prospectus, and if given or made, such information or representations must not 1,000,000 SHARES be relied upon as having been authorized by the Company or any Underwriter. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities other than the shares of Common Stock to which it relates or an offer to, or a solicitation of, any person in any jurisdiction in [LOGO] which such offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has not been any change in the affairs of the Company or that the information contained herein is correct as of any time subsequent to the date hereof. CHAMPION ----------------- INDUSTRIES, INC. TABLE OF CONTENTS Page Common Stock ---- Prospectus Summary................................. 3 ------------------------------------------------------- Investment Considerations.......................... 6 PROSPECTUS Use of Proceeds.................................... 8 ------------------------------------------------------ Price Range of Common Stock........................ 8 Dividend Policy.................................... 9 Capitalization..................................... 9 Selected Consolidated Financial Data............... 10 Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 11 Business........................................... 17 Legal Proceedings.................................. 28 Management......................................... 28 Principal Shareholder.............................. 30 FERRIS, BAKER WATTS Description of Capital Stock....................... 30 Incorporated Underwriting....................................... 31 Legal Matters...................................... 33 Experts............................................ 33 Special Note Regarding Forward-Looking Statements.. 33 Available Information.............................. 34 Incorporation of Certain Information by Reference.. 34 Index to Consolidated Financial Statements......... F-1 March __, 1998 ======================================================= =======================================================
PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Printing and engraving expenses..... $* == Legal fees and expenses............. * Accounting fees and expenses........ * Transfer agent fees................. * Miscellaneous....................... * Total............................... $* - ----------------- * To be supplied by amendment. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. West Virginia Code 31-1-9, entitled "Indemnification of officers, directors, employees, and agents" states as follows: "(a) A corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines, taxes and penalties and interest thereon, and amounts paid in settlement actually and reasonably incurred by him in connection with such action or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding had no reasonable cause to believe his conduct was unlawful. The termination of any action or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, that such person did have reasonable cause to believe that his conduct was unlawful. (b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the corporation to procure judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter, including, but not limited to, taxes or any interest or penalties thereon, as to which such person shall have been adjudged to be liable for negligence or misconduct II-1 in the performance of his duty to the corporation unless and only to the extent that the court in which such action or proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. (c) To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action or proceeding referred to in subsection (a) or (b), or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under subsection (a) or (b) (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsection (a) or (b). Such determination shall be made (1) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action or proceeding, or (2) if such a quorum is not obtainable, or even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders or members. (e) Expenses (including attorneys' fees) incurred in defending a civil or criminal action or proceeding may be paid by the corporation in advance of the final disposition of such action or proceeding as authorized in the manner provided in subsection (d) upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as authorized in this section. (f) The indemnification provided by this section shall not be deemed exclusive of any other rights to which any stockholder or member may be entitled under any bylaw, agreement, vote of stockholders, members or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. (g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this section." Article VIII of the Registrant's By-Laws provides as follows: Each director of this corporation, or former director or officer of this corporation, or any person who may have served at its request as a director or officer of another corporation, his heirs and personal representatives, shall be indemnified by this corporation against costs and expenses at any time reasonably incurred by him arising out of or in connection with any claim, action, suit or proceeding, civil or criminal, against him or to which he may be made a party by reason of his being or having been such director or officer except in relation to matters as to which he shall be adjudged in such action, suit or proceeding to be liable for gross negligence or willful misconduct in the performance of a duty to the corporation. If in the judgement of the board of directors of this corporation a settlement of any claim, action, suit or proceeding so arising be deemed in the best interests of the corporation, any such director or officer shall be reimbursed for any amounts II-2 paid by him in effecting such settlement and reasonable expenses incurred in connection therewith. The foregoing right of indemnification shall be in addition to any and all rights to which any director or officer may be entitled as a matter of law. Pursuant to the foregoing authority, the Registrant has entered into Indemnification Agreements dated January 28, 1993 with certain of its directors and officers, the form of which is incorporated by reference as an exhibit to this Registration Statement. ITEM 16. EXHIBITS Number Description Reference - ------------------------------------------------------------------------------- (1) Form of Underwriting Agreement Exhibit 1.1 (2) Plan of acquisition, Agreement of Merger dated March 24, reorganization, arrangement, 1997 between Company and Blue Ridge liquidation or succession Printing Co., Inc., filed as Exhibit 2.1 to Form 8-K dated April 3, 1997 filed April 3, 1997. (3) 3.1 Articles of Incorporation Filed as Exhibit 3.1 to Form 10-Q dated June 16, 1997, filed on June 16, 1997. 3.2 Bylaws Filed as Exhibit 3.2 to Registration Statement on Form S-1, File No. 33-54454, filed on November 10, 1992. (4) Instruments defining the See Exhibit 3.1 above. rights of security holders, including debentures. (5) Opinion and Consent of Exhibit 5.1. Huddleston, Bolen, Beatty, Porter & Copen (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. II-3 16. EXHIBITS (continued) 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. 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. 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. 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. Realty Lease dated January 28, 1993 between Printing Property Corp. and Company regarding 890 Russell Cave Road, Lexington, Kentucky, filed as Exhibit 10.6 to Form 10-K dated January 27, 1994, filed January 31, 1994. Realty Lease dated January 28, 1993 between BCM Company, Ltd. and Company regarding 1563 Hansford Street, Charleston, West Virginia, filed as Exhibit 10.7 to Form 10-K dated January 27, 1994, filed January 31, 1994. $2,000,000 line of credit pursuant to Letter Agreement, Loan Agreement, Commercial Promissory Note and Guaranty Agreement dated September 24, 1993 with Bank One, West Virginia, Huntington, N.A., filed as Exhibit 10.11 to Form 10-K dated January 27, 1994, filed January 31, 1994. II-4 16. EXHIBITS (continued) Lease dated April 11, 1994 between Terry and Anis Wyatt and Stationers Inc. regarding 214 Stone Road, Belpre, Ohio, filed as Exhibit 10.1 to Form 10-K dated January 26, 1995, filed January 27, 1995. Form of Indemnification Agreement between Company and certain 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. Lease Agreement dated June 1, 1995 between Owl Investors Joint Venture and U.S. Tag & Ticket Company, Inc. regarding 2217 Robb Street, Baltimore, Maryland filed as Exhibit 10.1 to Form 10-K dated January 26, 1996, filed January 26, 1996. Lease Agreement dated November 1, 1991 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 10.2 to Form 10-K dated January 28, 1997, filed January 28, 1997. Lease Agreement dated June 1, 1972 between Earl H. and Elaine D. Seibert and Smith & Butterfield Co., Inc. regarding 113-117 East Third Street, Owensboro, Kentucky, filed as Exhibit 10.3 to Form 10-K dated January 28, 1997, filed January 28, 1997. Agreement of Lease dated August 21, 1996 between Marion B. and Harold A. Merten, Jr. and CM Acquisition Corp. (now The Merten Company) regarding 1515 Central Parkway, Cincinnati, Ohio, filed as Exhibit 10.4 to Form 10-K dated January 28, 1997, filed January 28, 1997. II-5 16. EXHIBITS (continued) Agreement of Lease dated October 1, 1988 between Ronald H. Scott and Frank J. Scott t/d/b/a St. Clair Leasing Co. and Interform Corporation, regarding 1901 Mayview Road, Bridgeville, Pennsylvania, as amended by Amendment No. 1 dated November 30, 1989, as amended by Amendment No. 2 dated April 24, 1992, and as amended by Stipulation and Order of Court (United States Bankruptcy Court for the Western District of Pennsylvania in the matter of Interform Corporation v. Ronald H. Scott and Frank J. Scott t/d/b/a St. Clair Leasing Company, Bankruptcy No. 94-20094-JLC) entered August 17, 1994, filed as Exhibit 10.5 to Form 10-K dated January 28, 1997, filed January 28, 1997. Master Vehicle Lease dated January 28, 1993 between Champion Leasing Corp. and Company, filed as Exhibit 10.8 to Form 10-K dated January 27, 1994, filed January 31, 1994. Line of credit pursuant to Note of Stationers, Inc. in principal amount of $500,000, payable to The Twentieth Street Bank, filed as Exhibit 10.5 to Registration Statement on Form S-1, File No. 33-54454, filed on November 10, 1992. $12,500,000 Term Loan Credit Agreement by and among Champion Industries, Inc. and the Banks Party Thereto and PNC Bank, National Association, as Agent, dated as of March 31, 1997, as amended by Amendment No. 1 to Credit Agreement dated August 1, 1997, filed as Exhibit 10.1 to Form 10-K dated January 29, 1998, filed January 29, 1998. Business Loan Agreement between Stationers Inc. and First Sentry Bank dated March 11, 1997 in original principal amount of $800,000, with attendant Promissory Note, filed as Exhibit 10.2 to Form 10-K dated January 29, 1998, filed January 29, 1998. Commercial Gross Lease between M. Feild Gomila et al and Bourque Printing d/b/a Upton Printing dated October 29, 1997, regarding 740 and 746 Carondolet Street, New Orleans, Louisiana, filed as Exhibit 10.3 to Form 10-K dated January 29, 1998, filed January 29, 1998. II-6 16. EXHIBITS (continued) Executive Compensation Plans Company's 1993 Stock Option Plan, and Arrangements effective March 22, 1994, filed as Exhibit 10.14 to Form 10-K dated January 27, 1994, filed January 31, 1994. (10.4) Deferred Compensation Agreement dated July 1, 1993 between Blue Ridge Printing Co., Inc. and Glenn W. Wilcox, Sr., filed as Exhibit 10.4 to Form 10-K dated January 29, 1998, filed January 29, 1998. (10.5) Split Dollar Life Insurance Agreement dated July 1, 1993 between Blue Ridge Printing Co., Inc. and Glenn W. Wilcox, Sr., filed as Exhibit 10.5 to Form 10-K dated January 29, 1998, filed January 29, 1998. (21) Subsidiaries of the Registrant Exhibit 21.1 (23.1) Consent of Ernst & Young LLP Exhibit 23.1 (24) Power of Attorney Exhibit 24.1 (27) Financial Data Schedule Exhibit 27 EDGAR ITEM 17. UNDERTAKINGS. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. II-7 (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Huntington, State of West Virginia, on March 6, 1998. CHAMPION INDUSTRIES, INC. By /s/ Marshall T. Reynolds ------------------------------------- Marshall T. Reynolds President and Chief Executive Officer II-9 Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities on the dates indicated. SIGNATURE AND TITLE DATE /s/ Marshall T. Reynolds March 6, 1998 - ------------------------------------------ Marshall T. Reynolds, Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) /s/ Joseph C. Worth, III March 6, 1998 - ------------------------------------------ Joseph C. Worth, III, Chief Financial Officer (Principal Financial Officer); Vice President /s/ Marshall T. Reynolds * March 6, 1998 - ------------------------------------------ Robert H. Beymer, Director /s/ Marshall T. Reynolds * March 6, 1998 - ------------------------------------------ Philip E. Cline, Director /s/ Marshall T. Reynolds * March 6, 1998 - ------------------------------------------ Harley F. Mooney, Jr., Director /s/ Marshall T. Reynolds * March 6, 1998 - ------------------------------------------ Todd L. Parchman, Director /s/ Marshall T. Reynolds * March 6, 1998 - ------------------------------------------ A. Michael Perry, Director /s/ Marshall T. Reynolds * March 6, 1998 - ------------------------------------------ Neal W. Scaggs, Director /s/ Marshall T. Reynolds * March 6, 1998 - ------------------------------------------ Glenn W. Wilcox, Sr., Director * By Marshall T. Reynolds, attorney in fact II-10 EX-1.1 2 EXHIBIT 1.1 EXHIBIT 1.1 FORM OF UNDERWRITING AGREEMENT March ___, 1998 Ferris, Baker Watts, Incorporated As Representative of the Several Underwriters Identified In Schedule A Annexed Hereto 100 Light Street Baltimore, Maryland 21202 Gentlemen: SECTION 1. Introduction. Champion Industries Inc., a West Virginia corporation (the "Company"), has authorized capital stock consisting of 20,000,000 shares of Common Stock, $1.00 par value per share (the "Common Stock"), of which 8,464,167 shares are issued and outstanding. The Company proposes to sell an aggregate of 1,000,000 shares of Common Stock (the "Firm Common Shares") to the several underwriters identified in Schedule A annexed hereto (the "Underwriters"), who are acting severally and not jointly. In addition, the Company has agreed to grant to the Underwriters an option to purchase up to 150,000 additional shares of Common Stock (the "Optional Common Shares") as provided in Section 4 hereof. The Firm Common Shares and, to the extent such option is exercised, the Optional Common Shares, are hereinafter collectively referred to as the "Common Shares." You, as representative of the Underwriters (the "Representative"), have advised the Company that the Underwriters propose to make a public offering of the Common Shares on the effective date of the Registration Statement, as defined in Section 2(f) hereof, or as soon thereafter as in the Representative's judgment is advisable, and that the purchase price of the Common Shares will be the public offering price of $_____ per share less underwriting discounts and commissions of seven percent (7%) or $_____ per share. The Company hereby confirms its agreements with the Underwriters as follows: SECTION 2. Representations and Warranties of the Company. The Company represents and warrants to each Underwriter that: (a) The Company and its subsidiaries (collectively the "Subsidiaries") are duly incorporated and validly existing as corporations in good standing under the laws of their jurisdictions of incorporation, with full corporate power and authority to own and/or lease their properties and conduct their business as described in the Prospectus (as defined in Section 2(f) hereof); the Company and its Subsidiaries are duly qualified to do business as foreign corporations under the corporation law of, and are in good standing as such in, each jurisdiction in which they own or lease properties, have an office or conduct business and such qualification is required, and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. (b) The Company does not own or control any subsidiary and does not own any interest in any other corporation, joint venture, proprietorship or other commercial entity or organization except as described in the Prospectus. (c) The shares of Common Stock outstanding have been duly and validly authorized and are validly issued, fully paid and nonassessable. There are no pre-emptive, preferential or other rights to subscribe for or purchase any of the Common Shares to be sold by the Company hereunder, and no shares of Common Stock have been issued in violation of such rights of stockholders. There are no outstanding rights, warrants or options to acquire or instruments convertible into or exchangeable for, any shares of Common Stock or other equity interest in the Company, except as described in the Prospectus. No holders of securities of the Company have any rights to the registration of such securities under the Registration Statement, or such rights have been waived with respect to the Registration Statement. The statements made in the Prospectus under the caption "Description of Capital Stock" are accurate in all material respects. (d) The Common Shares to be sold by the Company have been duly authorized, and when issued, delivered and paid for pursuant to this Agreement, will be validly issued, fully paid and nonassessable, and will conform to the description thereof contained in the Prospectus. Upon consummation of the purchase of the Common Shares by the Underwriters under this Agreement, the Underwriters will acquire good and marketable title thereto, free and clear of any claim, security interest, community property right, or other encumbrance or restriction on transfer. (e) The Company has full corporate power and authority to enter into and perform this Agreement, and the execution and delivery hereof and the performance of the Company's obligations hereunder have been duly authorized by all necessary corporate action. This Agreement has been duly executed and delivered by the Company and is the legal, valid and binding agreement of the Company enforceable in accordance with its terms, except that rights to indemnity or contributions may be limited by applicable law and enforceability may be limited by bankruptcy, insolvency or similar laws generally affecting the rights of creditors and by equitable principles limiting the right to specific performance or other equitable relief. The execution and performance by the Company of this Agreement, including application of the net proceeds of the offering, if and when received, as described in the Prospectus under "Prospectus Summary," "Capitalization" and "Use of Proceeds," will not violate any provisions of the Certificate or Articles of Incorporation or By-Laws of the Company, or its Subsidiaries, or any law, rule or regulation applicable to the Company or its Subsidiaries of any government, court, regulatory body, administrative agency or other governmental body having jurisdiction over the Company or its Subsidiaries or any of its businesses or properties, and will not result in the breach, or be in contravention, of any provision of any loan agreement, lease, franchise, license, note, bond, other evidence of indebtedness, indenture, mortgage, deed of trust, other instrument, permit or other contractual obligation to which the Company or its Subsidiaries is a party or by which the Company or its Subsidiaries or its property may be bound or affected, or any order of any court or governmental agency or authority entered in any proceeding to which the Company or its Subsidiaries was or is now a party or by which it is bound except those, if any, described in the Prospectus or which are not material to the Company and do not materially affect its business. No consent, approval, authorization or other order of any court, regulatory body, administrative agency, or other governmental body is required for the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated by this Agreement, except for compliance with the Securities Act of 1933, as amended (the "Act") and the state securities laws (the "Blue Sky Laws") applicable to the public offering of the Common Shares by the Underwriters, and the clearance of such offering with the National Association of Securities Dealers, Inc. (the "NASD"). (f) A registration statement with respect to the Common Shares, prepared by the Company in conformity with the requirements of the Act and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, has been filed with the Commission, and the Company has prepared and has filed prior to the effective date of such registration statement an amendment or amendments to such registration statement as may be required. There have been delivered to the Representative and its counsel two signed copies of such registration statement, as initially filed with the Commission and for each of the Underwriters conformed copies of such registration statement, as initially filed with the Commission and each amendment thereto (but without exhibits) and 2 of each related preliminary prospectus included in the registration statement prior to the time it becomes effective or filed with the Commission pursuant to Rule 424(a) under the Act (each, a "Preliminary Prospectus"). Such registration statement, as finally amended and revised at the time such registration statement becomes effective, which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A under the Act and contained in the Prospectus (hereafter defined), and any amendments thereto, is herein referred to as the "Registration Statement". The related final prospectus, including any information incorporated by reference therein, filed by the Company with the Commission pursuant to Rules 424(b) and 430A under the Act is herein referred to as the "Prospectus." (g) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus, and each Preliminary Prospectus has conformed fully in all material respects with the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are made, not misleading. The Registration Statement and the Prospectus, and any amendments or supplements thereto, contain all statements that are required to be stated therein in accordance with the Act and the Rules and Regulations and in all material respects conform to the requirements of the Act and the Rules and Regulations, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, includes any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are made, not misleading; provided, however, that the Company makes no representation or warranty as to information contained in or omitted from any Preliminary Prospectus, the Registration Statement, the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representative specifically for use in the preparation thereof. There are no legal or governmental actions, suits or legal proceedings, and there are no contracts or other documents, transactions or relationships of or by the Company required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been described or filed as required. (h) Ernst & Young LLP, which has expressed its opinion with respect to certain of the financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent certified public accountants as required by the Act and the Rules and Regulations. (i) The financial statements of the Company for the respective periods covered thereby, and the related notes and schedules thereto included in the Registration Statement and the Prospectus, present fairly the financial position of the Company for the periods covered thereby as of the respective dates of such financial statements, all in conformity with generally accepted accounting principles consistently applied throughout the periods involved. All adjustments for a fair presentation of results have been made. The selected financial data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein. No other financial statements are required by Form S-2 or otherwise to be included in the Registration Statement. (j) Neither the Company nor its Subsidiaries is in violation of its Certificate or Articles of Incorporation or By-Laws, or in default under any court or administrative order or decree, or in default with respect to any provision of any material loan agreement, lease, franchise, license, note, bond, other evidence of indebtedness, indenture, mortgage, deed of trust, other instrument, permit or other contractual obligation to which the Company or its Subsidiaries is a party or by which the Company or its Subsidiaries 3 or any of its properties or businesses may be bound, and, to the knowledge of the Company, there does not exist any state of facts which constitutes an event of default as defined in such documents or which, upon notice or lapse of time or both, would constitute such an event of default, except those, if any, described in the Prospectus or which are not material to the Company and do not materially affect its business. (k) There are no governmental actions, suits or legal proceedings pending or, to the Company's knowledge, threatened to which the Company or its Subsidiaries is a party or to which the business of the Company or its Subsidiaries or any material property owned or leased by the Company or its Subsidiaries is subject, or related to product liability, environmental or discrimination matters which are not disclosed in the Registration Statement and the Prospectus, or which question the validity of this Agreement or the Exchange Agreement or any action taken or to be taken pursuant hereto and thereto except those, if any, described in the Prospectus or which are not material to the Company and do not materially affect its business. (l) The Company and its Subsidiaries have good and marketable title to all the properties and assets reflected as owned in the financial statements hereinabove described (or elsewhere in the Prospectus), subject to no lien, mortgage, pledge, charge or encumbrance of any kind or nature whatsoever except those, if any, reflected in such financial statements (or elsewhere in the Prospectus) or which, in the aggregate, are not material to the Company, its Subsidiaries, and its business and do not materially affect the value of such property and do not materially interfere with the use made or proposed to be made of such property; all material properties held or used by the Company, and its Subsidiaries under leases, licenses or other agreements are held by them under valid, subsisting and enforceable leases, franchises, or other agreements with respect to which they are not in default, except to the extent that the enforceability of the rights and remedies of the Company and its Subsidiaries under any such lease, franchise, license or other agreement may be limited by bankruptcy, insolvency or similar laws generally affecting the rights of creditors and by equitable principles limiting the right to specific performance or other equitable relief. (m) The Company and its Subsidiaries will not take and have not taken, directly or indirectly, any action (and does not know of any action by their directors, officers or stockholders, or others) designed to or which has constituted or which might reasonably be expected to cause or result, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise, in stabilization or manipulation of the price of the Common Shares to facilitate the sale or resale of the Common Shares. (n) Except as reflected in or contemplated by the Registration Statement or any amendment thereto, since the respective dates as of which information is given in the Registration Statement: (i) the Company and its Subsidiaries have not incurred any material liabilities or obligations, direct or contingent, nor entered into any material transactions not in the ordinary course of business; (ii) the Company and its Subsidiaries have not paid or declared any dividends or other distributions with respect to their capital stock and is not delinquent in the payment of principal or interest on any outstanding debt obligations; and (iii) there has not been any change in the capital stock or long-term debt of the Company and its Subsidiaries or any material adverse change in the business (resulting from litigation or otherwise), business prospects, properties, condition (financial or otherwise), net worth or results of operations of the Company and its Subsidiaries. 4 (o) The Company and its Subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and paid all taxes shown as due thereon; and the Company and its Subsidiaries have no knowledge of any tax deficiency which has been asserted or threatened against the Company and its Subsidiaries which would materially adversely affect the business or operations or properties of the Company taken as a whole. (p) The Company has an outstanding capitalization as set forth under "Capitalization" in the Prospectus as of the date indicated therein and there has been no material change therein except as disclosed in the Prospectus. The financial and numerical information and data in the Prospectus under "Prospectus Summary," "The Company," "Use of Proceeds," "Dividend Policy," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," "Management," "Principal Shareholder," "Certain Transactions" and "Description of Capital Stock" are fairly presented and prepared on a basis consistent with the audited financial statements of the Company. (q) The Company and its Subsidiaries have obtained all material licenses, permits, approvals and other governmental authorizations required for the present and proposed conduct of their business as described in the Prospectus. Such licenses, permits and other governmental authorizations are in full force and effect, the Company and its Subsidiaries are in all material respects complying therewith, and the Company and its Subsidiaries have not received any notice of proceedings relating to the revocation or modification of any such license, permit, approval or authorization. The Company and its Subsidiaries are complying in all material respects with all material laws, ordinances and regulations applicable to the Company and its Subsidiaries, its properties and its business. (r) The Company and its Subsidiaries have maintained its books of account in accordance with generally accepted accounting principles consistently applied in all material respects, and such books and records are, and during periods covered by the financial statements included in the Registration Statement and the Prospectus are, correct and complete in all material respects, and fairly and accurately reflect the income, expenses, assets and liabilities of the Company and provide a fair and materially accurate basis for the preparation of such financial statements. (s) The minute books of the Company and its Subsidiaries are current and contain a materially correct and complete record of all corporate action taken by the Board of Directors and the stockholder of the Company and its Subsidiaries and all signatures contained therein are true signatures of the persons whose signatures they purport to be. (t) Except as described in the Prospectus, the Company and its Subsidiaries are unaware of any loss or threatened loss of any key customer, supplier, or account which is material to the Company. (u) The Company and its Subsidiaries own or possess all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names used by them or necessary in connection with the present and proposed conduct of their business as described in the Prospectus, and the Company and its Subsidiaries have not received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in any material adverse change in the condition, financial or otherwise, or in the earnings, affairs or business prospects of the Company and its Subsidiaries. (v) The Company and its Subsidiaries are in substantial compliance with all federal, state or local laws or ordinances, including orders, rules and regulations thereunder, regulating or otherwise 5 affecting employee health and safety or the environment, non-compliance with which could have a material adverse effect on the Company. To their knowledge, the Company and its Subsidiaries have disposed of all wastes in substantial compliance with applicable laws, and they are not aware of any existing condition that may form the basis for any present or future claim, demand or action seeking clean-up of any site, location, or body of water, surface or subsurface. (w) The provisions of any qualified retirement plans sponsored by the Company and its Subsidiaries are in compliance with the Employee Retirement Income Security Act of 1974 ("ERISA"), and the Company and its Subsidiaries are in material compliance with ERISA, including, without limitation, ERISA's fiduciary and prohibited transaction rules, or the funding requirements with respect to any such plan. The Company and its Subsidiaries have timely filed the reports required to be filed by ERISA in connection with the maintenance of plans sponsored by the Company and its Subsidiaries,and no fact, including, without limitation, any "reportable event" as defined by ERISA and the regulations thereunder, exists in connection with any plan sponsored by the Company and its Subsidiaries which might constitute grounds for the termination of such plan by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United States District Court of a trustee to administer any such plan. With respect to multiemployer plans in which the Company and its Subsidiaries participates on behalf of its employees who are members of collective bargaining units, the Company and its Subsidiaries have no withdrawal liability except to the extent set forth in the Prospectus. The provisions of any employee benefit welfare plan, as defined in ERISA's Section 3(l), sponsored by the Company and its Subsidiaries are in material compliance with ERISA's fiduciary and prohibited transaction rules and reporting and disclosure requirements with respect to any such plan. (x) No labor dispute with the employees of the Company and its Subsidiaries exist or, to the knowledge of the Company and its Subsidiaries, is imminent, and they are not aware of any existing or imminent labor disputes by the employees of any of their principal suppliers, manufacturers or contractors which might be expected to result in any material adverse change in the condition, financial or otherwise, or in the earnings, affairs or business prospects of the Company and its Subsidiaries. A certificate signed by any officer of the Company delivered to you or to counsel for the Underwriters shall be deemed a representation and warranty of the Company and its Subsidiaries to you as to the matters covered thereby. SECTION 3. Representation of Underwriters. You have been duly authorized to act and will act as the Representative for the Underwriters in connection with this financing, and any action under or in respect of this Agreement taken by you, as such Representative, will be binding upon all Underwriters. You may engage another representative to co-manage the public offering, and from and after the date of any such engagement, the term Representative, used herein, shall include such other representative. SECTION 4. Purchase, Sale and Delivery of Common Shares. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell 1,000,000 Firm Common Shares to the Underwriters, and the Underwriters agree, severally and not jointly, to purchase from the Company the number of Firm Common Shares as hereinafter set forth at the price per share set forth in Section 1 hereof. In addition, on the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase from the Company up to 150,000 Optional Common Shares at the same purchase price per share to be paid for the Firm Common Shares, for use solely in covering any overallotment made by the Underwriters in the sale and distribution of the Firm Common Shares. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of full Optional Common Shares which (as nearly as practicable in full shares as determined by the Representative) bears to 1,000,000 the 6 same proportion as the number of shares set forth opposite the name of such Underwriter in Schedule A hereto bears to the total number of Firm Common Shares to be purchased by all the Underwriters under this Agreement. At 9:00 A.M., Baltimore time, on the third full business day after the public offering, or at such other time not later than seven (7) full business days after the public offering, as the Representative, and the Company may agree, the Company will deliver to the Representative, at the offices of Ferris, Baker Watts, Incorporated, 1720 Eye Street, N.W., Washington, D.C., or through the facilities of The Depository Trust Company, for the accounts of the Underwriters, certificates representing the Firm Common Shares to be sold against payment in Baltimore, Maryland of the purchase price therefor by certified or bank cashier's check or wire transfer payable, as appropriate, to the order of the Company in respect of the Firm Common Shares being sold by the Company. Such time of delivery and payment is referred to throughout this Agreement as the "First Closing Date." The certificates for the Firm Common Shares to be so delivered will be in denominations and registered in such names as the Representative requests by notice delivered to the Company prior to 9:00 A.M., Baltimore time, no later than the second full business day preceding the First Closing Date, and, if the certificates are to be physically delivered, will be made available for checking and packaging at 9:00 A.M., Baltimore time, at least 24 hours prior to the First Closing Date at a location to be designated by the Representative. The overallotment option granted hereunder may be exercised at any time (but not more than once) within thirty (30) days after the date the Registration Statement becomes effective upon written notice by the Representative to the Company setting forth the aggregate number of Optional Common Shares as to which the Underwriters are exercising the option, the names and denominations in which the certificates for such shares are to be registered and the time and place at which such certificates will be delivered. Such time of delivery (which may not be earlier than the First Closing Date, as hereinafter defined), being herein referred to as the "Second Closing Date," shall be determined by the Representative, but if at any time other than the First Closing Date, shall not be earlier than three (3) nor later than seven (7) full business days after delivery of such notice of exercise to the Company. Certificates for the Optional Common Shares will be made available for checking and packaging at 9:00 A.M., Baltimore time, at least 24 hours prior to the Second Closing Date at a location to be designated by the Representative if the certificates are to be physically delivered. The manner of payment for and delivery of (including the denominations of and the names in which certificates are to be registered) the Optional Common Shares shall be the same as for the Firm Common Shares purchased from the Company. As Representative of the Underwriters, you may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company. The Representative has advised the Company that each Underwriter has authorized the Representative to accept delivery of its Common Shares and to make payment therefor. You, individually and not as the Representative of the Underwriters, may make payment for any Common Shares to be purchased by any Underwriter whose funds shall not have been received by you by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any obligation hereunder. SECTION 5. Covenants of the Company. The Company covenants and agrees with the several Underwriters as follows: (a) The Company will use its best efforts to cause the Registration Statement to become effective at the earliest possible time and upon notification from the Commission that the Registration Statement has become effective, will so advise the Representative and its counsel promptly. Thereafter, the Company will prepare and timely file with the Commission pursuant to Rule 424(b) under the Act the Prospectus containing information previously omitted in reliance on Rule 430A under the Act. The Company will advise the Representative and its counsel promptly of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any 7 proceedings for that purpose, or of any notification of the initiation or threatening of any proceedings for that purpose, and will also advise the Representative and its counsel promptly of any request of the Commission for amendment or supplement of the Registration Statement (either before or after it becomes effective), of any Preliminary Prospectus or of the Prospectus, or for additional information, and will not file or make any amendment or supplement of the Registration Statement (either before or after it becomes effective), to any Preliminary Prospectus or to the Prospectus of which the Representative has not been furnished with a copy prior to such filing or to which you object; and the Company will file promptly and will furnish to the Representative at or prior to the filing thereof copies of all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Sections 13, 14 and 15 of the Exchange Act subsequent to the date of the Prospectus, and for so long as the delivery of a prospectus is required in connection with the offering or sale of the Common Shares. (b) If, at any time when a prospectus relating to the Common Shares is required to be delivered under the Act, any event occurs as a result of which the Prospectus, including any subsequent amendment or supplement, would include an untrue statement of a material fact, or would omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus, including any amendment or supplement thereto, to comply with the Act or the Rules and Regulations, the Company promptly will advise the Representative and its counsel thereof and will promptly prepare and file with the Commission an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance; and, in case any Underwriter is required to deliver a prospectus nine months or more after the effective date of the Registration Statement, the Company upon request, but at the expense such Underwriter, will prepare promptly such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act. (c) Except as described in the Prospectus, the Company and its Subsidiaries will not, prior to the Second Closing Date (or the expiration of the thirty (30) day period within which the Representative is required to exercise the over allotment option pursuant to Section 4 hereof if there is no Second Closing Date), incur any liability or obligation, direct or contingent, or enter into any material transaction, other than in the ordinary course of business. (d) The Company will not acquire any of the Company's capital stock prior to the Second Closing Date (or the expiration of the thirty (30) day period within which the Representative is required to exercise the over allotment option pursuant to Section 4 hereof if there is no Second Closing Date) nor will the Company declare or pay any dividend or make any other distribution upon its capital stock payable to its holders of record on a date prior to the Second Closing Date or, if there is no Second Closing Date, then prior to the First Closing Date. (e) Until the Underwriters have completed the offering referred to in Section 1 above, the Company and its Subsidiaries will not take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result, under the Exchange Act, or otherwise, in stabilization or manipulation of the price of the Common Shares to facilitate the sale or resale of the Common Shares. (f) The Company will make generally available to the Representative and to the Company's security holders an earnings statement (which need not be audited) as soon as practicable, but in no event later than 15 months after the end of the Company's current fiscal quarter, covering a period of 12 consecutive calendar months beginning after the effective date of the Registration Statement, which will satisfy the provisions of the last paragraph of Section 11(a) of the Act and Rule 158 promulgated thereunder. 8 (g) During such period as a prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, the Company will furnish the Representative, at the Company's expense, with copies of the Registration Statement, the Prospectus, the Preliminary Prospectus and all amendments and supplements to any such documents in each case as soon as available and in such quantities as the Representative may reasonably request, for the purposes contemplated by the Act or Exchange Act. (h) The Company will cooperate with the Representative, its counsel and the Underwriters in qualifying or registering the Common Shares if and as required for sale under the Blue Sky Laws of such jurisdictions as the Representative shall designate, and will continue such qualifications or registrations in effect so long as reasonably requested by the Representative to effect the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction where it is not presently qualified to transact business. (i) During the period of five years after the date hereof, as soon as practicable after the end of each fiscal year, the Company will furnish the Representative with two copies, and to each of the other Underwriters who may so request, one copy, of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and corresponding statements of earnings, stockholders' equity and cash flows for the year then ended, such financial statements to be under the certificate or opinion of the Company's independent certified public accountants. During such period the Company will also furnish the Representative with one copy: (i) as soon as practicable after the filing thereof, of each report filed by the Company with the Commission; and (ii) as soon as available, of each report of the Company mailed to its stockholders. (j) The Company will comply or cause to be complied with the conditions to the obligations of the Underwriters set forth in Section 7 hereof. (k) The Company shall take all necessary and appropriate action such that the Common Shares are authorized for trading on the NASDAQ National Market System as soon as practicable after the effectiveness of the Registration Statement and the Common Shares shall remain so authorized for at least thirty-six (36) months thereafter. (l) The Company shall promptly prepare and file with the Commission, from time to time, such reports as may be required to be filed by the Rules and Regulations. (m) The Company shall comply in all respects with the undertakings given by the Company in connection with the qualification or registration of the Common Shares for offering and sale under the Blue Sky Laws of one or more jurisdictions. (n) The Company shall apply the net proceeds from the sale of the Common Shares to be sold by it hereunder for the purposes set forth in the Prospectus. (o) Except for the sale of Common Shares pursuant to this Agreement, the Company shall not make any offering, sale or other disposition of any of its Common Stock on the open market or otherwise within 180 days after the effective date of the Registration Statement without the Representative's prior written consent. The Company has obtained for the benefit of the Underwriters, the agreement of all present officers, directors and principal stockholders of the Company that for the period indicated in the foregoing sentence, they will not offer, sell or otherwise dispose of any Common Stock without the Representative's prior written consent. 9 SECTION 6. Payment of Expenses. Whether or not the transactions contemplated hereunder are consummated or this Agreement becomes effective or is terminated for any reason, except as otherwise set forth below, the Company will pay the costs and expenses incurred in connection with the public offering. Costs, fees and expenses to be paid by the Company include: (a) All costs, fees and expenses incurred in connection with the performance of the Company's obligations hereunder, including without limiting the generality of the foregoing, all costs and expenses incurred in connection with the preparation, printing, filing and distribution of the Registration Statement, each Preliminary Prospectus and the Prospectus (including all exhibits and financial statements) and all agreements and supplements provided for herein, this Agreement, the Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters' Questionnaire, various letters from the Representative to the Underwriters and the Preliminary and, if required, any Supplemental Blue Sky Memoranda. (b) All costs, fees and expenses, including legal fees and disbursements of counsel for the Underwriters, incurred by the Underwriters in connection with qualifying or registering all or any part of the Common Shares for offer and sale under the Blue Sky Laws, if required, including the preparation of the Preliminary and any Supplemental Blue Sky Memoranda relating to the Common Shares, and the clearing of such sales with the NASD. (c) All fees and expenses of the Company's transfer agent, printing of the certificates for the Common Shares, and all transfer taxes, if any, with respect to the transfer, sale and delivery of the Common Shares to the several Underwriters and all fees of the NASD and NASDAQ. (d) Expenses incurred by the Underwriters, as follows: (i) Actual, accountable, out-of-pocket expenses not to exceed $_______ if this Agreement is terminated after the date on which the Registration Statement is filed with the Commission but prior to the date of closing of the Offering; or ____ percent (___%) of the gross proceeds raised in the Offering upon the closing of the Offering; (ii) All costs and expenses customarily incurred by the Underwriters associated with settlement in same day funds (including, but not limited to, interest or cost of funds expenses), if settlement in same day funds is requested by the Company; (iii) All costs and expenses of advertising the public offering, including any "tombstone" advertisements; provided, however, that the Underwriters shall not be entitled to such payment if the Underwriters terminates this Agreement except as provided in Section 13(b) hereof or the Company terminates this Agreement because of the negligence or material breach on the part of the Underwriters which was the cause of the failure of the offering to be completed. SECTION 7. Conditions of the Obligations of the Underwriters. The obligations of the Underwriters to purchase and pay for the Firm Common Shares on the First Closing Date and the Optional Common Shares on the Second Closing Date shall be subject to the accuracy of the representations and warranties on the part of the Company herein set forth as of the date hereof and as of the First Closing Date or the Second Closing Date, as the case may be, to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder, and to the following additional conditions: 10 (a) The Registration Statement shall have become effective not later than 1:00 P.M., Baltimore time, on the date of this Agreement, or such later time as shall have been consented to by the Representative but in no event later than 1:00 P.M., Baltimore time, on the third full business day following the date hereof; prior to each Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been instituted or shall be pending or, to the knowledge of the Company, or the Representative, shall be contemplated by the Commission, and any request of the Commission for additional information shall have been complied with to the Representative's reasonable satisfaction. (b) The Common Shares shall either be "covered securities" as defined in the Act or shall have been qualified or registered for sale under the Blue Sky Laws of such states as shall have been specified by the Representative prior to the date hereof. (c) The legality and sufficiency of the authorization, issuance and sale of the Common Shares hereunder, the validity and form of the certificates representing the Common Shares, the execution and delivery of this Underwriting Agreement, and all corporate proceedings and other legal matters incident thereto, and the form of the Registration Statement and the Prospectus (except financial statements and other financial data included therein) shall have been approved by Shapiro and Olander, Baltimore, Maryland, counsel for the Representative and the Underwriters. (d) The Representative shall not have advised the Company that the Registration Statement or Prospectus, or any amendment or supplement thereto, contains an untrue statement of fact, which, in the opinion of Shapiro and Olander, counsel for the Representative and the Underwriters, is material or omits to state a fact which, in the written opinion of such counsel, is material and is required to be stated therein or necessary to make the statements therein not misleading. (e) Since the dates as of which information is given in the Registration Statement: (i) the Company and its Subsidiaries shall not have sustained any material loss or interference with its business from any labor dispute, strike, fire, explosion, flood or other calamity (whether or not insured), or from any court or governmental action, order or decree; and (ii) there shall not have been any change in the capital stock, short-term debt or long-term debt of the Company or a change or a development involving a prospective change in or affecting the ability of the Company or its Subsidiaries to conduct their business (whether by reason of any court, legislative, other governmental action, order, decree, or otherwise), or in the general affairs, management, financial position, stockholders' equity or results of the operations of Company, whether or not arising from transactions in the ordinary course of business, in each case other than as set forth in or contemplated by the Registration Statement and Prospectus. The effect of which on the Company, in any such case described in clause (i) or (ii), above, is in the Representative's opinion sufficiently material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Common Shares on the terms and in the manner contemplated in the Registration Statement and the Prospectus. (f) All formal and informal voting agreements, understandings and arrangements with respect to the voting of Common Stock shall have been terminated and shall be of no further force or effect except as disclosed in the Prospectus. (g) There shall have been furnished to you, as Representative of the Underwriters, on each Closing Date: 11 (i) An opinion of Huddleston, Bolen, Beatty, Porter & Copen, counsel for the Company, addressed to the Representative as such and dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) the Company and its Subsidiaries are duly incorporated, validly existing and in good standing under the laws of their jurisdiction of incorporation with full corporate power and authority to own and/or lease their properties and conduct their business as described in the Prospectus; and the Company and its Subsidiaries are duly qualified to do business as foreign corporations under the corporation law of, and is in good standing as such in, each state where such qualification is required, and do not own or lease any property or have any employees situated in any other state. (2) the Company does not own or control any subsidiary and does not, to such counsel's knowledge after due investigation, own any interest in any other corporation, joint venture, proprietorship or other commercial entity or organization except as described in the Prospectus. (3) the authorized capital stock of the Company consists of 20,000,000 shares of Common Stock, $1.00 par value, and all such capital stock conforms as to legal matters to the description thereof in the Registration Statement and Prospectus; the issued and outstanding shares have been duly authorized and validly issued and are fully paid and nonassessable and were issued in compliance with exemptions from or were registered in accordance with the registration provisions of Section 5 of the Act and comparable provisions of applicable Blue Sky Laws; there are not preemptive, preferential or other rights to subscribe for or purchase any of the Common Shares to be sold by the Company hereunder and no shares of Common Stock have been issued in violation of such rights of stockholders; and, to such counsel's knowledge, after due investigation, there are not outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of Common Stock or other equity interest in the Company. Except as otherwise stated in the Registration Statement, to such counsel's knowledge, after due investigation, no holders of securities of the Company have rights to the registration of such securities in the Registration Statement. The statements made in the Prospectus under the section entitled "Description of Capital Stock" are accurate in all material respects. (4) the Common Shares will be duly authorized and validly issued, fully paid and nonassessable and, upon consummation of the purchase by the Underwriters, and assuming they have no knowledge of any liens, claims or encumbrances affecting the Common Shares, the Underwriters will acquire good and marketable title thereto, free and clear of any claim, security interest, community property right, or other encumbrance or restriction on transfer (except for restrictions under the Act and under the Blue Sky Laws). (5) the Company has full corporate power and authority to enter into and perform this Agreement and this Agreement the execution and delivery hereof, and the performance of the Company's obligations hereunder have been duly executed and delivered by and on behalf of the Company, and are legal, valid, and binding agreements of the Company, enforceable in accordance with their terms, except that rights to indemnity or contribution may be limited by applicable law and enforceability may be 12 limited by bankruptcy, insolvency or similar laws affecting the rights of creditors and by equitable principles limiting the right to specific performance or other equitable relief. (6) the execution and performance by the Company of this Agreement, including application of the net proceeds of the offering, if and when received, as described in the Prospectus under "Prospectus Summary," "Capitalization" and "Use of Proceeds," will not violate any provisions of the Company's or its Subsidiaries' Articles or Certificate of Incorporation or By-Laws or, to such counsel's knowledge after due investigation, any law, rule or regulation applicable to the Company or its Subsidiaries of any government, court, regulatory body, administrative agency or other governmental body having jurisdiction over the Company or its Subsidiaries or any of their properties, and will not, to such counsel's knowledge after due investigation, result in the breach, or be in contravention, of any provision of any loan agreement, lease, franchise, license, note, bond, other evidence of indebtedness, indenture, mortgage, deed of trust, other instrument, permit or other contractual obligation to which the Company or its Subsidiaries is a party or by which the Company or its Subsidiaries or their property may be bound, or any order of any court or governmental agency or authority entered in any proceeding to which the Company or its Subsidiaries was or is now a party or by which they are bound. (7) no consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated by this Agreement, except for compliance with the Act and Blue Sky Laws applicable to the public offering of the Common Shares by the Underwriters, and the clearance of such offering with the NASD. (8) the Registration Statement has become effective under the Act, and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Act, and the Registration Statement, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the Rules and Regulations (except that such counsel need express no opinion as to the financial statements and other financial data included therein); such counsel has no reason to believe that either the Registration Statement or the Prospectus or any such amendment or supplement thereto, or any document incorporated by reference therein, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are made, not misleading (except that such counsel need express no opinion as to the financial statements and other financial data included therein); such counsel, after due investigation, does not know of any legal or governmental proceedings or of any contracts or other documents, transactions or relationships of or by the Company or its Subsidiaries required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement by the Act or the Rules and Regulations which are not described or filed, as required. (9) except as described in the Prospectus, there are no legal or governmental actions, suits or legal proceedings pending or threatened to which the Company or its Subsidiaries is a party or to which their respective businesses or material property owned or leased by the Company or its Subsidiaries is subject, or which 13 question the validity of this Agreement or any action taken or to be taken pursuant hereto. (10) to the knowledge of such counsel, the Company and its Subsidiaries have good and marketable title except as otherwise stated in the Prospectus, to all the real property owned by the Company and its Subsidiaries as set forth in the Prospectus, subject to no lien, mortgage, pledge, charge or encumbrance of any kind or nature whatsoever except those, if any, referred to in the Prospectus (or reflected in the financial statements included therein) or which, in the aggregate, are not material to the Company and its Subsidiaries and their business and do not materially affect the value of such property; and the real properties held or used, by the Company and its Subsidiaries under leases or other agreements as set forth in the Prospectus are, held by them under valid, subsisting and enforceable leases or other agreements with respect to which, to such counsel's knowledge after due investigation, the Company and its Subsidiaries are not in default, except to the extent that the enforceability of the rights and remedies of the Company and its Subsidiaries under any such lease or other agreement may be limited by bankruptcy, insolvency, or similar laws generally affecting the rights of creditors and by equitable principles limiting the right to specific performance or other equitable relief. (11) (i) the Company and its Subsidiaries possess all licenses, permits, approvals and other governmental authorizations required for the conduct of its business, as described in the Prospectus; (ii) such licenses, permits and other governmental authorizations are in full force and effect and the Company and its Subsidiaries are in all material respects complying therewith; (iii) the Company and its Subsidiaries are complying in all respects with all laws, ordinances and regulations applicable to the Company and its Subsidiaries, their properties and business, the noncompliance or violation of which would have a material adverse effect on the Company. (12) to the knowledge of such counsel, the Company and its Subsidiaries own or possess all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, and trade names used by them or necessary in connection with the conduct of their business, as described in the Prospectus. It is understood that the opinion of such counsel may state that such counsel is relying as to factual matters on certificates of officers of the Company and its Subsidiaries and of state officials and, as to legal matters in jurisdictions other than in which they are domiciled, on opinions of local counsel or of other counsel retained or having rendered legal services with respect to specific matters, in which case their opinion is to state that they are so doing and they believe such reliance is reasonable, and copies of said certificates and/or opinions are to be attached to the opinion. (ii) An opinion of Shapiro and Olander, counsel for the Representative and the Underwriters, addressed to the Representative in such capacity and dated the First Closing Date or the Second Closing Date, as the case may be, with respect to the validity of the Common Shares, the Registration Statement and the Prospectus and other related matters as you may reasonably require, and the Company shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they request for the purpose of enabling them to pass upon such matters. 14 (iii) A certificate of the chief executive officer and the principal financial officer and the chief accountant of the Company dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) the representations and warranties of the Company set forth in Section 2 of this Agreement are true and correct as of the date of this Agreement and as of the First Closing Date or the Second Closing Date, as the case may be, as if again made on and as of such Closing Date, and the Company has complied with all the agreements and satisfied all the conditions to be performed or satisfied by it at or prior to such Closing Date. (2) the Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus filed as a part of the Registration Statement or any amendment thereto; no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending or contemplated under the Act. (3) each of the respective signatories of the certificate for the Company has carefully examined the Registration Statement and the Prospectus, and any amendment or supplement thereto, and, in the opinion of such signatory and to his knowledge, the Registration Statement and the Prospectus and any amendment or supplement thereto contain all statements that are required to be stated therein, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are made, not misleading, and, since the date on which the Registration Statement was first filed with the Commission, there has occurred no event required to be set forth in an amended or supplemented prospectus or in an amendment to the Registration Statement which has not been so set forth. (4) since the date on which said Registration Statement was initially filed, there has not been any material adverse change or a development involving a prospective material adverse change in the business, properties, financial condition or earnings of the Company or its Subsidiaries, whether or not arising from transactions in the ordinary course of business, except as disclosed in said Registration Statement as heretofore amended including the proposed amendment thereto delivered to the Representative prior to or contemporaneously with the execution of this Agreement or (but only if the Representative expressly consents thereto in writing) delivered to the Representative thereafter; since such date and except as so disclosed or in the ordinary course of business, the Company and its Subsidiaries have not incurred any liability or obligation, direct or indirect, or entered into any material transaction since such date and except as so disclosed there has not been any material change in the capital stock, short-term debt or long-term debt of the Company and its Subsidiaries and the Company has not acquired any of the Common Shares nor has the Company declared or paid any dividend, or made any other distribution, upon its outstanding shares of Common Stock payable to stockholders of record on a date prior to the First Closing Date or Second Closing Date, as the case may be; since such date and except as so disclosed, the Company and its Subsidiaries have not incurred any material contingent obligations, and no material litigation is pending or threatened against the Company and its Subsidiaries; and, since such date and except as so disclosed the Company and its Subsidiaries have not sustained a material loss or interference by strike, labor dispute, fire, explosion, flood, windstorm, accident or other calamity (whether or not insured) or from any court or governmental action, order or decree. 15 The delivery of the certificate provided for in this subparagraph (iii) shall be and constitute a representation and warranty of the Company as to the facts required in the immediately foregoing clauses (1), (2), (3) and (4) of this subparagraph (iii) to be set forth in said certificate. (iv) A written agreement or agreements signed by each director, officer and principal stockholder of the Company to the effect that such persons will not make any offering, sale or other disposition of any Common Stock in the open market or otherwise for a period of 180 days after the commencement of the public offering of the Common Shares by the Underwriters, except with the prior written consent of the Representative. (v) At the time this Agreement is executed and also on the First Closing Date and the Second Closing Date, there shall be delivered to the Representative a letter addressed to the Representative, as Representative of the Underwriters, from Ernst & Young LLP, independent certified public accountants, the first letter to be dated the date of this Agreement, the second letter to be dated the First Closing Date and the third letter (in the event of a Second Closing) to be dated the Second Closing Date, to the effect set forth in Schedule B annexed hereto and containing the information set forth therein and such other information as may be requested by the Representative as of a date within five days of the date of such letter. There shall not have been any change or decrease specified in any of the letters referred to in this subparagraph (vi) which makes it impractical or inadvisable in the Representative's judgment to proceed with the initial public offering or the purchase of the Common Shares as contemplated hereby. (vi) Such further certificates and documents as the Representative may reasonably request. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are satisfactory to the Representative and to Shapiro and Olander, counsel for the Representative and the Underwriters. The Company shall furnish the Representative with such manually signed or conformed copies of such opinions, certificates, letters and documents as the Representative may reasonably request. If any condition to the Underwriters' obligations hereunder to be satisfied prior to or at either Closing Date is not so satisfied, this Agreement at the Representative's election will terminate upon notification to the Company without liability on the part of any Underwriter (including the Representative), or the Company except for the expenses to be paid by the Company pursuant to Section 6 hereof or reimbursed by the Company pursuant to Section 8 hereof and except to the extent provided in Section 10 hereof. SECTION 8. Reimbursement of Underwriters' Expenses. If the sale to the Underwriters of the Common Shares at the First Closing Date or the Second Closing Date is not consummated because any condition to the Underwriters' obligations hereunder is not satisfied, because the Company terminates this Agreement pursuant to Section 13, or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or comply with any provision hereof, the Company agrees to reimburse the Representative and the other Underwriters upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by the Representative and them in connection with the proposed purchase and the sale of the Common Shares. Any such termination shall be without liability of any party to any other party except that the provisions of this Section, Section 6 and Section 10 shall at all times be effective and shall apply. 16 SECTION 9. Effectiveness of Registration Statement. The Representative and the Company will each use their respective best efforts to cause the Registration Statement to become effective, to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement, and, if such stop order is issued, to obtain as soon as possible the lifting thereof. SECTION 10. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act against any losses, claims, damages, or liabilities, joint or several, to which such Underwriter or each such controlling person may become subject under the Act, the Exchange Act, Blue Sky Laws or other federal or state securities laws or regulations, at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such losses, claims, damages or liabilities (or actions in respect thereof, arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or in any application filed under any Blue Sky Law or other document executed by the Company specifically for that purpose or filed in any state or other jurisdiction in order to qualify any or all of the Common Shares under the securities laws thereof (any such application or document being hereinafter referred to as a "Blue Sky Application") or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are made, not misleading; the Company agrees, to reimburse each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or any such controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that: (i) any such loss, claim, damage, liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or in any Blue Sky Application in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representative specifically for use therein; or (ii) if such statement or omission was contained or made in any Preliminary Prospectus and corrected in the Prospectus and (1) any such loss, claim, damage or liability suffered or incurred by any Underwriter (or any person who controls any Underwriter) resulted from an action, claim or suit by any person who purchased Common Shares which are the subject thereof from such Underwriter in the offering, and (2) such Underwriter failed to deliver or provide a copy of the Prospectus to such person at or prior to the confirmation of the sale of such Common Shares in any case where such delivery is required by the Act unless such failure was due to failure by the Company to provide copies of the Prospectus to the Underwriters as required by this Agreement. The indemnification obligations of the Company as provided above are in addition to any liabilities the Company may otherwise have under other agreements, under common law or otherwise. (b) Each Underwriter will severally and not jointly indemnify and hold harmless the Company, each of its directors and each of its officers who sign the Registration Statement, and each person, if any, who controls the Company within the meaning of the Act or the Exchange Act, against any losses, claims, damages or liabilities to which the Company, or any such director, officer or controlling person may become subject under the Act, the Exchange Act, Blue Sky Laws or other federal or state statutory laws or regulations, at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter and the Representative, which shall not be unreasonably withheld), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or in any Blue Sky Application, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or in any Blue Sky Application, in reliance upon and in conformity with any written information furnished to the Company by such Underwriter through the Representative specifically for use in the preparation thereof; each Underwriter will severally reimburse any legal or other expenses reasonably incurred by the Company, or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action. The indemnification obligations of each Underwriter as provided above are in addition to any liabilities any such Underwriter may otherwise have under other agreements, under common law or otherwise. Notwithstanding the provisions of this Section, no Underwriter shall be required to indemnify the Company, or any officer, director or controlling person of the Company in any amount in excess of the total price at which the Common Shares purchased by any such Underwriter hereunder were offered to the public, plus reimbursement for reasonable legal fees and other reasonable expenses incurred. For all purposes of this Agreement, the name of each Underwriter, and the amounts of the selling concession and reallowance set forth in the Prospectus constitute the only information furnished in writing by or on behalf of any Underwriter for inclusion in the Preliminary Prospectus, Registration Statement, Prospectus (as amended or supplemented from time to time) or Blue Sky Application. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section, notify the indemnifying party in writing of the commencement thereof, but the omission to so notify the indemnifying party will not relieve any indemnifying party from any liability which it or he may have to any indemnified party otherwise than under this Section. In case any such action is brought against any indemnified party and such indemnified party notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it or he may wish, jointly with all other indemnifying parties, similarly notified, to assume the 17 defense thereof, with counsel reasonably satisfactory to such indemnified party, provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it or he and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election to assume the defense of such action and upon approval by the indemnified party of counsel to the indemnifying party, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, unless: (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel, approved by the Representative in the event that one or more of the Underwriters, their directors, officers or controlling persons, are the indemnified parties); (ii) the indemnifying party shall not have employed counsel reasonable satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action; or (iii) the indemnifying party has authorized the employment of counsel at the expense of the indemnifying party. (d) If the indemnification provided for in this Section is unavailable to an indemnified party under subparagraphs (a) or (b) hereof in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall, subject to the limitations hereinafter set forth, contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities: (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the offering of the Common Shares; or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above, but also the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The respective relative benefits received by the Company and the Underwriters shall be deemed to be in such proportion so that the Underwriters are responsible for the portion of the losses, claims, damages or liabilities represented by the percentage that the underwriting discount per share appearing on the cover page of the Prospectus bears to the initial public offering price per share appearing thereon, and the Company is responsible for the remaining portion. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to the information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages and liabilities referred to above shall be deemed to include, subject to the limitations set forth in paragraph (d) of this Section, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. 18 The Company, and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method or allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Common Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section are several in proportion to their respective underwriting commitments and not joint. SECTION 11. Default of Underwriters. It shall be a condition to this Agreement and the obligation of the Company to sell and deliver the Common Shares hereunder, and of each Underwriter to purchase the Common Shares hereunder in the manner as described herein, that, except as hereinafter in this paragraph provided, each of the Underwriters shall purchase and pay for all of the Common Shares agreed to be purchased by such Underwriter hereunder upon tender to the Representative of all such Common Shares in accordance with the terms hereof. If any Underwriter or Underwriters default in their obligations to purchase Common Shares hereunder on either the First or Second Closing Date and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed ten percent (10%) of the total number of Common Shares which the Underwriters are obligated to purchase on such Closing Date, the Representative may make arrangements satisfactory to the Company for the purchase of such Common Shares by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date the nondefaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Common Shares which such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of Common Shares with respect to such default or defaults occur is greater than the above percentage and arrangements satisfactory to the Representative and the Company for the purchase of such Common Shares by other persons are not made with 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company except for the expenses to be paid by the Company pursuant to Section 6 hereof and except to the extent provided in Section 10 hereof. In the event that Common Shares to which a default relates are to be purchased by the non-defaulting Underwriters or by another party or parties, the Representative or the Company shall have the right to postpone the First or Second Closing Date, as the case may be, for not more than seven business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. Nothing herein will relieve a defaulting Underwriter from liability for its default. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. SECTION 12. Effective Date. This Agreement shall become effective immediately as to Sections 6, 8, 10 and 13 and, as to all other provisions, at 9:00 A.M., Baltimore time, on the day following the date upon which the Registration Statement becomes effective, unless such a day is a Saturday, Sunday or holiday (in which event this Agreement shall become effective at such hour on the business day next succeeding such Saturday, Sunday or holiday); notwithstanding the foregoing, this Agreement shall nevertheless become effective at such earlier time after the Registration Statement becomes effective as the Representative may determine on and by notice to the Company or by release of any of the Common Shares for sale to the public. For the purposes of this Section, the Common Shares shall be deemed to have been released upon the release for publication of any newspaper advertisement relating to the Common Shares or upon the release by the Representative of telegrams: (a) advising the Underwriters that the Common Shares are released for public offering; or 19 (b) offering the Common Shares for sale to securities dealers, whichever may occur first. SECTION 13. Termination. Without limiting the right to terminate this Agreement pursuant to any other provisions hereof: (a) This Agreement may be terminated by the Company by notice to the Representative or by the Representative by notice to the Company at any time prior to the time this Agreement shall become effective as to all its provisions, and any such termination shall be without liability on the part of the Company to any Underwriter (except for the expenses to be paid by the Company pursuant to Section 6 hereof or reimbursed by the Company pursuant to Section 8 hereof and except to the extent provided in Section 10 hereof) or of any Underwriter to the Company. (b) This Agreement may also be terminated by the Representative prior to the First Closing Date, and the option from the Company referred to in Section 4 hereof, if exercised, may be canceled at any time prior to the Second Closing Date, if in the Representative's judgment payment for and delivery of the Common Shares is rendered impracticable or inadvisable because: (i) additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange, the American Stock Exchange, the NASDAQ National Market or over-the-counter market, or trading in securities generally shall have been suspended on either such exchange or over-the-counter market or a general banking moratorium shall have been established by federal, or New York or West Virginia authorities; (ii) any event shall have occurred or shall exist which makes untrue or incorrect in any material respect any statement or information contained in the Registration Statement or which is not reflected in the Registration Statement but should be reflected therein in order to make the statements or information contained therein, in light of the circumstances in which they are made, not misleading in any material respect; (iii) an outbreak or escalation of major hostilities or other national or international emergency or calamity or any substantial change in political, financial or economic conditions shall have occurred or shall have accelerated to such extent, as in your judgment, to have a material adverse effect on the general securities market or make it impractical or inadvisable to proceed with completion of the sale of and payment for the Common Shares; or (iv) since the respective dates as of which information is given in the Registration Statement and the Prospectus, a material adverse change has occurred in the business, financial condition, results of operations, properties or business prospects of the Company and its Subsidiaries, whether or not in the ordinary course of business. Any termination pursuant to subsection (b) shall be without liability on the part of any Underwriter to the Company or on the part of the Company to any Underwriter (except for expenses to be paid by the Company pursuant to Section 6 hereof or reimbursed by the Company pursuant to Section 8 hereof and except as to indemnification to the extent provided in Section 10 hereof). SECTION 14. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties, and other statements of the Company, of its officers or directors, and of the Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers, 20 directors or any controlling person, as the case may be, and will survive delivery of and payment for the Common Shares sold hereunder. SECTION 15. Notices. All communications hereunder will be in writing and, if sent to the Underwriters or the Representative will be mailed, delivered or telegraphed and confirmed to you c/o Ferris, Baker Watts, Incorporated, 100 Light Street, 8th Floor, Baltimore, Maryland 21202, Attention: Steven Shea, Senior Vice President, With a copy to: Shapiro and Olander 20th Floor 36 S. Charles Street Baltimore, Maryland 21201 Attention: A. Lynne Puckett If sent to the Company will be mailed, delivered or telegraphed and confirmed to the Company at: Champion Industries, Inc. 2450 First Avenue Huntington, West Virginia 25728 Attention: Marshall T. Reynolds, President With a copy to: Huddleston, Bolen, Beatty, Porter & Copen 611 Third Avenue Huntington, West Virginia 25701 Attention: Thomas J. Murray SECTION 16. Successors. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors, personal representatives and assigns, and to the benefit of the officers and directors and controlling persons referred to in Section 10, and no other person will have any right or obligations hereunder. The term "successors" shall not include any purchaser of the Common Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 17. Partial Unenforceability. If any section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other section, paragraph or provision hereof. SECTION 18. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Maryland, except in regard to its choice of law. 21 SECTION 19. Counterparts. This Agreement may be signed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters, including you, all in accordance with its terms. Very truly yours, Champion Industries, Inc. By: ------------------------------------ Marshall T. Reynolds, President The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. FERRIS, BAKER WATTS, INCORPORATED By: --------------------------------- Acting as Representative of the several Underwriters (including itself) named in Schedule A hereto. 22 SCHEDULE A ---------- Number of Name of Underwriter Shares ------------------- --------- Total............................................................. 1,000,000 ========= SCHEDULE B (1) They are independent public accountants with respect to the Company within the meaning of the Act and the applicable rules and regulations thereunder, and the answer to Item _ of the Form S-_ Registration Statement, insofar as it relates to them, is correct. (2) In their opinion, the financial statements of the Company included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the rules and regulations thereunder. (3) They have not examined any financial statements of the Company as of any date or for any period subsequent to October 31, 1997. (4) For purposes of their letter, they have read the minutes of meetings of the stockholders and Board of Directors of the Company as set forth in the respective minute books at February _, 1998, officials of the Company having advised them that the minutes of all such meetings through that date were set forth therein, and have carried out other procedures to February _, 1998, as follows: (a) With respect to the period from November 1, 1997 to February , 1998, they have: (i) Read the unaudited, internally prepared financial statements of the Company for November and December of 1997 and January of 1998 furnished by the Company, officials of the Company having advised them that no such financial statements as of any later date were available; and (ii) Made inquiries of certain officials of the Company who have responsibility for financial and accounting matters regarding whether the unaudited financial statements referred to under (4)(a)(i) are stated on a basis substantially consistent with that of the audited financial statements included in the Registration Statement; and (iii) Read the unaudited financial statements of the Company for November and December of 1997, and January of 1998, furnished by the Company, officials of the Company having advised them that no such financial statements as of any date or for any period subsequent to January 31, 1998 were available; and (iv) Made inquiries of certain officials of the Company who have responsibility for financial and accounting matters regarding whether the unaudited financial statements referred to under (4)(a)(iii) are stated on a basis substantially consistent with that of the audited balance sheet included in the Registration Statement. (5) Nothing came to their attention as a result of the foregoing procedures, however, that caused them to believe that (a) at February _, 1998, there was any change in the long-term debt of the Company or any decreases in net current assets or net assets as compared with amounts shown in the October 31, 1997 audited balance sheet included in the Registration Statement or (ii) for the period from November 1, 1997 to February _, 1998, there were any decreases, as compared with the corresponding period in the preceding year, in - revenues or in the total amounts of net income of the Company; or B-1 (6) They have made inquiries of certain officials have responsibility for financial and accounting matters regarding whether (a) there was any change at February _, 1998, in the long-term debt of the Company or any decreases in net current assets or Net assets as compared with amounts shown on the October 31, 1997 balance sheet included in the Registration Statement or (b) for the period from November 1, 1997 to February _, 1998, there were any decreases, as compared with the corresponding period in the preceding year, in revenues or in the total amounts of net income. They have made inquiries of certain Company officials who have responsibility for financial and accounting matters regarding whether there was any change at February _, 1998, in the capital stock of the Company or any decreases in total stockholders' equity as compared with amounts shown on the October 31, 1997 audited balance sheet included in the Registration Statement. On the basis of these inquiries and their reading of the minutes as described in 4 above, nothing came to their attention that caused them to believe that there was any such change or decrease except in all instances for changes or decreases that the Registration Statement discloses have occurred or may occur. (7) In addition to the procedures referred to in 4, 5 and 6 above, they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages, numerical data and financial information appearing in the Registration Statement, which have previously been specified by the Representative and which are specified in their letter, and have compared certain of such items with, and have found such amounts, percentages, numerical data and financial information to be in agreement with, the accounting, financial and other records of the Company. B-2 EX-5.1 3 EXHIBIT 5.1 EXHIBIT 5.1 March , 1998 DIRECT DIAL NUMBER: (304) 691-8398 Champion Industries, Inc. Post Office Box 2968 Huntington, WV 25728 RE: Form S-2 Registration Statement Number 333- Gentlemen: This opinion is rendered in connection with the Form S-2 Registration Statement (the "Registration Statement") which has been filed on March , 1998, by Champion Industries, Inc. (the "Registrant") with the Securities and Exchange Commission under the Securities Act of 1933, as amended, with respect to the proposed offering and sale of 1,150,000 shares of common stock of the Registrant, $1.00 par value (the "Common Stock"). We are of the opinion that: (1) The Common Stock, when issued as described in the Registration Statement, will be validly issued, fully paid and nonassessable, and (2) No personal liability for the liabilities of the Registrant attaches to the ownership of such Common Stock under the laws of the State of West Virginia. We hereby consent to the use of this opinion as an Exhibit to the Registration Statement and to the reference of our firm under the caption "Legal Opinion" in the Prospectus forming a part of the Registration Statement. Very truly yours, /s/ Thomas J. Murray Thomas J. Murray TJM/cgd EX-21.1 4 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT The Registrant, Champion Industries, Inc., a West Virginia corporation, does business under the trade name "Chapman Printing Company". Its wholly owned subsidiaries are: 1. The Chapman Printing Company, Inc., a West Virginia corporation. 2. Stationers, Inc., a West Virginia corporation (doing business in Ohio as "Garrison Brewer"). 3. Bourque Printing, Inc., a Louisiana corporation. 4. Dallas Printing Company, Inc., a Mississippi corporation. 5. Carolina Cut Sheets, Inc., a West Virginia corporation. 6. U.S. Tag & Ticket Company, Inc., a Maryland corporation. 7. Donihe Graphics, Inc., a Tennessee corporation. 8. Smith & Butterfield Co., Inc., an Indiana corporation. 9. The Merten Company, an Ohio corporation. 10. Interform Corporation, a Pennsylvania corporation. 11. CHMP Leasing, Inc., a West Virginia corporation. 12. Blue Ridge Printing Co., Inc., a North Carolina corporation. 13. Rose City Press, a West Virginia corporation. EX-23.1 5 EXHIBIT 23.1 EXHIBIT 23.1 We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 23, 1998, in the Registration Statement (Form S-2 No. 333-_____) and related Prospectus of Champion Industries, Inc. for the registration of 1,150,000 shares of its common stock. /s/ Ernst & Young LLP Charleston, West Virginia March 4, 1998 EX-24 6 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that the undersigned do hereby constitute and appoint MARSHALL T. REYNOLDS and JOSEPH C. WORTH, III and each of them severally, the true and lawful agents and attorneys-in-fact (the "Agents" and, severally, an "Agent") of the undersigned with full power to act and sign, upon the terms and conditions herein set forth, with full power of substitution and resubstitution, for and in the name, place and stead (in any such capacity) with respect to all applications, certificates, letters, registration statements, exhibits, amendments (including post-effective amendments) to registration statements or other documents addressed to or filed with the Securities and Exchange Commission which may be required in connection with the registration under the Securities Act of 1933, as amended, of the common stock of Champion Industries, Inc., and to file the same with the Securities and Exchange Commission, each of said attorneys and agents to have power to act with or without the other, and to have full power and authority to do and perform in the name and on behalf of each of the undersigned directors every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as the undersigned may or could do in person, all of such acts being hereby ratified and confirmed. WITNESS the following signatures and seals: /s/ Robert H. Beymer - ------------------------------ Robert H. Beymer /s/ Philip E. Cline - ------------------------------ Philip E. Cline /s/ Harley F. Mooney, Jr. - ------------------------------ Harley F. Mooney, Jr. /s/ Todd L. Parchman - ------------------------------ Todd L. Parchman /s/ A. Michael Perry - ------------------------------ A. Michael Perry /s/ Neal W. Scaggs - ------------------------------ Neal W. Scaggs /s/ Glenn W. Wilcox, Sr. - ------------------------------ Glenn W. Wilcox, Sr. 2 STATE OF WEST VIRGINIA, COUNTY OF CABELL, TO-WIT: I, Lisa A. Lucas, a Notary Public in and for the aforesaid, do hereby certify that Robert H. Beymer, Philip E. Cline, Harley F. Mooney, Jr., Todd L. Parchman, A. Michael Perry, Neal W. Scaggs, and Glenn W. Wilcox, Sr., to me known to be the persons described in and who executed the foregoing instrument and whose names are signed to the same, have this day acknowledged that they executed the same, before me, in my said state. Given under my hand and official seal this 6th day of March, 1998. My commission expires December 22, 2003. (SEAL) /s/ Lisa A. Lucas -------------------------------------- Notary Public 3 EX-27 7
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