ITEM 1 - BUSINESS
HISTORY
Champion Industries, Inc. ("Champion" or the "Company") is a major commercial printer, business forms manufacturer and office products and office furniture supplier in regional markets east of the Mississippi River. The Company's sales offices and production facilities are located in Huntington, Charleston, Parkersburg, Clarksburg, and Morgantown, West Virginia; Lexington and Owensboro, Kentucky; Baton Rouge, New Orleans and Gonzales, Louisiana; Cincinnati and Belpre, Ohio; Jackson, Mississippi; Baltimore, Maryland; Kingsport and Knoxville, Tennessee; Timmonsville, South Carolina; Evansville, Indiana; Bridgeville and Altoona, Pennsylvania; and Asheville, North Carolina. The Company's sales force of approximately 130 salespeople sells printing services, business forms management services, office products and office furniture.
The Company was chartered as a West Virginia corporation on July 1, 1992. Prior to the public offering of the Company's Common Stock on January 28, 1993 (the "Offering"), the Company's business was operated by The Harrah and Reynolds Corporation ("Harrah and Reynolds"), doing business as Chapman Printing Company, together with its wholly-owned subsidiaries, The Chapman Printing Company, Inc. and Stationers, Inc. Incident to the Offering, Harrah and Reynolds and the Company entered into an Exchange Agreement, pursuant to which, upon the closing date of the Offering: (i) Harrah and Reynolds contributed to the Company substantially all of the operating assets of its printing division, including all inventory and equipment (but excluding any real estate and vehicles) and all issued and outstanding capital stock of its subsidiaries, The Chapman Printing Company, Inc. and Stationers, Inc.; (ii) the Company assumed certain of the liabilities relating to the operations of the printing divisions of Harrah and Reynolds and its subsidiaries, The Chapman Printing Company, Inc. and Stationers, Inc., excluding debts associated with real estate, certain accounts payable to affiliates and certain other liabilities; and (iii) Harrah and Reynolds was issued 2,000,000 shares of Common Stock of the Company.
The Company and its predecessors have been headquartered in Huntington since 1922. Full scale printing facilities, including web presses for manufacturing business forms, and sales and customer service operations are located in Huntington. The Company's Charleston division was established in 1974 through the acquisition of the printing operations of Rose City Press. Sales and customer service operations, as well as the Company's largest pre-press departments, are located in Charleston. The Parkersburg division opened in 1977 and was expanded by the acquisitions of Park Press and McGlothlin Printing Company. In addition to sales and customer service operations, this division houses a large full-color printing facility and a state-of-the-art studio, with scanners, electronic color retouching equipment and 4-, 5- and 6-color presses.
The Lexington division commenced operations in 1983 upon the acquisition of the Transylvania Company. This location includes a pre-press department, computerized composition facilities, a press room and bindery department, as well as sales and customer service operations.
The Company acquired Stationers, Inc. ("Stationers"), an office product, office furniture and retail bookstore operation located in Huntington, in 1987 and consolidated its own office products and office furniture operations with Stationers. On August 30, 1991, Stationers, Inc. sold the assets, primarily inventory and fixtures, of its retail bookstore operation. In July 1993, Stationers expanded through acquisition and began operations in Marietta, Ohio, under the name "Garrison Brewer."
The Bourque Printing division ("Bourque") commenced operations in June, 1993, upon the acquisition of Bourque Printing, Inc. in Baton Rouge, Louisiana. This location includes a pre-press department, computerized composition facilities, a pressroom with up to 4-color presses and a bindery department, as well as sales and customer service operations. Bourque was expanded through the acquisition of Strother Forms/Printing in Baton Rouge in 1993 and through the acquisition of the assets of E. S. Upton Printing Company, Inc. in New Orleans in 1996.
The Dallas Printing division ("Dallas") commenced operations in September, 1993, upon the acquisition of Dallas Printing Company, Inc. in Jackson, Mississippi. This location includes a pre-press department, computerized composition facilities, as well as sales and customer service operations.
On November 2, 1993, a wholly-owned subsidiary of the Company chartered to effect such acquisition purchased selected assets of Tri-Star Printing, Inc., a Delaware corporation doing business as "Carolina Cut Sheets" in the manufacture and sale of business forms in Timmonsville, South Carolina. The Company's subsidiary has changed its name to "Carolina Cut Sheets, Inc." Carolina Cut Sheets manufactures single-part business forms for sale to dealers and through the Company's other divisions.
On February 25, 1994, Bourque acquired certain assets of Spectrum Press Inc. ("Spectrum"), a commercial printer located in Baton Rouge, Louisiana.
On June 1, 1994, the Company acquired certain assets of Premier Data Graphics, a distributor of business forms and data supplies located in Clarksburg, West Virginia.
On August 30, 1994, Dallas acquired certain assets of Premier Printing Company, Inc. ("Premier Printing") of Jackson, Mississippi.
On June 1, 1995, in exchange for issuance of 52,383 shares of its Common stock, the Company acquired U.S. Tag & Ticket Company, Inc. ("U.S. Tag"), a Baltimore, Maryland based manufacturer of tags used in the manufacturing, shipping, postal, airline and cruise industries.
On November 13, 1995, in exchange for $950,000 cash and the issuance of 66,768 shares of its Common stock, the Company acquired Donihe Graphics, Inc. ("Donihe"), a high-volume color printer based in Kingsport, Tennessee.
On February 2, 1996, Bourque purchased various assets and assumed certain liabilities of E.S. Upton Printing Company, Inc. ("Upton") for approximately $750,000 in cash.
On July 1, 1996, the Company acquired Smith & Butterfield Co., Inc. ("Smith & Butterfield"), an office products company located in Evansville, Indiana and Owensboro, Kentucky. Smith & Butterfield is operated as a division of Stationers, Inc. The Company issued 66,666 shares of common stock valued at $1,200,000 in exchange for all of the issued and outstanding shares of common stock of Smith & Butterfield.
On August 21, 1996, the Company purchased the assets of The Merten Company ("Merten"), a commercial printer headquartered in Cincinnati, Ohio, for cash and assumption of liabilities aggregating $2,535,295.
On December 31, 1996, the Company acquired all outstanding capital stock of Interform Corporation ("Interform"), a business form manufacturer in Bridgeville, Pennsylvania, for $2,500,000 in cash which was financed by a bank.
On May 21, 1997, the Company acquired all outstanding common shares of Blue Ridge Printing Co., Inc. of Asheville, North Carolina and Knoxville, Tennessee ("Blue Ridge") in exchange for 277,775 shares of the Company's common stock. The transaction has been accounted for as a pooling of interests.
On February 2, 1998, the Company acquired all outstanding common shares of Rose City Press ("Rose City") of Charleston, West Virginia, in exchange for 75,722 shares of the Company's common stock valued at $1,250,000.
On May 18, 1998, the Company acquired all outstanding common shares of Capitol Business Equipment, Inc. ("Capitol"), doing business as Capitol Business Interiors, of Charleston, West Virginia, in exchange for 72,202 shares of the Company's common stock valued at $1,000,000.
On May 29, 1998, the Company acquired all outstanding common shares of Thompson's of Morgantown, Inc. and Thompson's of Barbour County, Inc. (collectively, "Thompson's") of Morgantown, West Virginia, in exchange for 45,473 shares of the Company's common stock valued at $600,000.
Rose City, Capitol and Thompson's are operated as divisions of Stationers.
On June 1, 1999, the Company acquired all of the issued and outstanding common stock of Independent Printing Service, Inc. ("IPS") of Evansville, Indiana. IPS is operated as a division of Smith & Butterfield. This transaction was accounted for under the purchase method.
On July 16, 1999, the Company's Blue Ridge subsidiary acquired certain assets and assumed certain liabilities of AIM Printing ("AIM") of Knoxville, Tennessee. This transaction was accounted for under the purchase method.
On November 30, 1999, the Company acquired all of the issued and outstanding common stock of Diez Business Machines ("Diez") of Gonzales, Louisiana. This transaction was accounted for as a purchase. Diez is operated as a subsidiary of Stationers.
On November 6, 2000, the Company acquired certain assets of the Huntington, West Virginia paper distribution division of the Cincinnati Cordage Paper Company ("Cordage"). This transaction was accounted for under the purchase method.
BUSINESS
Champion is engaged in the commercial printing and office products and furniture supply business in regional markets east of the Mississippi River. The Company'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 one-stop shopping.
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 scanner separations. The Company also offers complete bindery and letterpress services. The printing operations contributed $96.7 million, or 76.5% of the Company's total revenues for the fiscal year ended October 31, 2000.
The Company provides a full range of office products and office furniture primarily in the budget and middle price ranges, and also offers office design services. The Company publishes a catalog of high volume, frequently ordered items purchased directly from manufacturers. These catalog sales account for the bulk of sales volume and afford sales personnel flexibility in product selection and pricing. Medium to large volume customers are offered levels of pricing discounts. In addition, the Company offers a broad line of general office products through major wholesalers' national catalogs. The Company has implemented an Internet e-commerce site, which allows customers to order office products, furniture and forms online. The e-commerce site includes the office products and office furniture catalog and may be accessed at the Company's web page at www.champion-industries.com. The Company believes that this site will allow customers to access data concerning their company's purchase habits so as to better control expenditures for office products and eliminate large in-house inventories. The Company is a member of a major office products purchasing organization. Members benefit from volume discounts, which permit them to offer competitive prices and improve margins. The Company's office furniture business focuses on the budget to middle price range lines, although upscale lines are offered as well. Office products, office furniture and office design operations contributed $29.7 million, or 23.5% of the Company's total revenues for the fiscal year ended October 31, 2000.
ORGANIZATION
Champion's two lines of business are comprised of twenty-two operating divisions. The Huntington headquarters provides centralized financial management and administrative services to each of its two business segments.
Commercial Printing
Eleven 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 and Knoxville, Tennessee; and Asheville, North Carolina. Each has a sales force, a customer service operation and a pre-press department that serve the customers in their respective geographic areas. Although each customer's interface is solely with its local division's personnel, its printing job may be produced in another division using the equipment most suited to the quality and volume requirements of the job. In this way, for example, Champion can effectively compete for high quality process color jobs in Lexington by selling in Lexington, printing in Cincinnati and binding in Huntington. The full range of printing resources is available to customers in the entire market area without Champion having to duplicate equipment in each area.
Interform Corporation, doing business as Interform Solutions and located in Bridgeville, Pennsylvania, manufactures business forms and related products which it sells through a network of independent distributors concentrated in Eastern Pennsylvania, New Jersey and metropolitan New York, and directly through its own distributor, the Consolidated Graphic Communications division in Pittsburgh, Pennsylvania.
Carolina Cut Sheets, Inc., 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 Company manufactures single sheet and multi-part, snap-out and continuous business forms for sale through many of the Company's commercial printing divisions.
U.S. Tag, located in 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, Office Furniture and Office Design
Stationers, located in Huntington, Clarksburg (doing business as "Champion Clarksburg"), Morgantown (through its Champion Morgantown division), 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, 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.
Diez, located in Gonzales, Louisiana, provides office products and office furniture primarily to customers in the Company's Louisiana market area.
Stationers, through its Capitol division, offers office design services throughout West Virginia and eastern Kentucky.
Champion Jackson located in Jackson, Mississippi functions as both a printing sales headquarters with full digital prepress and an office products sales center.
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 webprinting of brochures and catalogs.
The capabilities of the Company's various printing divisions are stated below.
Office Products, Office Furniture and Office Design
Champion provides its customers with a wide range of product offerings in two major categories: supplies, such as file folders, paper products, pens and pencils, computer paper and laser cartridges; and furniture, including budget and middle price range desks, chairs, file cabinets and computer furniture. Office supplies are sold primarily by Company salespeople through the Company's own catalogs. Office furniture is primarily sold from catalogs and supplied from in-house stock. Special orders constitute a small portion of sales. The Capitol division of Stationers provides interior design services to commercial customers. The design services include space planning, purchasing and installation of office furniture, and management of design projects.
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 six color presses and envelope presses. Rotary equipment (for printing
onto continuous rolls of paper) includes multi-color business form web presses, carbon and multi-part collators, and a high-speed 5-color half-web press.
Binding equipment consists of hot-foil, embossing and die cutting equipment, perforators, folders, folder-gluers, scoring machines, collator/stitcher/ trimmers for saddle stitching, automatic and manual perfect binders, numbering machines and mailing equipment.
Each of the Company's offices is linked with overnight distribution of products and on-line electronic telecommunications permitting timely transfer of various production work from facility to facility as required. While the Company maintains a fleet of delivery vehicles for intracompany and customer deliveries, it utilizes the most cost effective and expeditious means of delivery, including common carriers.
Requirements for the Company's press runs are determined shortly before the runs are made and, therefore, backlog is not a meaningful measure in connection with the Company's printing business.
The Company's inventory goal is to have approximately 85% of the office product items the Company sells in stock. Another 12% are ordered on a daily basis and received overnight. The remaining 3% are items that come direct from manufacturers and may take one week 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.
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, 2000, no single customer accounted for more than 3% of the Company's 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 for supplies. The Company has negotiated Company-wide paper purchasing agreements directly with paper manufacturers and is a member of a major office products buying group, which management believes provides the Company with a competitive advantage.
COMPETITION
The markets for the Company's printing services and office products are highly competitive, with success based primarily on price, quality, production capability, capacity for prompt delivery and personal service.
Champion's printing competitors are numerous and range in size from very large national companies with substantially greater resources than the Company to many smaller local companies. In recent years, despite consolidation within the printing industry, there has been a substantial increase in technological advances in new equipment, resulting in excess capacity and highly competitive pricing. The Company has remained competitive by maintaining its printing equipment at state-of-the-art levels and emphasizing personal attention to customers.
Large national and regional mail order discount operations provide significant competition in the office products and office furniture business. The economics 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.
ENVIRONMENTAL REGULATION
The Company is subject to the environmental laws and regulations of the United States and the states in which it operates concerning emissions into the air, discharges into waterways and the generation, handling and disposal of waste materials. The Company's past expenditures relating to environmental compliance have not had a material effect on the Company and are included in normal operating expenses. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they may have upon the capital expenditures, earnings and competitive position of the Company in the future. Based upon information currently available, management believes that expenditures relating to environmental compliance will not have a material impact on the financial position of the Company.
GEOGRAPHIC CONCENTRATION AND ECONOMIC CONDITIONS
The Company's operations and the majority of its customers are located east of the Mississippi River. The Company and its profitability may be more susceptible to the effects of unfavorable or adverse local or regional economic factors and conditions than a company with a more geographically diverse customer base.
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, 2000, the Company had approximately 900 employees.
The Company's subsidiary, Interform Corporation, is party to a collective bargaining agreement with the United Steelworkers of America, AFL-CIO-CLC on behalf of its Local Union 8263 covering all production and maintenance employees (totaling 88 employees at October 31, 2000) at its Bridgeville, Pennsylvania facility. The Company believes relations with the union and covered employees are good.
EXECUTIVE OFFICERS OF CHAMPION
ITEM 2
ITEM 2 - PROPERTIES
The Company conducts its operations from twenty-six (26) different physical locations, nineteen (19) of which are leased, six (6) of which are owned in fee simple by Company subsidiaries, and one (1), Cordage, which is operated from an owned building pursuant to a land lease under the terms described below. The properties leased, and certain of the lease terms are set forth below:
(1) Lease is "triple net", whereby Company pays for all utilities, insurance, taxes, repairs and maintenance, and all other costs associated with properties.
The Dallas Printing Division owns, and operates from, a single-story masonry structure of approximately 19,600 square feet at 321-323 East Hamilton Street, Jackson, Mississippi.
The Bourque Printing Division owns, and operates from, a single-story building of approximately 18,501 square feet at 13112 South Choctaw Drive, Baton Rouge, Louisiana.
Stationers' Clarksburg operation is conducted from a single-story masonry building of approximately 20,800 square feet owned by the Company at 700 N. Fourth Street, Clarksburg, West Virginia.
Donihe owns, and operates from, a single-story steel building of approximately 38,500 square feet situated on roughly 14.5 acres at 766 Brookside Drive, Kingsport, Tennessee.
Blue Ridge owns, and operates from, (i) a two-story masonry building of approximately 9,066 square feet and a contiguous 1,692 square foot former residential structure at 544 and 560 Haywood Road, Asheville, North Carolina, and (ii) a two-story steel building of approximately 12,500 square feet on approximately 3 acres at 1485 Amherst Road, Knoxville, Tennessee.
The Company consolidated Stationers' Rose City division operations with those of the Chapman Printing - Charleston division at its Hanford Street location during fiscal year 1999. The former Rose City facility, consisting of (i) two masonry buildings (2 story and 5 story) of approximately 20,900 square feet in the aggregate, at 811-813 Virginia Street, East, and (ii) an adjacent 6 story brick warehouse of approximately 42,500 square feet, in Charleston, West Virginia, is currently held for sale.
(2) The Cordage division owns, and operates from, a single story building of approximately 14,500 square feet at 3254 Route 60 East, Huntington, West Virginia.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
The Company is subject to various claims and legal actions that arise in the ordinary course of business. In the opinion of management, after consulting with legal counsel, the Company
believes that the ultimate resolution of these claims and legal actions will not have a material effect on the consolidated financial statements of the Company.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Champion common stock has traded on the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") National Market System since the Offering under the symbol "CHMP."
The following table sets forth the high and low closing prices for Champion common stock for the period indicated. The range of high and low closing prices are based on data from NASDAQ and do not include retail mark-up, mark-down or commission.
At the close of business on January 12, 2001, there were 506 shareholders of record of Champion common stock.
The following table sets forth the quarterly dividends per share declared on Champion common stock.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five years in the period ended October 31, 2000 have been derived from the Audited Consolidated Financial Statements of the Company. The information set forth below should be read in conjunction with the Audited Consolidated Financial Statements, related notes, and the information contained in Management's Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere herein.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a commercial printer, business forms manufacturer and office products and office furniture supplier in regional markets 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, operational efficiencies, and exposure of its core products to new markets. The Company has acquired fourteen printing companies, seven office products and office furniture companies and a paper distribution division since its initial public offering on January 28, 1993.
The Company's largest acquisition since the initial public offering was the purchase of Interform on December 31, 1996. The addition of Interform sales to the printing segment 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 access to the large northeastern markets of Pennsylvania, New Jersey and New York.
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. The Company recognizes revenues when products are shipped or services are rendered to the customer. The Company's revenues are subject to seasonal fluctuations caused by variations in demand for its products.
The Company's cost of sales primarily consists of raw materials, including paper, ink, pre-press supplies and purchased office supplies, furniture and data products, and manufacturing costs including direct labor, indirect labor and overhead. Significant factors affecting the Company's cost of sales include the costs of paper in 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, legal, audit, information systems equipment costs, software maintenance and depreciation.
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.
The following discussion and analysis presents the significant changes in the financial position and results of operations of the Company and should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included elsewhere herein.
YEAR ENDED OCTOBER 31, 2000 COMPARED TO YEAR ENDED OCTOBER 31, 1999
Revenues
Consolidated net revenues were $126.3 million for the year ended October 31, 2000 compared to $124.4 million in the prior fiscal year. This change represents a growth in revenues of $2.0 million or 1.6%. Printing revenues increased by $4.3 million or 4.6% from $92.4 million in 1999 to $96.7 million in 2000. Office products and office furniture revenue decreased $2.3 million or 7.1% from $32.0 million in 1999 to $29.7 million in 2000. The decrease in revenues for the office products and office furniture segment was primarily attributable to lower furniture sales. Gross margin dollars declined in both divisions with an overall decrease of $548,000 or 1.5%.
Cost of Sales
Total cost of sales for the year ended October 31, 2000 totaled $89.3 million compared to $86.8 million in the previous year. This change represented an increase of $2.5 million or 2.9% in cost of sales. Printing cost of sales increased $4.4 million or 6.7% to $69.4 million in 2000 compared to $65.0 million in 1999. Printing cost of sales were higher due to an overall increase in printing sales coupled with an increase in material costs as a percentage of sales. Office products and office furniture cost of sales decreased $1.8 million or 8.4% to $19.9 million from $21.8 million in 1999, primarily due to lower furniture sales.
Operating Expenses and Income
Selling, general and administrative (S,G&A) expenses increased $1.2 million to $32.6 million in 2000 from $31.4 million in 1999. S,G&A as a percentage of net sales represented 25.8% of net sales in 2000 compared with 25.2% of net sales in 1999. This increase is related, in part, to increases in corporate overhead expenses, higher information system costs, depreciation on newly acquired equipment and increased health insurance costs and expenses related to AIM Printing and IPS being included for a full year in 2000. In addition, expenses for eleven months for Diez are included in 2000.
Other Income/Expense
Interest expense decreased $211,000 to $1.0 million in 2000 from $1.2 million in 1999 as a result of a reduction in debt. Interest income decreased $87,000 to $71,000 in 2000 from $158,000 in 1999. The additional income in 1999 was due to higher average funds invested as a result of a stock offering in April of 1998.
Income Taxes
Income taxes as a percentage of income before taxes were 41.0% in 2000 compared with 40.1% in 1999. This increase was primarily caused by a change in the geographic profitability mix of our operations, which resulted in higher effective tax rates at the state level.
Net income
For reasons set forth above, net income for 2000 decreased $1.1 million to $2.1 million, or $0.22 per share on a basic and diluted basis, from $3.2 million for 1999, or $0.33 per share on a basic and diluted basis.
YEAR ENDED OCTOBER 31, 1999 COMPARED TO YEAR ENDED OCTOBER 31, 1998
Revenues
Consolidated net revenues were $124.4 million for the year ended October 31, 1999 compared to $123.1 million in the prior fiscal year. This change represents a growth in revenues of $1.3 million or 1.1%. Printing revenues declined by $2.6 million or 2.7% from $95.0 million in 1998 to $92.4 million in 1999. Office products and office furniture revenue increased $3.9 million or 13.9% from $28.1 million in 1998 to $32.0 million in 1999. The increase in revenues for the office products and office furniture segment was primarily attributable to the Rose City, Capitol and Thompson acquisitions, which contributed an additional $3.3 million in revenue in 1999 over 1998 as these acquisitions were included for a full year in 1999 versus partial periods in 1998. Gross margin dollars remained relatively stable with a modest increase in office products and furniture offsetting a slight decline in printing.
Cost of Sales
Total cost of sales for the year ended October 31, 1999 totaled $86.8 million compared to $85.3 million in the previous year. This change represented an increase of $1.5 million or 1.7% in cost of sales. Printing cost of sales decreased $1.7 million or 2.5% to $65.0 million in 1999 compared to $66.7 million in 1998. Printing cost of sales were impacted by sluggish sales in many of the geographical areas served by the Company. Office products and office furniture cost of sales increased $3.1 million or 16.9% to $21.8 million from $18.6 million in 1998, primarily due to acquisitions.
Operating Expenses and Income
Selling, general and administrative (S,G&A) expenses increased $1.5 million to $31.4 million in 1999 from $29.9 million in 1998. S,G&A as a percentage of net sales represented 25.2% of net sales in 1999 compared with 24.3% of net sales in 1998. This increase is related, in part, to increases in corporate overhead expenses, depreciation on newly acquired equipment and expenses of Rose City, Capitol and Thompson. The results of operations for the year ended October 31, 1999 include Rose City, Capitol and Thompson for the entire year while they were only included for a partial year in 1998. In addition, expenses of a partial year for the AIM Printing and IPS acquisitions are included in 1999.
Other Income/Expense
Interest expense decreased $279,000 to $1.2 million in 1999 from $1.5 million in 1998 as a result of a reduction in debt. Interest income decreased $87,000 to $158,000 in 1999 from $245,000 in 1998. The additional income in 1998 was due to higher average funds invested as a result of a stock offering in April of 1998.
Income Taxes
Income taxes as a percentage of income before taxes were 40.1% in 1999 compared with 39.4% in 1998. This increase was primarily caused by a change in the geographic profitability mix of our operations which resulted in higher effective tax rates at the state level.
Net income
For reasons set forth above, net income for 1999 decreased $958,000 to $3.2 million, or $0.33 per share on a basic and diluted basis, from $4.2 million for 1998, or $0.45 per share on a basic and diluted basis.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2000, the Company had $3.2 million of cash and cash equivalents, an increase of $710,000 from the prior year. Working capital as of October 31, 2000 was $29.1 million, a decrease of $1.3 million from October 31, 1999. The decrease in working capital was primarily the result of capital expenditures and dividend payments. The increase in cash and cash equivalents is primarily attributable to cash provided from operations including net cash flow from accounts receivable and inventory reductions of $1.7 million and $571,000.
The Company has historically used cash generated from operating activities and debt to finance capital expenditures and the cash portion of the purchase price of acquisitions. Management plans to continue making significant investments in equipment and to seek appropriate acquisition candidates. However, to fund the Company's continued expansion of operations, additional financing may be necessary. The Company has available a line of credit totaling $10.0 million and a line of credit totaling $1.0 million (see Note 3 to the Consolidated Financial Statements for additional information). For the foreseeable future, management believes it can fund operations, meet debt service requirements, and make the planned capital expenditures based on the available cash and cash equivalents, cash flow from operations, and lines of credit.
Cash Flows from Operating Activities
Cash flows from operating activities for the years ended October 31, 2000, 1999 and 1998 were $8.7 million, $4.2 million and $4.2 million. Cash flows from operating activities for the fiscal year 2000 compared to 1999 increased primarily due to positive cash flow from the reduction of accounts receivable and inventory.
Cash Flows from Investing Activities
Cash used in investing activities was ($3.1) million, ($4.9) million, and ($1.5) million for the years ended October 31, 2000, 1999 and 1998. Cash flows used in investing activities decreased in 2000 compared to 1999 due to a decrease in the purchase of property and equipment. Cash flows used in investing activities increased in 1999 compared to 1998 due to cash utilized for the purchase of property and equipment including the implementation of a new enterprise-wide resource management system, and the net effect of cash used in the purchase of businesses in 1999 over cash received.
Cash Flows from Financing Activities
Cash flows (used in) provided by financing activities for the years ended October 31, 2000, 1999 and 1998 were ($4.9) million, ($6.6) million and $6.1 million. Cash flows used in financing activities decreased in 2000 compared to 1999 due to proceeds from long-term debt. In 1998, as a result of a stock offering, the Company received net proceeds of $14.1 million. As a result of the offering, debt was paid down both in 1999 and in 1998 in the amounts of $4.7 million and $5.5 million. Dividends paid in 2000, 1999 and 1998 were $1.9 million, $1.9 million and $1.8 million.
INFLATION AND ECONOMIC CONDITIONS
Management believes that the effect of inflation on the Company's operations has not been material and will continue to be immaterial for the foreseeable future. The Company does not have long-term contracts; therefore, to the extent permitted by competition, it has the ability to pass through to its customers most cost increases resulting from inflation, if any. In addition, the Company is not particularly energy dependent; therefore, the increase in energy costs should not have a significant impact on the Company.
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.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and other information required by this Item are contained in the financial statements and footnotes thereto listed in the index on page of this report.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors of the Company is contained on pages 2 through 4 and page 13 of the Company's definitive Proxy Statement, dated February 16, 2001, with respect to the Annual Meeting of Shareholders to be held on March 19, 2001, which will be filed pursuant to regulation 14(a) of the Securities Exchange Act of 1934 and which is incorporated herein by reference.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The information called for by this Item is contained on pages 6 through 10 of the Company's definitive Proxy Statement, dated February 16, 2001, with respect to the Annual Meeting of Shareholders to be held on March 19, 2001, which will be filed pursuant to regulation 14(a) of the Securities Exchange Act of 1934 and which is incorporated herein by reference.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item is contained on pages 4 and 5 of the Company's definitive Proxy Statement, dated February 16, 2001, with respect to the Annual Meeting of Shareholders to be held on March 19, 2001, which will be filed pursuant to regulation 14(a) of the Securities Exchange Act of 1934 and which is incorporated herein by reference.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item is contained on page 12 of the Company's definitive Proxy Statement, dated February 16, 2001, with respect to the Annual Meeting of Shareholders to be held on March 19, 2001, which will be filed pursuant to regulation 14(a) of the Securities Exchange Act of 1934 and which is incorporated herein by reference.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed for this part of the report are filed as a separate section following the signature page. Reference is made to the Audited Consolidated Financial Statements and Schedule II Table of Contents on Page.
(1) See Page No..
(2) Schedules, other than Schedule II listed on page, are omitted because of the absence of conditions under which they are required.
3. EXHIBITS
(b) Champion filed the following reports on Form 8-K during the last quarter of the period covered by this report:
Form 8-K dated September 5, 2000, filed September 14, 2000 regarding appointment of Kirby J. Taylor as President and Chief Operating Officer.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHAMPION INDUSTRIES, INC.
By /s/ Marshall T. Reynolds ------------------------------------------ Marshall T. Reynolds Chief Executive Officer
By /s/ Kirby J. Taylor ------------------------------------------ Kirby J. Taylor President and Chief Operating Officer
By /s/ Todd R. Fry ------------------------------------------ Todd R. Fry Vice President and Chief Financial Officer
Date: January 22, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the dates indicated.
SIGNATURE AND TITLE DATE
January 22, 2001 ------------------------------------ Robert H. Beymer, Director
/s/ Philip E. Cline January 22, 2001 ------------------------------------ Philip E. Cline, Director
/s/ Harley F. Mooney, Jr. January 22, 2001 ------------------------------------ Harley F. Mooney, Jr., Director
/s/ Todd L. Parchman January 22, 2001 ------------------------------------ Todd L. Parchman, Director
/s/ A. Michael Perry January 22, 2001 ------------------------------------ A. Michael Perry, Director
/s/ Marshall T. Reynolds January 22, 2001 ------------------------------------ Marshall T. Reynolds, Director
/s/ Neal W. Scaggs January 22, 2001 ------------------------------------ Neal W. Scaggs, Director
/s/ Glenn W. Wilcox, Sr. January 22, 2001 ------------------------------------ Glenn W. Wilcox, Sr., Director
CHAMPION INDUSTRIES, INC.
Audited Consolidated Financial Statements and Schedule
October 31, 2000
CONTENTS
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, 2000 and 1999, 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, 2000. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based upon our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Champion Industries, Inc. and Subsidiaries at October 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Charleston, West Virginia December 22, 2000
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
See notes to consolidated financial statements.
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
See notes to consolidated financial statements.
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Income Statements
See notes to consolidated financial statements.
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
See notes to consolidated financial statements.
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
See notes to consolidated financial statements.
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Champion conform to accounting principles generally accepted in the United States. The preparation of the financial statements in conformity with generally accepted accounting principles 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, Blue Ridge Printing Co., Inc., CHMP Leasing, Inc., Rose City Press, Capitol Business Equipment, Inc., Thompson's of Morgantown, Inc., Independent Printing Service, Inc. and Diez Business Machines.
Significant intercompany transactions have been eliminated in consolidation.
CASH EQUIVALENTS
Cash and cash equivalents consist principally of cash on deposit with banks, repurchase agreements for government securities, and a money market account, all highly liquid investments with an original maturity of three months or less. At October 31, 2000 and 1999, the Company held overnight repurchase agreements for $1,474,000 and $2,228,000 of government securities with stated interest rates of 5.20% and 3.85%.
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:
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company leases certain equipment under financing agreements that 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 $3,975,000, $3,674,000, and $3,432,000 for the years ended October 31, 2000, 1999 and 1998.
GOODWILL
The excess cost over fair value of net assets of acquired businesses, goodwill, is being amortized by the straight-line method over periods ranging from 15 to 25 years. The carrying value of goodwill is evaluated periodically for impairment. This evaluation includes the review of operating performance and estimated 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, 2000 and 1999 approximated $1,495,000 and $1,253,000. Amortization expense approximated $242,000, $160,000 and $137,000, for the years ended October 31, 2000, 1999 and 1998.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for the years ended October 31, 2000, 1999 and 1998 approximated $641,000, $693,000 and $650,000.
INCOME TAXES
Provisions for income taxes currently payable and deferred income taxes are based on the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax 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.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted average shares of common stock outstanding for the period and excludes any dilutive effects of stock options. Diluted earnings per share is computed by dividing net income by the weighted average shares of common stock outstanding for the period plus the shares that would be outstanding assuming the exercise of dilutive stock options. The effect of dilutive stock options increased weighted average shares outstanding by 400, 500 and 30,000 for the years ended October 31, 2000, 1999 and 1998.
REVENUE RECOGNITION
Revenues are recognized when products are shipped or services are rendered to customers.
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Shipping and handling costs are recorded as a component of cost of sales.
SEGMENT INFORMATION
The Company designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments.
COST OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
Certain external costs and internal payroll and payroll-related costs have been capitalized during the application, development and implementation stages of software development projects and are being amortized over the software's useful life. Training and research and development costs are expensed as incurred.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which is required to be adopted in years beginning after June 15, 2000. Because of the Company's minimal use of derivatives, the adoption of the new Statement will not have a significant effect on earnings or the financial position of the Company.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to the current-year Financial Statement presentation.
2. INVENTORIES
Inventories consisted of the following:
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT
Long-term debt consisted of the following:
The unsecured term note agreements contain restrictive financial covenants requiring the Company to maintain certain financial ratios.
Maturities of long-term debt for each of the next five years follow:
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has an unsecured revolving line of credit with a bank for borrowings to a maximum of $10,000,000 with interest payable monthly at interest rates at LIBOR plus 1% to 1.5%. The line of credit expires in April 2002 and contains certain restrictive financial covenants. There were no borrowings outstanding under this facility at October 31, 2000.
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 December 2001 and contains certain financial covenants. There were no borrowings outstanding under this facility at October 31, 2000.
The prime rate, the base interest rate on the above loans, approximated 9.5% and 8.25% at October 31, 2000 and 1999. Interest paid during the years ended October 31, 2000, 1999 and 1998 approximated $1,018,000, $1,230,000 and $1,588,000.
The Company's non-cash activities for 2000, 1999 and 1998 included equipment purchases of approximately $756,000, $589,000 and $579,000, which were financed by a bank.
4. EMPLOYEE BENEFIT PLANS
The Company had a Profit Sharing Plan that covered all eligible employees and qualified as a Savings Plan under Section 401(k) of the Internal Revenue Code. Effective January 1, 1998, the Profit Sharing Plan was merged into The Champion Industries, Inc. 401(k) Plan (the "Plan"). The Plan covers all eligible employees who satisfy the age and service requirements. Each participant may elect to contribute up to 15% of annual compensation, and the Company is obligated to contribute 100% of the participant's contribution not to exceed 2% of the participant's annual compensation. The Company may make discretionary contributions to the Plan. The Company's expense under these Plans was approximately $375,000, $369,000 and $311,000 for the years ended October 31, 2000, 1999 and 1998.
The Company's 1993 Stock Option Plan provides for the granting of both incentive and non-qualified stock options to management personnel for up to 762,939 shares of the Company's common stock. The option price per share for incentive stock options shall not be lower than the fair market value of the common stock at the date of grant. The option price per share for non-qualified stock options shall be at such price as the Compensation Committee of the Board of Directors may determine at its sole discretion. All options to date are incentive stock options. Exercise prices for options outstanding as of October 31, 2000 ranged from $4.25 to $18.50. 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 2.42 years.
A summary of the Company's stock option activity and related information for the years ended October 31 follows:
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of stock options outstanding and exercisable at October 31, 2000, follows:
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 2000, 1999 and 1998, respectively: risk-free interest rates of 6.00%; dividend yields of 4.71%, 2.91% and 1.08%; volatility factors of the expected market price of the Company's common stock of 39.9%, 32.5% and 21.2%; 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. Accordingly, the following pro forma disclosures are not likely to be representative of the effects on reported net income for future years.
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 years ended October 31 follows:
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 $676,000 and $651,000 at October 31, 2000 and 1999 relating to these agreements. The amount expensed for these agreements for the years ended October 31, 2000, 1999 and 1998 approximated $25,000, $42,000 and $53,000. To assist in funding the deferred compensation agreements, the Company has invested in life insurance policies which had cash surrender values of $604,000 and $500,000 at October 31, 2000 and 1999.
5. INCOME TAXES
Income taxes consisted of the following:
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets and liabilities are as follows:
A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows:
Income taxes paid during the years ended October 31, 2000, 1999 and 1998 approximated $2,144,000, $1,755,000 and $2,393,000.
The Company has available for income tax purposes net operating loss carryforwards from acquired companies of approximately $1,484,000, of which $487,000 expires in 2011, $899,000 in 2012 and $98,000 in 2013. The Company has available for state income tax purposes net operating loss carryforwards from acquired companies of approximately $1,892,000 of which $21,000 expires in 2010, $47,000 expires in 2011, $545,000 expires in 2012, $253,000 expires in 2013 and $1,026,000 expires in 2014. The Company established valuation allowances against certain net operating loss carryforwards and to the extent that the amounts are subsequently recognized, they will be recorded in the period used as a reduction of goodwill.
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTIONS AND OPERATING LEASE COMMITMENTS
The Company leases operating facilities from entities controlled by its Chief Executive Officer, his family and affiliates. The terms of these leases, which are accounted for as operating leases, range from five to fifteen years.
A summary of significant related party transactions follows:
Historically, the Company either purchased a new vehicle or entered 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 $119,000, $168,000 and $231,000 for the years ended October 31, 2000, 1999 and 1998.
In addition, the Company leases property and equipment from unrelated entities under operating leases. Rent expense amounted to $690,000, $742,000 and $779,000 for the years ended October 31, 2000, 1999 and 1998.
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, 2000:
In order to minimize premium costs, the Company participates in a self-insurance program for employee health care benefits with affiliates controlled by its Chief Executive Officer. 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, 2000, 1999 and 1998 was approximately $2,614,000, $1,961,000 and $2,049,000.
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to the environmental laws and regulations of the United States and the states in which it operates concerning emissions into the air, discharges into the waterways and the generation, handling and disposal of waste materials. The Company's past expenditures relating to environmental compliance have not had a material effect on the Company and are included in normal operating expenses. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they may have upon the capital expenditures, earnings, and competitive position of the Company in the future. Based upon information currently available, management believes that expenditures relating to environmental compliance will not have a material impact on the financial position of the Company.
The Company is subject to various claims and legal actions that arise in the ordinary course of business. In the opinion of management, after consulting with legal counsel, the Company believes that the ultimate resolution of these claims and legal actions will not have a material effect on the consolidated financial statements of the Company.
8. ACQUISITIONS
On November 6, 2000, the Company acquired certain assets of the Huntington, West Virginia paper distribution division of The Cincinnati Cordage Paper Company ("Cordage") pursuant to an auction held by the U.S. Bankruptcy Court for the Southern District of Ohio. This transaction was accounted for under the purchase method of accounting.
On November 30, 1999, the Company acquired all of the issued and outstanding common stock of Diez Business Machines, Inc. of Gonzales, Louisiana. This transaction was accounted for under the purchase method of accounting.
On July 16, 1999, the Company acquired certain assets and assumed certain liabilities of AIM Printing of Knoxville, Tennessee. On June 1, 1999, the Company acquired all of the issued and outstanding common stock of Independent Printing Service, Inc. of Evansville, Indiana. These transactions were accounted for under the purchase method of accounting.
On May 29, 1998, the Company acquired all of the outstanding common stock of Thompson's of Morgantown, Inc. and Thompson's of Barbour County, Inc. (collectively referred to as "Thompson"), both companies doing business as Thompson's Office Furniture and Supplies of Morgantown and Philippi, West Virginia, in exchange for 45,473 shares of its common stock with a market value at the time of acquisition of $600,000.
On May 18, 1998, the Company acquired all of the outstanding common shares of Capitol Business Equipment, Inc. (Capitol), doing business as Capitol Business Interiors of Charleston, West Virginia, in exchange for 72,202 shares of its common stock with a market value at the time of acquisition of $1,000,000.
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Capitol and Thompson transactions were accounted for under the pooling of interests method. However, prior period financial statements were not restated due to the immaterial effect on Champion's consolidated financial statements. Accordingly, Capitol's and Thompson's operations are included in these consolidated financial statements since their acquisition date.
On February 2, 1998, the Company acquired all of the outstanding common stock of Rose City Press (Rose City) of Charleston, West Virginia, an office products company, in exchange for 75,722 shares of its common stock with a market value at the time of acquisition of $1,250,000. The transaction was accounted for under the purchase method and Rose City's operations are included in these consolidated financial statements since the acquisition date.
Pro forma financial information related to these acquisitions has not been presented because such information would not be materially different from amounts reported herein.
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. The Company employs approximately 900 people, of whom 88 are covered by a collective bargaining agreement which expires on May 31, 2001. The Company believes its relations with employees is satisfactory.
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The table below presents information about reported segments for the years ending October 31:
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of total segment revenue, assets and operating income to consolidated income before income taxes for the years ending October 31, 2000, 1999 and 1998 is as follows:
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. The fair value of revolving credit agreements and long-term debt was estimated using discounted cash flows and it approximates their carrying value.
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years ended October 31, 2000 and 1999.
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Schedule II
Valuation and Qualifying Accounts
Years Ended October 31, 2000, 1999 and 1998
(1) Uncollectable accounts written off, net of recoveries