UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

Champion Industries, Inc.

2450-90 1^st Avenue
P.O. Box 2968
Huntington, WV 25728

(Address of principal executive offices)
(Zip Code)

 

(304) 528-2700

(Registrant’s telephone number,
including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      ü      No                .

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes                 No      ü     .

9,717,913 shares of common stock of the Registrant were outstanding at January 31, 2004.

Champion Industries, Inc.

INDEX

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Champion Industries, Inc. and Subsidiaries

See notes to consolidated financial statements.

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Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
(Unaudited)

See notes to consolidated financial statements.

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Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)

See notes to consolidated financial statements.

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Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

See notes to consolidated financial statements.

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Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

January 31, 2004

1. Basis of Presentation and Business Operations

The foregoing financial information has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and rules and regulations of the Securities and Exchange Commission for interim financial reporting. The preparation of the financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. In the opinion of management, the financial information reflects all adjustments (consisting of items of a normal recurring nature) necessary for a fair presentation of financial position, results of operations and cash flows in conformity with GAAP. These interim financial statements should be read in conjunction with the consolidated financial statements for the year ended October 31, 2003, and related notes thereto contained in Champion Industries, Inc.’s Form 10-K dated January 26, 2004. The accompanying interim financial information is unaudited. The balance sheet information as of October 31, 2003 was derived from our audited financial statements.

Certain prior-year amounts have been reclassified to conform to the current-year Financial Statement presentation.

2. Earnings per Share

Basic earnings per share is computed by dividing net income by the weighted average shares of common stock outstanding for the period and excludes any dilutive effects of stock options. Diluted earnings per share is computed by dividing net income by the weighted average shares of common stock outstanding for the period plus the shares that would be outstanding assuming the exercise of dilutive stock options. The dilutive effect of stock options was 109,000 and 16,000 shares for the three months ended January 31, 2004 and 2003. The Company also had 34,000 and 77,000 outstanding options that were anti-dilutive for the three months ended January 31, 2004 and January 31, 2003 because the option exercise price exceeded the stock price.

3. Inventories

Inventories are principally stated at the lower of first-in, first-out cost or market. Manufactured finished goods and work in process inventories include material, direct labor and overhead based on standard costs, which approximate actual costs. The Company utilizes an estimated gross profit method for determining cost of sales in interim periods.

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Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)

Inventories consisted of the following:

4. Goodwill and other intangibles

Goodwill and other intangibles increased by $130,814 during the three months ended January 31, 2004 as a result of the payment of contingent consideration of a prior acquisition.

5. Long-Term Debt

Long-term debt consisted of the following:

The Company has an unsecured revolving line of credit with a bank for borrowings to a maximum of $10,000,000 with interest payable monthly at the prime rate of interest. The line of credit expires in July 2006 and contains certain restrictive financial covenants. The Company had outstanding borrowings under this facility of $2.0 million and $1.7 million at January 31, 2004 and October 31, 2003.

The Company has an unsecured revolving line of credit with a bank for borrowings to a maximum of $1,000,000 with interest payable monthly at the Wall Street Journal prime rate. The line of credit expires in April 2004 and contains certain financial covenants. There were no borrowings outstanding under this facility at January 31, 2004 and October 31, 2003.

The Company’s non-cash financing activities for the three months ended January 31, 2003 included vehicle purchases of approximately $96,000 which were financed by a bank. There were no non-cash financing activities for the three months ended January 31, 2004.

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Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)

6. Shareholders’ Equity

The Company paid a dividend of five cents per share on December 26, 2003 to stockholders of record on December 1, 2003. Also, the Company declared a dividend of five cents per share to be paid on March 22, 2004 to stockholders of record on March 5, 2004.

7. Commitments and Contingencies

On February 16, 2002, a jury verdict was rendered against the Company in a civil action brought against the Company in state court in Jackson, Mississippi.

The plaintiffs in this civil action asserted that the Company and its Dallas Printing Company, Inc. subsidiary had engaged in unfair competition and other wrongful acts in hiring certain of its employees. The jury awarded the plaintiffs $1,745,000 in actual damages and $750,000 in punitive damages.

On March 1, 2002, the plaintiffs in the civil action filed a motion for attorney’s fees and costs in the amount of $889,401. On July 16, 2002, the court entered an order granting plaintiff $645,119 in attorney fees and expenses, and ordered that interest on the amount of the jury award accrue from February 22, 2002.

On July 17, 2002, the Company filed a notice of appeal from the jury verdict. The appeal involves both the jury award and the attorney’s fee and expense award. If the Company is not successful on appeal, Mississippi law provides that it is liable for an additional 15% of the total award.

The Company was advised on February 3, 2004 that the Court of Appeals of the State of Mississippi has reversed the aforementioned judgment and jury verdict rendered against the Company and has remanded the case for new trial. As a result of this action plaintiffs had 14 days from February 3, 2004 to petition the appeals court for rehearing of its ruling. The plaintiffs filed their petition for rehearing on February 17, 2004. The Company had 7 days to respond to such a petition and the Company’s response was filed on February 24, 2004. Unless the appeals court reverses its order upon petition, the effect of the appeals court is to negate the lower court’s award of damages and attorney’s fees previously granted against the Company, and grant a new trial on plaintiff’s claims. If the appeals court does not reverse its order, plaintiffs may seek an appeal to the Mississippi Supreme Court. Similarly, if the appeals court reverses its order, the Company may seek an appeal to the Mississippi Supreme Court.

The Company has been advised that it has no insurance coverage for this award. If upon final resolution of the appeals process, the verdict is not overturned, the impact on the operating results of the Company could be material.

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Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)

As of January 31, 2004 the Company had contractual obligations in the form of leases and debt as follows:

8. Accounting for Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure”. Statement 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to Statement 123’s fair value method of accounting for stock-based employee compensation.

The Company has elected to follow the intrinsic value method in accounting for its employee stock options. Accordingly, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2003 and 2002, respectively: risk-free interest rates of 4.03% and 3.97%; dividend yields of 4.21% and 7.22%; volatility factors of the expected market price of the Company’s common stock of 54.0% and 46.4%; and a weighted-average expected life of the option of 4 years.

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Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)

The following pro forma information has been determined as if the Company had accounted for its employee stock options under the fair value method. For purposes of pro forma disclosures, the estimated fair value of the options is expensed in the year granted since the options vest immediately. The Company’s pro forma information for the quarters ended January 31 are as follows:

Since the Company had a pro-forma net loss as shown above for the three months ended January 31, 2004 the dilutive effect of 109,000 stock options were anti-dilutive on a pro-forma basis for the three months ended January 31, 2004.

9. Industry Segment Information

The Company operates principally in two industry segments organized on the basis of product lines: the production, printing and sale, principally to commercial customers, of printed materials (including brochures, pamphlets, reports, tags, continuous and other forms), and the sale of office products and office furniture including interior design services.

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Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)

The table below presents information about reported segments for the three months ended January 31:

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Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)

A reconciliation of total segment revenues and of total segment operating income to income before income taxes, for the three months ended January 31, 2004 and 2003, is as follows:

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Champion Industries, Inc. and Subsidiaries

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The following table sets forth, for the periods indicated, information derived from the Consolidated Income Statements as a percentage of total revenues.

Three Months Ended January 31, 2004 Compared to Three Months Ended January 31, 2003

Revenues

Total revenues increased 2.4% in the first quarter of 2004 compared to the same period in 2003 from $28.6 million to $29.3 million. Printing revenue increased 1.7% in the first quarter of 2004 to $23.0 million from $22.6 million in the first quarter of 2003. Office products and office furniture revenue increased 5.0% in the first quarter of 2004 to $6.3 million from $6.0 million in the first quarter of 2003. The revenue increase for the office product and office supply segment was primarily attributable to an increase in furniture sales in 2004 due in part to the additional sales derived from the purchase of certain assets of Contract Business Interiors in June 2003. The increase in printing sales was primarily due to the addition of a new large customer subsequent to the first quarter of 2003 and additional sales derived primarily from the operations of certain assets purchased from Integrated Marketing Solutions in July 2003.

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Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Cost of Sales

Total cost of sales increased 3.1% in the first quarter of 2004 to $21.3 million from $20.7 million in the first quarter of 2003. Printing cost of sales in the first quarter of 2004 increased $500,000 over the prior year and increased as a percentage of printing sales from 73.1% in 2003 to 74.0% in 2004 primarily due to increased material and outside purchase costs. The dollar increase resulted from the increased material and outside purchase costs as a percentage of sales and the increase in sales. Office products and office furniture cost of sales increased 3.8% or approximately $157,000 in 2004 to $4.3 million from $4.2 million in 2003 but decreased as a percent of sales from 69.3% in 2003 to 68.5% in 2004. The increase in office products and office furniture cost of sales is attributable to the increase in sales. The decrease in office products and office furniture as a percent of sales is reflective of reduced costs resulting from an import program, margin enhancements on sales growth and new pricing programs for the calendar year, one month of which was included in the first quarter.

Operating Expenses

In the first quarter of 2004, selling, general and administrative expenses increased on a gross dollar basis to $7.9 million from $7.5 million in 2003 an increase of $465,000 or 6.2%. As a percentage of sales the expenses increased on a quarter to quarter basis in 2004 to 27.0% from 26.1% in 2003 of total sales.

The increase in selling, general and administrative expenses is primarily the result of increased payroll expenses to support the sales growth and increased professional fees during the quarter.

Income from Operations and Other Income and Expenses

Income from operations decreased 90.3% in the first quarter of 2004 to $45,000 from $462,000 in the first quarter of 2003. This decrease is the result of increased selling, general and administrative expenses partially offset by an increase in sales and gross profit. Other expense (net), decreased approximately $3,000 from 2003 to 2004.

Income Taxes

The Company’s effective income tax rate was 40.3% for the first quarter of 2004 and 41.8% for the first quarter of 2003. The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate.

Net Income

Net income for the first quarter of 2004 was $14,000 compared to net income of $254,000 in the first quarter of 2003. Basic and diluted earnings per share for the three months ended January 31, 2004 and 2003 were $0.00 and $0.03.

Inflation and Economic Conditions

Management believes that the effect of inflation on the Company’s operations has not been material and will continue to be immaterial for the foreseeable future. The Company does not have long-term sales and purchase contracts; therefore, to the extent permitted by competition, it has the ability to pass through to the customer most cost increases resulting from inflation, if any.

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Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Seasonality

Historically, the Company has experienced a greater portion of its profitability in the second and fourth quarters than in the first and third quarters. The second quarter generally reflects increased orders for printing of corporate annual reports and proxy statements. A post-Labor Day increase in demand for printing services and office products coincides with the Company’s fourth quarter.

Liquidity and Capital Resources

Net cash provided by operations for the three months ended January 31, 2004, was $2.0 million compared to net cash used in operations of $39,000 during the same period in 2003. This change in net cash from operations is due primarily to timing changes in assets and liabilities including a reduction of inventories in 2004 compared to an increase in inventories in 2003 and an increase in cash generated from accounts receivable collections representing $3.2 million in 2004 compared to $1.0 million in 2003.

Net cash used in investing activities for the three months ended January 31, 2004 was $1.0 million compared to $387,000 during the same period in 2003. The net cash used in investing activities during the first three months of 2004 and 2003 primarily relates to equipment purchases and building improvements.

During the first quarter of 2004, the Company entered into purchase agreements with an equipment manufacturer for the purchase of three printing presses in the aggregate amount of approximately $1.7 million. As a result of this commitment the Company paid this manufacturer a deposit of $170,000.

Net cash used in financing activities for the three months ended January 31, 2004 was $448,000 compared to $1.1 million during the same period in 2003. This change is primarily due to an increase in net borrowings of $170,000 and a $500,000 reduction of principal payments in 2003.

Working capital on January 31, 2004 was $26.6 million, a decrease of $400,000 from October 31, 2003. Management believes that working capital and operating ratios remain at acceptable levels.

The Company expects that the combination of funds available from working capital, borrowings available under the Company’s credit facilities and anticipated cash flows from operations will provide sufficient capital resources for the foreseeable future. In the event the Company seeks to accelerate internal growth or make acquisitions beyond these sources, additional financing would be necessary.

Environmental Regulation

The Company is subject to the environmental laws and regulations of the United States, and the states in which it operates, concerning emissions into the air, discharges into the waterways and the generation, handling and disposal of waste materials. The Company’s past expenditures relating to environmental compliance have not had a material effect on the Company. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they may have upon the capital expenditures, earnings, and competitive position of the Company in the future. Based upon information currently available, management believes that expenditures relating to environmental compliance will not have a material impact on the financial position of the Company.

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Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Special Note Regarding Forward-Looking Statements

Certain statements contained in this Form 10-Q, including without limitation statements including the word “believes,” “anticipates,” “intends,” “expects” or words of similar import, constitute “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, general economic conditions, changes in business strategy or development plans, and other factors referenced in this Form 10-Q. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

ITEM 3a. Quantitative and Qualitative Disclosure About Market Risk

The Company does not have any significant exposure relating to market risk.

ITEM 4. Controls and Procedures

Company management, including the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15c as of the end of the period covered by this annual report. Based on that evaluation, the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion. There were no changes in internal controls over financial reporting during the last fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

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PART II — OTHER INFORMATION

Item 6. Exhibits and reports on Form 8-K

Form 8-K dated January 7, 2004, filed January 7, 2004 regarding Champion’s press release titled “CHAMPION ANNOUNCES 2003 YEAR END AND FOURTH QUARTER EARNINGS.”

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SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CHAMPION INDUSTRIES, INC.

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