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 also publishes The Herald-Dispatch daily newspaper in Huntington, WV with a total daily and Sunday circulation of approximately 24,000 and 30,000 respectively. The Company's sales offices and/or production facilities are located in Huntington, Charleston, Parkersburg, Clarksburg, Wheeling and Morgantown, West Virginia; Lexington Kentucky; Baton Rouge and New Orleans, Louisiana; Cincinnati, Ohio; Kingsport, Tennessee; 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, office furniture and newspaper advertising.
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 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, 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 Company’s Garrison Brewer operation was relocated across the Ohio river to the nearby Chapman Printing Parkersburg location in 2002.
The Bourque Printing division (“Bourque” or “Champion Graphic Communications - Baton Rouge”) 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 6-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, through the acquisition of the assets of E. S. Upton Printing Company, Inc. (“Upton” or "Champion Graphic Communications - New Orleans”) in New Orleans in 1996 and through the acquisition of Transdata Systems, Inc. in Baton Rouge and New Orleans in 2001. The Upton production operations were relocated to Baton Rouge in the fourth quarter of 2005 as a result of Hurricane Katrina. However, the sales and customer service staff continue to operate in New Orleans.
The Dallas Printing division (“Dallas” or “Champion Jackson”) 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. The operations of Dallas were moved to Baton Rouge, Louisiana in August 2005 and consolidated into an existing facility.
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. Carolina Cut Sheets was relocated to Huntington, West Virginia in 2001.
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. This operation was moved to Baton Rouge, Louisiana with the Dallas relocation.
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. The operations of U.S. Tag were moved to Huntington, West Virginia in August 2003 and they were consolidated into an existing facility.
On November 13, 1995, the Company acquired Donihe Graphics, Inc. (“Donihe”), a high-volume color printer based in Kingsport, Tennessee.
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.
On August 21, 1996, the Company purchased the assets of The Merten Company (“Merten”), a commercial printer headquartered in Cincinnati, Ohio.
On December 31, 1996, the Company acquired all outstanding capital stock of Interform Corporation (“Interform”), a business form manufacturer in Bridgeville, Pennsylvania.
On May 21, 1997, the Company acquired all outstanding common shares of Blue Ridge Printing Co., Inc. of Asheville, North Carolina (“Blue Ridge”). During the second quarter of 2004, the Blue Ridge Knoxville plant was consolidated into the Asheville plant.
On February 2, 1998, the Company acquired all outstanding common shares of Rose City Press (“Rose City”) of Charleston, West Virginia.
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.
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” or “Champion Morgantown”) of Morgantown, West Virginia.
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.
On July 16, 1999, the Company’s Blue Ridge subsidiary acquired certain assets and assumed certain liabilities of AIM Printing (“AIM”) of Knoxville, Tennessee.
On November 30, 1999, the Company acquired all of the issued and outstanding common stock of Diez Business Machines (“Diez”) of Gonzales, Louisiana. Diez was operated as a subsidiary of Stationers until 2004 when it was relocated to the Bourque facility in Baton Rouge, Louisiana.
On November 6, 2000, the Company acquired certain assets of the Huntington, West Virginia paper distribution division of the Cincinnati Cordage Paper Company (“Cordage”). On April 30, 2001, the Company entered into a strategic alliance with Xpedx resulting in the assumption by Xpedx of the Cordage customer list and the sale of certain inventory items.
On October 10, 2001, the Company acquired Transdata Systems, Inc. (“Transdata”) of Baton Rouge and New Orleans, Louisiana. In 2004, Transdata was relocated to existing facilities in New Orleans and Baton Rouge. In 2005, Transdata New Orleans operations were relocated to Baton Rouge.
On June 18, 2003, the Company acquired certain assets of Contract Business Interiors ("CBI") of Wheeling, West Virginia pursuant to acceptance by the U.S. Bankruptcy Court for the Northern District of West Virginia. As a result of this transaction, the Company also assumed certain customer deposit liabilities in the ordinary course of business.
On July 1, 2003, the Company acquired certain assets of Pittsburgh based Integrated Marketing Solutions, the direct sales division and distributorship of Datatel Resources Corporation.
On May 13, 2004, the Company acquired certain assets of Cincinnati, Ohio Westerman Print Company (“Westerman”). The assets of Westerman were moved to the Company’s Merten operation in Cincinnati, Ohio.
On September 7, 2004, the Company acquired all the issued and outstanding capital stock of Syscan Corporation (“Syscan”), a West Virginia corporation, for a gross cash price of $3,500,000 and a contingent purchase price, dependent upon satisfaction of certain conditions, not to exceed the amount of $1,500,000. At closing, after considering the cash received in the transaction, the acquisition of a building and acquisition costs, the net assets acquired totaled approximately $2,688,000. On December 14, 2006, the Company satisfied the contingent purchase price for a payment of $1,350,725.
On September 14, 2007, the Company completed, pursuant to an asset purchase agreement, the acquisition of The Herald-Dispatch daily newspaper in Huntington, West Virginia through a newly formed subsidiary Champion Publishing, Inc. The purchase price was $77.0 million and subject to a working capital payment of $837,554 plus or minus any change in working capital from the index working capital base of $1,675,107 at the closing date of September 14, 2007. The working capital payment totaled approximately $1.6 million.
All acquisitions have been accounted for using the purchase method of accounting except for U.S. Tag, Blue Ridge, Capitol and Thompson’s, which utilized the “pooling-of-interest” method of accounting.
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 also publishes The Herald-Dispatch daily newspaper in Huntington, WV with a total daily and Sunday circulation of approximately 24,000 and 30,000. The Company's sales force markets 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, labels, 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. Included within our print segment are fulfillment services to our customers which encompass warehousing, distribution, and reporting services. The Company also offers complete bindery and letterpress services. The printing operations contributed $89.0 million, $105.3 million, and $104.5 million or 63.0%, 63.5% and 70.4% of the Company's total revenues for the fiscal years ended October 31, 2009, 2008 and 2007.
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 Internet e-commerce sites, which allow customers to order office products, furniture and forms online. The e-commerce sites include the office products and office furniture catalog, which is customized specifically for each customer requesting Internet e-commerce access. These sites include www.stationers-wv.com and www.cbiwv.com. In addition, the Company offers customized on-line forms management solutions through various sites including http://printwithchampion.com and www.cgc1.com. The Company believes that its e-commerce sites will allow customers to access data concerning their company’s purchase habits so as to better control expenditures for office products and business forms 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 $35.9 million, $41.5 million, and $41.4 million, or 25.4%, 25.1% and 27.9% of the Company's total revenues for the fiscal years ended October 31, 2009, 2008 and 2007.
The Company operates a daily newspaper in Huntington, WV. The Company entered the newspaper business by purchasing the assets of The Herald-Dispatch from Gatehouse Media, Inc. The Herald-Dispatch was previously owned by Gannett, Inc. since 1971 and was sold to Gatehouse Media, Inc. in May of 2007.
The Herald-Dispatch serves a regional market area in southwestern West Virginia covering Cabell County and portions of neighboring Wayne County and eastern Lawrence County, Ohio. The Herald-Dispatch is the primary print advertising medium for the region, which centers on Huntington and draws business from across the border into Ohio and Kentucky. The Herald-Dispatch has circulation of 24,000 Monday through Saturday mornings and 30,000 on Sunday, according to the latest Audit Bureau of Circulations (ABC) Newspaper Publisher's Statement for the 6 months ended September 30, 2009. The Herald-Dispatch faces a very limited amount of print competition from other daily newspapers in its home county. It is estimated, based on research performed by Scarborough Management, that the designated market area readership (DMA) is approximately 101,000 on Sunday and 86,000 for weekdays. The website has attracted approximately 416,000 unique visitors per month and approximately 5.16 million page views per month based on the latest Newspaper Publisher's Statement. The historical on-line revenues for The Herald-Dispatch have decreased from approximately $1.6 million in fiscal year 2008 to approximately $1.1 million in fiscal year 2009. The six weeks of 2007 from the acquisition on September 14, 2007 to the Company's fiscal calendar year ending on October 31, 2007 represented approximately $200,000 of online revenues. The Herald-Dispatch contributed $16.4 million, $18.9 million, and $2.5 million, or 11.6%, 11.4% and 1.7% of the Company's total revenues for the fiscal years ended October 31, 2009, 2008 and 2007.
The operations also publish the Putnam Herald serving Putnam County, West Virginia, one of the fastest-growing counties in the state, and the Lawrence Herald in Lawrence County, Ohio. The Putnam Herald and Lawrence Herald are distributed free via mail on Saturday and Thursday, respectively.
The Huntington area has been heavily affected by the de-industrialization experienced in the Upper Midwest since the 1970s. Huntington has sought to recast itself as a university town home to 14,000 students. Downtown Huntington was recently revitalized with a $60 million retail/mixed use project; and new industries such as call centers are opening and expanding their locations. The area is also a regional shopping hub and growing medical and research center.
Marshall University borders the downtown area of Huntington. Marshall is over 170 years old and is the second largest university in West Virginia. The university currently enrolls 9,500 undergraduate and 4,500 graduate students and offers a full range of programs. Marshall's positive effect on the local economy goes beyond being one of Huntington's top two employers. The university's research corporation, medical school and graduate programs are dedicated to bringing research and development dollars into the community. The university's medical school is a nationwide leader for rural healthcare delivery.
Huntington has experienced several positive industrial developments in the last 10 plus years. According to the Huntington Area Development Council, 9,000 new jobs have been brought to the Huntington area in the last ten years and 1.7 million square feet of building space has been leased, sold or built. In 2005 the $60 million Pullman Square open-air retail, restaurant and entertainment project was completed to rejuvenate the downtown "Superblock" area, immediately increasing downtown usage. The Harris Riverfront Park promenade that stretches along the Ohio River and downtown is also a target of revitalization efforts.
Kinetic Park was another major development to open for business in 2005. This 95-acre site was developed to become a business and technology park/retail area. Early tenants included professional service firms and a restaurant. In addition, Marshall University and the Huntington Area Development Council, both committed to promoting the biotech industry in the area, have teamed up to plan to develop the Velocity Center in Kinetic Park. The Velocity Center is envisioned as a technology business incubator that will work with the Robert C. Byrd Biotechnology Center at Marshall University to explore and expand commercial applications to technology innovations. The 60,000-square-foot building is also projected to house other technology businesses, including AFB­TECH, the American Foundation for the Blind Employment and Technology Center in Huntington.
Other developments in the area include the opening of two call centers. Amazon.com opened a call center in 2000 that employs 350. Global Contact Services opened a call center in 1998 and in recent years announced the intent to expand their facility and employee base. The expansion will make them one of the larger employers in the area.
The Huntington area also serves as a regional shopping center. The Huntington Mall, the largest mall in the state, houses over 150 stores, restaurants and boutiques. It is anchored by Sears, Macy's, JC Penney, Elder Beerman and Dick's Sporting Goods. Many retail stores surround the mall including Best Buy, Kohl's and Wal-Mart. Only a few minutes west on U.S. 60 from the Huntington Mall is another growing shopping plaza, Merritt Creek Farm. This plaza of 30-plus shops includes Home Depot, Target, Marshall's, and the state's first freestanding Starbucks. River Place, a bustling shopping center located near the entrance to downtown Barboursville, is just another few miles down the road. This area features many locally owned restaurants and stores.
Huntington's medical community provides health care for the region, which also includes portions of Ohio and Kentucky. St. Mary's Hospital is the second-largest health care facility in West Virginia with 393 beds, and has recently completed a $28 million regional heart center and expanded emergency medicine department. Cabell-Huntington Hospital, with 322 beds, recently opened its $84 million North Patient Tower, and shares its campus with the Marshall University Medical Center and the $44 million Edwards Comprehensive Cancer Center, which opened in 2006. The two hospitals are jointly designated as a Level II trauma center. The third area hospital, the Huntington VA Medical Center, is an 80-bed medical and surgical facility. In 1998 the hospital completed a $10 million research facility. These hospitals are three of the top employers in the region.
Huntington's historic roots as an industrial hub remain alive today. Located along the Ohio River, Huntington was founded as the western terminus of the C&O Railroad. CSX, the successor to C&O, still maintains operations in the city. Huntington's inland port along the Ohio River is the largest in the United States in terms of total tonnage and ton­ miles, and much of the coal mined in southern West Virginia is brought to Huntington via train to be transported by river barges to industrial centers in other parts of the country. Several heavy industrial plants still line the Ohio River and the Guyandotte River.
ORGANIZATION
Champion’s three lines of business are comprised of nineteen operating divisions. The Huntington headquarters provides centralized financial management and administrative services to all of its business segments.
Commercial Printing
Eight commercial printing divisions are located in Huntington, Charleston and Parkersburg, West Virginia; Lexington, Kentucky; Baton Rouge, Louisiana; Cincinnati, Ohio; Kingsport, Tennessee; and Asheville, North Carolina. Each has a sales force, a customer service operation and a pre-press department that serve the customers in their respective geographic areas. Although each customer's interface is solely with its local division's personnel, its printing job may be produced in another division using the equipment most suited to the quality and volume requirements of the job. In this way, for example, Champion can effectively compete for high quality process color jobs in Lexington by selling in Lexington, printing in Cincinnati and binding in Huntington. The full range of printing resources is available to customers in the entire market area without Champion having to duplicate equipment in each area.
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.
Consolidated Graphic Communications division in Bridgeville, Pennsylvania operates as a full line printing and printing services distributor. The division offers complete print management, fulfillment services and B2B e-commerce solutions.
Carolina Cut Sheets, Inc., located in Huntington, West Virginia, 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 Huntington, West Virginia, 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.
Chapman Printing in Charleston, West Virginia operates as a full line printing, printing services distributor and office products and office furniture distributor. Chapman Printing Charleston offers complete print management, fulfillment, mail, digital print, office furniture and print and office products and B2B e-commerce solutions. The Syscan operation was consolidated into the Chapman Printing Charleston division effective November 1, 2005. This division also operates a facility in Morgantown, West Virginia providing printing, office products and office furniture, distribution and integration services. In 2007, the Chapman Printing Charleston division spun off its print on demand and mail operations into a new division located in Charleston, West Virginia operating under the name Champion Output Solutions. Champion Output Solutions is a comprehensive transactional printing and mail center providing statement rendering, check and explanation of benefits variable print, medical billing and postal optimization.
River Cities Printing was acquired via the acquisition of The Herald-Dispatch and is a commercial printer with sales comprised primarily of stick-on labels and other commercial printing. In 2008, River Cities Printing was relocated to an existing facility in Huntington, WV.
Office Products, Office Furniture and Office Design
Stationers, located in Huntington, Clarksburg (doing business as “Champion Clarksburg”), Morgantown (through its Chapman Printing Morgantown division) and Parkersburg, West Virginia (doing business as “Chapman Printing”), 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 sales people and delivered in bulk daily to each division, or shipped directly to customers.
Smith & Butterfield, located in Evansville, Indiana, 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.
Stationers, through its Capitol division, offers office design services throughout West Virginia and eastern Kentucky.
Newspaper
The Herald-Dispatch, located in Huntington, WV, publishes a daily newspaper with a daily and Sunday circulation of approximately 24,000 and 30,000 respectively.
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 and label manufacturing; (vii) high volume process color web printing of brochures and catalogs; and (viii) output solutions including print on demand, inserting and mailing services. The capabilities of the Company's various printing divisions are stated below.
* - Services Provided
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.
Newspaper
The Company provides its customers in the Tri-State regions surrounding Huntington, West Virginia with the primary and premier print advertising solutions for the region.
MANUFACTURING AND DISTRIBUTION
The Company's pre-press facilities have desktop publishing, typesetting, laser imagesetting and scanning/retouching equipment, as well as complete layout, design, stripping and plate processing operations. Sheet printing equipment (for printing onto pre-cut, individual sheets) includes single color duplicators, single to eight 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 or more from placement of order to delivery to customer. Office furniture sales for mid-line and budget are made primarily from the Company's in-house stock. However, special orders from manufacturers and project furniture may require 30 to 90 days for delivery.
The newspaper is produced nightly at its own in-house facility. The paper is then distributed via contract haulers between 3:00AM and 4:00AM each morning. The contract haulers then deliver the papers to each of the route delivery personnel for a targeted delivery of 6:00AM each morning.
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 years ended October 31, 2009, 2008 and 2007, no single customer accounted for more than 3% of the Company’s total revenues. Due to the project-oriented nature of customers' printing and furniture 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. The Company is also affiliated with a buying group with a national organization for its newsprint purchases.
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 economies afforded by membership in a national purchasing association and by purchasing directly from manufacturers, and the high level of personal services to customers, contribute substantially to the Company's ability to compete in the office supply and office furniture market segments.
The Herald-Dispatch faces limited competition from other daily newspapers in its primary market area of Cabell County, West Virginia. The Herald-Dispatch competes with other advertising media in its designated market area, including television and radio advertising.
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 in the United States of America, 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.
The Company's newspaper operations are geographically concentrated and serve a regional market area in southwestern West Virginia primarily covering Cabell County, West Virginia, parts of neighboring Wayne County, West Virginia and eastern Lawrence County, Ohio.
On August 29, 2005, Hurricane Katrina made landfall and subsequently caused extensive flooding and destruction along the coastal areas of the Gulf of Mexico, including New Orleans and other communities in Louisiana and Mississippi in which Champion conducts business. Operations in many of the Company’s markets were disrupted by both the evacuation of large portions of the population as well as damage and/or lack of access to the Company’s operating facility in New Orleans.
The Company filed insurance claims related to both actual and contingent losses. The Company received an advance to claim payment from an insurance company of $300,000 in February 2006 and final settlement claims of $278,000 in April and May 2006. The Company recorded the $300,000 payment as an insurance recovery and related receivable at January 31, 2006. The Company recorded additional charges of approximately $42,000 in the first quarter of 2006 associated with Hurricane Katrina. The Company received a second advance to claim check in April of 2006 in the amount of $200,000 and a full settlement of any and all claims check of $78,000 in May of 2006. The Company recorded the aggregate amount of these checks as an insurance recovery and the $78,000 as a related receivable at April 30, 2006. The Company incurred additional charges of $234,000 primarily related to additional inventory valuation reserves and costs associated with relocation in the second quarter of 2006. During the fourth quarter of 2006 the Company successfully negotiated an early lease termination related to its New Orleans location resulting in Katrina related recoveries of approximately $76,000.
SEASONALITY
Our business is subject to seasonal fluctuations that we expect to continue to be reflected in our operating results in future periods.
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.
On a historical basis The Herald-Dispatch's first and third calendar quarters of the year tended to be the weakest because advertising volume is at its lowest levels following the holiday season and a seasonal slowdown in the summer months. Correspondingly, on a historical basis the fourth calendar quarter followed by the second calendar quarter tended to be the strongest quarters. The fourth calendar quarter includes heavy holiday season advertising. Other factors that affect our quarterly revenues and operating results may be beyond our control, including changes in the pricing policies of our competitors, the hiring and retention of key personnel, wage and cost pressures, distribution costs, changes in newsprint prices and general economic factors.
EMPLOYEES
On October 31, 2009, the Company had approximately 790 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 approximately 40 employees at October 31, 2009) at its Bridgeville, Pennsylvania facility. This contract expires May 31, 2010. As a result of the acquisition of The Herald-Dispatch, the Company also is party to a collective bargaining agreement with Graphic Communication Conference/ International Brotherhood of Teamsters Local 619-M of District Council 3 covering newspaper press production employees (totaling approximately 10 employees at October 31, 2009) at The Herald-Dispatch Huntington, West Virginia location. The contract expires December 31, 2010. The Company believes relations with the unions and covered employees are good.
EXECUTIVE OFFICERS OF CHAMPION
ITEM 1A
ITEM 1A - RISK FACTORS
The Company’s business and results of operations are subject to a number of risks, many of which are outside of the Company’s control. In addition to the other information in this report, readers should carefully consider that the following important factors, among others, including risks not presently known or currently deemed immaterial by us could materially impact the Company’s business and future results of operations.
Dependence on Marshall T. Reynolds; Control of the Company.
The Company's operations and prospects are dependent in large part on the continued efforts of Marshall T. Reynolds. The loss of Mr. Reynolds could have an adverse effect on the Company. In addition, by virtue of Mr. Reynolds' ownership of Company common stock, Mr. Reynolds will continue to significantly influence our operations. As of October 31, 2009, Marshall T. Reynolds and his affiliated entities, including The Harrah and Reynolds Corporation ("Harrah and Reynolds"), held 4,266,127 shares (41.8%) of the common stock of the Company. Sales by Mr. Reynolds of common stock could adversely affect the prevailing market price of the common stock. The Company is unable to estimate the amount of common stock, if any, that may be sold in the future.
The Company operates in a highly competitive market that could negatively impact our results of operations.
In the printing segment, there has been an ongoing consolidation resulting in fewer competitors. This in part has resulted in numerous competitors that are larger with greater geographic diversity and broader product offerings. In addition, the office products and office furniture industries are extremely competitive and fragmented. The Company competes with numerous large and small companies that operate in each industry, some of which have greater financial resources than the Company. The Company competes on the basis of its reputation for quality, production capability, prompt delivery, price and strength of its continuing customer relationships.
Our supply-chain management services are embedded into our printing and office products and office furniture segments. The competitive factors faced by the Company include customer service, price, distribution geography, information technology and the customer's fulfillment and distribution needs.
The Company may be adversely impacted by the rising costs of critical raw materials such as paper, ink, energy, postage and other raw materials.
Our primary raw material is paper, therefore, the purchase of paper and other raw materials such as ink, energy, postage and items we distribute such as office products and office furniture and goods and services represent a large portion of our costs. Any increases in the costs of these items will also increase our costs. Depending on the nature of such increases we may not be able to pass these costs on to customers through higher prices. Increases in the costs of these items may also adversely impact our customers’ demand for printing and related services as well as for office products and office furniture.
The Company has substantial investment in the credit worthiness and financial condition of our customers.
The largest current asset on the Company's balance sheet on a net basis is our accounts receivable balances from our customers. We grant credit to substantially all of our customers. A decline in financial condition across a significant component of our customer base could hinder our ability to collect amounts owed by customers. In addition, such a decline could result in lower demand for our services. The potential causes of such a decline include national or local economic downturns, the fact that many of our customers are in highly-competitive industries or markets and the impact of regulatory actions may impact the financial stability of our customers.
We may have difficulty adjusting our operating models to meet changing or current market conditions.
Because the markets in which we compete are highly-competitive, we must continue to improve our operating efficiency in order to maintain or improve our profitability. Although we have been able to improve efficiency and reduce costs in the past, there is no assurance that we will continue to do so in the future. In addition, the need to reduce ongoing operating costs may result in significant up-front costs to reduce workforce, close or consolidate facilities, or upgrade equipment and technology.
We may be unable to grow through acquisitions or to successfully integrate acquired businesses.
The Company has historically grown through a combination of organic growth and acquisitions. It is critical that the Company achieve the anticipated benefits of acquisitions. The integration of companies that have previously operated independently may result in significant challenges, and we may be unable to accomplish the integration smoothly or successfully. In particular, the coordination of geographically dispersed organizations with differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration of acquired businesses may also require the dedication of significant management resources, which may temporarily shift senior management’s attention from the other day-to-day operations of the Company. Our strategy is, in part, predicated on our ability to realize cost savings and to increase revenues through the acquisition of businesses that strategically enhance our capabilities and services.
We may have difficulty hiring and retaining appropriate employees including senior management.
Our success depends, in part, on our general ability to attract, develop, motivate and retain highly skilled employees. The loss of a significant number of our employees or the inability to attract, hire, develop, train and retain additional skilled personnel could have a material adverse effect on us. We currently operate in several locations with geographic diversity, individual locations may encounter strong competition from other employers for skilled labor. In addition, many members of our management have significant industry experience and a long track record with us that is important to our continued success. If one or more members of our senior management team leave and we cannot replace them with a suitable candidate quickly, we could experience difficulty in managing our business properly, which could harm our business and results of operations.
We may be negatively impacted by strikes or other work stoppages by our employees.
We employ approximately 50 persons who are covered by collective bargaining agreements. If our unionized employees were to engage in a concerted strike or other work stoppage, or if our other employees were to become unionized, we could experience a disruption of operations, higher labor costs or both.
We may have increased employee benefit costs for health care and other benefits.
We provide health care and certain other benefits to our employees. In recent years, costs for health care have increased more rapidly than general inflation in the U.S. economy. If this trend in health care costs continues, our cost to provide such benefits could increase, adversely impacting our business and results of operations.
We may be negatively impacted by declines in general economic conditions or acts of war and terrorism.
Demand for printing services is highly correlated with general economic conditions. A decline in U.S. economic conditions may, therefore, adversely impact our business and results of operations. Because such outcomes are difficult to predict, the industry may experience excess capacity resulting in declines in prices for our services. The overall business climate may also be impacted by foreign wars or domestic or foreign acts of terrorism. Such acts may have sudden and unpredictable adverse impacts on demand for our services.
We may face adverse pricing pressures as a result of operating in a highly-competitive market.
The markets for our services are highly fragmented and we have a large number of competitors, resulting in a highly-competitive market and increasing the risk of adverse pricing pressures in various circumstances outside of our control, including economic downturns.
We are dependent on the markets utilizing printed materials in lieu of alternative media. If this changes we may be adversely affected.
In addition to traditional non-print based marketing and advertising channels, online distribution and hosting of media content may gain broad acceptance or preferred status relative to printed materials among consumers generally and have an adverse effect on our business. Consumer acceptance of electronic delivery as well as the extent that consumers may have previously replaced traditional reading of print material with online hosted media contents is uncertain. We have no ability to predict the likelihood that this may occur.
We may be adversely affected by regulatory requirements, tax requirements and The Sarbanes-Oxley Act.
We are subject to numerous rules and regulations, including, but not limited to, environmental and health and welfare benefit regulations as well as those associated with being a public company as well as numerous federal, state, and local tax rules and regulations. These rules and regulations and associated interpretations may be changed by local, state or federal governments or agencies. Changes in these regulations may result in a significant increase in our compliance costs. Compliance with changes in rules and regulations could require increases to our workforce, increased cost for services, compensation and benefits, or investments in new or upgraded equipment. In addition, audits and examinations of prior years may result in liabilities and additional financial burdens. The Company will be subject to reporting on internal controls in accordance with Section 404 of The Sarbanes-Oxley Act for auditors attestation for fiscal years ending on or after June 15, 2010. The Company is currently unable to predict the cost or difficulties required to complete such certifications.
We are highly dependent on information technology. If our systems fail or are unreliable our operations may be adversely impacted.
The efficient operation of our business depends on our information technology infrastructure and our management information systems. In addition, production technology in the printing industry has continued to evolve specifically related to the pre-press component of production. We rely on our management information systems to effectively manage accounting and financial functions, job entry, tracking and cost accumulation and certain purchasing functions as well as fulfillment and inventory management including e-commerce activities. Our information technology infrastructure includes both third party solutions and applications designed and maintained internally. Since our Company operates on multiple platforms, the failure of our information technology infrastructure and/or our management information systems to perform could severely disrupt our business and adversely affect our results of operation. In addition, our information technology infrastructure and/or our management information systems are vulnerable to damage or interruption from natural or man-made disasters, terrorist attacks, computer viruses or hackers, power loss, or other computer systems, Internet telecommunications or data network failures. Any such interruption could adversely affect our business and results of operations.
Competition from alternative forms of media may impair our ability to achieve revenue growth.
Advertising produces the predominant share of our newspaper revenues. With the continued development of alternative forms of media, particularly those based on the Internet, our traditional print business faces increased competition. Alternative media sources also affect our ability to increase our circulation revenues. This competition could make it difficult for us to grow our advertising and circulation revenues, which we believe will challenge us to expand the contributions of our online business.
Changes in economic conditions in the markets we serve may produce volatility in demand for our products and services.
Our operating results depend on the relative strength of the economy in our principal newspaper market as well as the strength or weakness of national and regional economic factors. Continuing or deepening softness in the U.S. economy could significantly affect key national advertising and automotive advertising, as well as retail and classified employment revenue.
If there is a significant increase in the price of newsprint or a reduction in the availability of newsprint, our results of operations and financial condition may suffer.
Newsprint is the major component of our cost of raw materials associated with production of the newspaper. Accordingly, our earnings are sensitive to changes in newsprint prices. We have not attempted to hedge fluctuations in the normal purchases of newsprint or enter into contracts with embedded derivatives for the purchase of newsprint. If the price of newsprint increases materially, our operating results could be adversely affected. If our newsprint suppliers experience labor unrest, transportation difficulties or other supply disruptions, our ability to produce and deliver newspapers could be impaired and/or the cost of the newsprint could increase, both of which would negatively affect our operating results.
Our indebtedness could adversely affect our financial health and reduce the funds available to us for other purposes, including dividend payments.
We have a significant amount of indebtedness. At October 31, 2009, we had total indebtedness of $66.7 million under our credit facilities. Our interest expense for the year ended October 31, 2009 was approximately $5.2 million. At October 31, 2009, the borrowings under our credit facility were subject to a floating interest rate of LIBOR plus the applicable margin or the prime rate plus the applicable margin. Subsequent to October 31, 2009 the Administrative Agent for Lenders suspended our LIBOR borrowing option. The borrowings under our credit facility were hedged through the execution of interest rate hedge agreements that convert the floating interest rate component to an effective interest rate of 4.78% plus the applicable LIBOR margin on initial borrowings of $25 million subsequently adjusted for scheduled amortization of these borrowings through October 29, 2010.
On December 29, 2009, the Administrative Agent and Lenders under the Company's Credit Agreement dated September 14, 2007 ("Credit Agreement"), the Company and Marshall T. Reynolds entered into a Forbearance Agreement (the "Forbearance Agreement") which provides, among other things, that during a standstill period commencing on December 29, 2009 and ending on March 31, 2010 (unless sooner terminated by default of Champion under the Forbearance Agreement or the Credit Agreement), the Required Lenders are willing to temporarily forbear exercising certain rights and remedies available to them, including acceleration of the obligations or enforcement of any of the liens provided for in the Credit Agreement. The Company acknowledged in the Forbearance Agreement that as a result of the existing defaults, the Lenders are entitled to decline to provide further credit to the Company, to terminate their loan commitments, to accelerate the outstanding loans, and to enforce their liens.
Volatility in U.S. credit markets could affect the Company's ability to obtain financing to fund acquisitions, investments, or other significant operating or capital expenditures.
At the end of 2009, the company had approximately $66.7 million of indebtedness. A further tightening of credit availability could restrict the Company's ability to finance significant transactions and also limit its ability to refinance its existing capital structure or to fund its current operation pursuant to the terms of the Forbearance Agreement.
We may not be able to pay or maintain dividends and the failure to do so may negatively affect our share price.
We have historically paid regular quarterly dividends to the holders of our common stock. Our ability to pay dividends, if any, will depend on, among other things, our cash flows, our cash requirements, our financial condition, the degree to which we are or become leveraged, contractual restrictions binding on us, provisions of applicable law and other factors that our board of directors may deem relevant. There can be no assurance that we will generate sufficient cash from continuing operations in the future, or have sufficient surplus or net profits to pay dividends on our common stock. Our dividend policy is based upon our directors’ current assessment of our business and the environment in which we operate and that assessment could change based on competitive or technological developments (which could, for example, increase our need for capital expenditures) or new growth opportunities. Our board of directors may, in its discretion, amend or repeal our dividend policy to decrease the level of dividends or entirely discontinue the payment of dividends. The reduction or elimination of dividends may negatively affect the market price of our common stock.
As a result of the Company's inability to remain in compliance with various financial covenants of the Credit Agreement during fiscal 2009, the Board of Directors suspended the Company's dividend. Any future dividends will be subject to the above mentioned factors under the current Forbearance Agreement and restricted payments are not permitted.
Our newspaper business is subject to seasonal and other fluctuations, which affects our revenues and operating results.
Our business is subject to seasonal fluctuations that we expect to continue to be reflected in our operating results in future periods. On a historical basis The Herald-Dispatch's first and third calendar quarters of the year tended to be the weakest because advertising volume is at its lowest levels following the holiday season and a seasonal slow down in the summer months. Correspondingly, on a historical basis the fourth calendar quarter followed by the second calendar quarter tended to be the strongest quarters. The fourth calendar quarter includes heavy holiday season advertising. Other factors that affect our quarterly revenues and operating results may be beyond our control, including changes in the pricing policies of our competitors, the hiring and retention of key personnel, wage and cost pressures, distribution costs, changes in newsprint prices and general economic factors.
We could be adversely affected by declining newspaper circulation.
According to the Newspaper Association of America, overall daily newspaper circulation, including national and urban newspapers, has continued to decline. There can be no assurance that our circulation will not decline in the future. Further declines in circulation could impair our ability to maintain or increase our advertising prices, cause purchasers of advertising in our publications to reduce or discontinue those purchases and discourage potential new advertising customers which could have a material adverse effect on our business, financial condition, results of operations or cash flows.
ITEM 2
ITEM 2 - PROPERTIES
The Company conducts its operations primarily from twenty-one (21) different physical locations, fourteen (14) of which are leased and seven (7) of which are owned in fee simple by Company subsidiaries. The Company also owns two facilities of which the operations have been consolidated into other Champion facilities. The Company also leases other facilities primarily as sales and customer service locations, these operations and locations are not included as core operating facilities. The Company does not anticipate any issues in regards to the renewal of certain leases when the terms expire. The properties leased and certain of the lease terms are set forth below and may be subject to periodic adjustments based on the consumer price index:
(1) Lease is “triple net”, whereby the Company pays for all utilities, insurance, taxes, repairs and maintenance and all other costs associated with properties.
(2) Lease is gross to the extent it excludes taxes and insurance during the lease term.
(3) Lease is gross to the extent it excludes taxes and insurance during the initial lease term. The Company has renewal options through 2024 at various rates and the lease essentially converts to a triple net lease in the renewal period. The Company has entered into a sublease agreement commencing January 2007, through June 30, 2011, at an annual sublease of $44,370, representing approximately 8,500 square feet.
The Dallas Printing subsidiary owns, and previously operated from, a single-story masonry structure of approximately 19,600 square feet at 321-323 East Hamilton Street, Jackson, Mississippi. This building was vacated during the fourth quarter of 2005. The Company is currently evaluating its options regarding this facility.
The Chapman Printing Charleston operation previously conducted business from a single story masonry building of approximately 21,360 square feet owned by the Company at 1563 Hansford Street, Charleston, West Virginia. This building was vacated during the second quarter of 2005. The Company is currently evaluating its facility needs in Charleston and the future use, if any, of this building. The Company also owns a structure in Charleston, WV that was purchased as a result of the Syscan acquisition. This building is located at 811 Virginia Street West and is a three-story block building.
The Bourque Printing subsidiary owns, and operates from, a single-story building of approximately 42,693 square feet at 10848 Airline Highway, Baton Rouge, Louisiana. The Company also owns a warehouse and storage facility 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, a two-story masonry and steel building of approximately 28,000 square feet and a contiguous 1,692 square foot former residential structure at 544 and 560 Haywood Road, Asheville, North Carolina.
The Capitol subsidiary of Stationers owns and operates from a 22,000 square foot building at 711 Indiana Avenue, Charleston, West Virginia.
The Herald-Dispatch owns and operates from a five-story masonry building of approximately 65,000 square feet at 946 5th Avenue, Huntington, West Virginia.
The Company continually reviews its production facilities and has and continues to consolidate facilities as deemed economically feasible. The Company believes its production facilities are suitable and adequate to meet current production needs.
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
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Champion common stock has traded on the National Association of Securities Dealers, Inc. Automated Quotation System (“NASDAQ”) National Market System (now Global Market) 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 does not include retail mark-up, mark-down or commission.
At the close of business on January 14, 2010, there were 400 shareholders of record of Champion common stock. The shareholders of record are determined by the Company’s transfer agent.
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, 2009, 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.
(1)
During the fourth quarter of 2005, the Company incurred various charges resulting from Hurricane Katrina. As a result of the hurricane, the Company recorded a pre-tax charge of $1,021,000 or $581,000 net of tax or $0.06 per share on a basic and diluted basis. In 2006, the Company recorded recoveries of approximately $377,000, or $224,000 net of tax or $0.02 per share on a basic and diluted basis.
(2)
The revenues associated with the acquisition of The Herald-Dispatch are primarily composed of advertising, circulation and commercial printing revenues. The advertising and circulation revenues are included as a component of the newspaper segment and the commercial printing revenues are recorded as a component of the printing segment. Approximately six weeks of the operations of The Herald-Dispatch are included in the Company's Statement of Operations commencing concurrent with the acquisition in 2007.
(3)
Includes impairment for goodwill and other intangibles in the fourth quarter of 2009 of $(41.1) million or $(25.5) million net of tax or $(2.55) per share on a basic and diluted basis. The Company also recorded a loss on an interest rate swap agreement resulting from a reclassification from other comprehensive income to other expense, pursuant to the elimination of a LIBOR borrowing option from the Administrative Agent of the Credit Agreement resulting in the ineffectiveness of a cash flow hedge in the amount of $(578,000), net of tax or $(0.06) per share on a basic and diluted basis. The Company also incurred a charge of $(206,000) or $(128,000) net of tax or $(0.01) per share on a basic and diluted basis related to impairment charges associated with property, plant and equipment.
(1) Includes $60.5 million of long-term debt reclassified to current debt due to the Company's inability to remain in compliance with various financial covenants in 2009.
(2) Includes non-current borrowings under the Company’s credit facilities.
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 of the United States of America, east of the Mississippi River. The Company also publishes The Herald-Dispatch daily newspaper in Huntington, West Virginia with a total daily and Sunday circulation of approximately 24,000 and 30,000 respectively. 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 fifteen printing companies, eight office products and office furniture companies, one company with a combined emphasis on both printing and office products and office furniture, a paper distribution division (which was subsequently sold in 2001) and a daily newspaper since its initial public offering on January 28, 1993.
The Company's net revenues consist primarily of sales of commercial printing, business forms, tags, other printed products, document output solutions including rendering, inserting and mailing, office supplies, office furniture, data products and office design services as well as newspaper revenues primarily from advertising and circulation. The Company recognizes revenues when products are shipped or ownership is transferred and when services are rendered to the customer. Newspaper advertising revenues are recognized, net of agency commissions, in the period when advertising is printed or placed on web sites. Circulation revenues are recognized when purchased newspapers are distributed. 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 printing, office supplies and the newspaper operations, 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.
CRITICAL ACCOUNTING POLICIES INVOLVING SIGNIFICANT ESTIMATES
The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 15 of this Form 10-K. The discussion and analysis of the financial statements and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The following critical accounting policies affect the Company’s more significant judgments and estimates used in the preparation of the consolidated financial statements. There can be no assurance that actual results will not differ from those estimates.
Restatement of Prior Year: In the fourth quarter of fiscal year 2009, the Company identified approximately $1.4 million or $0.14 per share on a basic and diluted basis of non-cash deferred tax related adjustments for 2008. Accordingly, the Consolidated Financial statements for October 31, 2008 presented in this Form 10-K have been restated to increase deferred income tax expense and to increase deferred income tax liability. This adjustment is related to the goodwill, tradename and masthead associated with the acquisition of The Herald-Dispatch. This deferred tax liability will remain on the balance sheet until such time as the associated intangible assets are impaired, sold or otherwise disposed of. As a result of the impairment charge recorded in 2009 this deferred tax liability is now reflected as a deferred tax asset due to the non-cash benefit associated with the impairment of goodwill, tradename and masthead.
Asset Impairment: The Company is required to test for asset impairment relating to property and equipment whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable. The Company uses guidelines and applies requirements that are set forth in the ASC Topic 360, “Impairment or Disposal of Long-Lived Assets” in order to determine whether or not an asset is impaired. This standard requires an impairment analysis when indicators of impairment are present. If such indicators are present, the standard indicates that if the sum of the future expected cash flows from the Company’s asset, undiscounted and without interest charges, is less than the carrying value, an asset impairment must be recognized in the financial statements. The amount of the impairment is the difference between the fair value of the asset and the carrying value of the asset.
The Company believes that the accounting estimate related to asset impairment is a “critical accounting estimate” because it is highly susceptible to change from period to period because it requires management to make assumptions about future cash flows over future years and that the impact of recognizing impairment could have a significant effect on operations. Management’s assumptions about future cash flows requires significant judgment because actual operating levels have fluctuated in the past and are expected to continue to do so in the future. Management has discussed the development and selection of this critical accounting estimate with the audit committee of our board of directors and the audit committee has reviewed the Company’s disclosure relating to it in the MD&A.
Beginning in fiscal year 2002, goodwill and other intangibles are required to be evaluated annually for impairment in accordance with ASC 350, “Intangibles- Goodwill and Other”. The standard requires a two-step process be performed to analyze whether or not goodwill has been impaired. Step one is to test for potential impairment and requires that the fair value of the reporting unit be compared to its book value including goodwill and other intangibles. If the fair value is higher than the book value, no impairment is recognized. If the fair value is lower than the book value, a second step must be performed. The second step is to measure the amount of impairment loss, if any, and requires that a hypothetical purchase price allocation be done to determine the implied fair value of goodwill and other intangibles. This fair value is then compared to the carrying value of goodwill and other intangibles. If the implied fair value is lower than the carrying value, an impairment must be recorded.
As discussed in the notes to the financial statements, goodwill and other intangibles are recorded at the adjusted book value and were analyzed for impairment with the implementation of ASC 350. The fair value of the Company’s goodwill and other intangibles was estimated using both the market and income approaches. The Company determined that it should perform impairment testing of goodwill and intangible assets during the fourth quarter of 2009, due, in part, to declines in our stock price, increased volatility in operating results and declines in market transactions in the industry. Based on the analysis and with the assistance of third party valuation specialists the Company determined that the fair value relating to goodwill and other intangibles resulted in an implied fair value less than the book value recorded for the corresponding goodwill and other intangibles, and therefore, an impairment was recognized in the fourth quarter of 2009 in the amount of $(41.1) million or $(25.5) million net of deferred tax benefit.
The Company believes that the accounting estimate related to the goodwill and other intangibles impairment is a “critical accounting estimate” because the underlying assumptions used for the discounted cash flow can change from period to period and could potentially cause a material impact to the income statement. Management’s assumptions about discount rates, inflation rates and other internal and external economic conditions, such as earnings growth rate, require significant judgment based on fluctuating rates and expected revenues. Additionally, ASC 350 requires that the goodwill and other intangibles be analyzed for impairment on an annual basis using the assumptions that apply at the time the analysis is updated. Management has discussed the development of these estimates with the audit committee of the board of directors. Additionally, the board of directors has reviewed this disclosure and its relation to MD&A.
Allowance for Doubtful Accounts: The Company encounters risks associated with sales and the collection of the associated accounts receivable. As such, the Company records a monthly provision for accounts receivable that are considered to be uncollectible. In order to calculate the appropriate monthly provision, the Company primarily utilizes a historical rate of accounts receivables written off as a percentage of total revenue. This historical rate is applied to the current revenues on a monthly basis. The historical rate is updated periodically based on events that may change the rate such as a significant increase or decrease in collection performance and timing of payments as well as the calculated total exposure in relation to the allowance. Periodically, the Company compares the identified credit risks with the allowance that has been established using historical experience and adjusts the allowance accordingly.
The Company believes that the accounting estimate related to the allowance for doubtful accounts is a “critical accounting estimate” because the underlying assumptions used for the allowance can change from period to period and could potentially cause a material impact to the income statement and working capital. Management has discussed the development and selection of this estimate with the audit committee of the board of directors, and the board has, in turn, reviewed the disclosure and its relation to MD&A.
During 2009, 2008 and 2007, $876,000, $854,000, and $492,000 of bad debt expense was incurred and the allowance for doubtful accounts was $1,353,000, $1,851,000 and $1,511,000 of October 31, 2009, 2008 and 2007. The actual write-offs for the periods were $1,375,000, $514,000, and $657,000 during 2009, 2008 and 2007. General economic conditions and specific geographic and customer concerns are major factors that may affect the adequacy of the allowance and may result in a change in the annual bad debt expense.
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.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated information derived from the Company's Consolidated Statements of Operations, including certain information presented as a percentage of total revenues.
Year Ended October 31, 2009 Compared to Year Ended October 31, 2008 (Restated)
Revenues
Consolidated net revenues were $141.3 million for the year ended October 31, 2009 compared to $165.8 million in the prior fiscal year. This change represents a decrease in revenues of approximately $24.5 million, or 14.8%. Printing revenues decreased by $16.3 million or 15.5% from $105.3 million in 2008 to $89.0 million in 2009. The decrease in printing sales was primarily due to the continued impact of the global economic crisis. Office products and office furniture revenue decreased from $41.5 million in 2008 to $35.9 million in 2009. The decrease in revenues for the office products and office furniture segment was primarily attributable to lower sales in both office products and office furniture. In 2009, newspaper revenues were composed of approximately $12.5 million in advertising revenue and $3.9 million in circulation revenue compared to the same period in 2008, in which the newspaper revenues were composed of approximately $14.7 million in advertising revenue and $4.2 million in circulation revenues.
Cost of Sales
Total cost of sales for the year ended October 31, 2009 totaled $100.4 million compared to $113.5 million in the previous year. This change represented a decrease of $13.1 million or 11.5% in cost of sales. Printing cost of sales decreased $ 8.7 million to $66.9 million in 2009 compared to $75.6 million in 2008. Printing cost of sales was lower due to lower sales partially offset by higher cost of goods sold as a percent of print sales. Printing cost of sales as a percentage of printing sales increased to 75.1% as a percent of printing sales in 2009 from 71.8.% in 2008. This increase was primarily the result of higher material, overhead and labor costs as a percent of printing sales. Office products and office furniture cost of sales decreased $3.6 million to $24.9 million in 2009 from $28.5 million in 2008. The decrease in office products and office furniture cost of sales is attributable to a decrease in office products and office furniture sales. The increase in office products and office furniture cost of sales as a percent of office products and office furniture sales is primarily reflective of higher furniture and office products costs as a percent of furniture and office products sales. Newspaper cost of sales and operating cost decreased $778,000 to $8.7 million in 2009 from $9.5 million in 2008. Newspaper cost of sales and operating costs as a percentage of newspaper sales were 53.2% in 2009 and 50.1% in 2008.
Operating Expenses and Income
Selling, general and administrative (S,G&A) expenses decreased $2.4 million to $37.1 million in 2009 from $39.5 million in 2008. S,G&A as a percentage of net sales represented 26.2% of net sales in 2009 compared with 23.8% of net sales in 2008. This decrease in selling, general and administrative costs is primarily due to various cost reduction initiatives primarily reflective of payroll related reductions. These reductions were initiated in part to address the impact of the global economic crisis and the associated reduction in sales.
In accordance with ASC Topic 350, a two-step impairment test is performed on goodwill. In the first step, a comparison is made of the estimated fair value of a reporting unit to its carrying value. If the carrying value of a reporting unit exceeds the estimated fair value, the second step of the impairment test is required. In the second step, an estimate of the current fair values of all assets and liabilities is made to determine the amount of implied goodwill and consequently the amount of any goodwill impairment.
In connection with our annual impairment testing of goodwill and other intangible assets conducted in the fourth quarter of 2009 in accordance with ASC Topic 350, we recorded a charge of $41.1 million ($25.5 million, net of deferred tax benefit) for impairment of the value of the goodwill and other intangible assets, which resulted from the 2007 acquisition of The Herald-Dispatch daily newspaper in Huntington, WV. This charge resulted in impairment charges of trademarks and masthead of $8.5 million, subscriber base asset of $2.2 million, advertiser base asset of $6.8 million and goodwill of $23.6 million, the associated deferred tax benefit of these charges approximated $15.6 million.
The valuation methodology utilized to estimate the fair value of the newspaper operating segment was based on both the market and income approach. The income approach was based off a discounted cash flow methodology, in which expected future free net cash flows to invested capital are discounted to present value, using an appropriate after-tax weighted average cost of capital. The market approach using a guideline company analysis weighs empirical evidence from shares of comparable companies sold in minority transactions on stock exchanges and merger and acquisition analysis, which analyses sales of newspapers in control transactions. The Company then undertook the next step in the impairment testing process by determining the fair value of assets and liabilities within this reporting unit. The implied fair values of goodwill for this reporting unit was less than the carrying amount by $41.1 million ($25.5 million net of deferred tax benefit), and therefore an impairment charge in this amount was taken. The goodwill and other intangible assets will continue to be amortized for tax purposes over its remaining life in accordance with applicable Internal Revenue Service standards.
The Company has other reporting units within Goodwill. The Company evaluated these reporting units during the fourth quarter of 2009, and while the estimated fair value of these reporting units declined from 2008, the estimated fair value of each of our other reporting units exceeded carrying values in 2009. As a result, no additional testing or impairment charges were necessary.
During 2009, the U.S. recession had a negative impact on the Company's operations across multiple segment lines. The newspaper operating segment reflected lower operating revenues in both advertising and circulation. In response to this difficult operating environment Champion initiated a cost reduction plan and eliminated 24 employee positions or approximately 15% of the workforce at the Champion Publishing subsidiary.
The Company also incurred asset impairment charges from property, plant and equipment of approximately $(206,000), or $(128,000) net of tax or $(0.01) per share on a basic and diluted basis.
Other Income (Expense)
Other expense increased approximately $59,000 from $5.6 million in 2008 to $5.7 million in 2009. This was primarily due to charges associated with ineffectiveness in the interest rate swap hedge due to the elimination of the LIBOR borrowing option by the Administrative Agent of the Credit Agreement partially offset by a decrease in interest expense of $549,000 from $5,734,000 in 2008 to $5,185,000 in 2009. The decrease in interest expense was attributed to the acquisition of The Herald-Dispatch which was completed on September 14, 2007 and was reflective of lower benchmark rates and debt offset partially by increased applicable margins due to the implementation of the default rate by the Administrative Agent. The loss reclassified to other expense from other comprehensive income approximated $0.6 million, net of tax or $(0.06) per share on a basic and diluted basis.
Income Taxes
Income taxes as a percentage of income before taxes were a benefit of 36.4% in 2009 compared with an expense of (34.6%) in 2008. The income tax benefit (expense) rate is reflective of deferred tax benefits associated with impairment charges of The Herald-Dispatch partially offset by deferred tax liabilities representing timing changes associated with goodwill and other non-amortizing assets with indefinite lives being recorded as deferred tax liabilities. The effective income tax rate in 2009 and 2008 approximates the combined federal and state, net of federal benefit, statutory income tax rate.
Net (Loss) Income
For reasons set forth above coupled with restructuring related expenses primarily associated with employee separation costs of $0.2 million or $0.1 million net of tax, net income decreased approximately $32.2 million to a loss of $(27.5) million or $(2.76) per share on a basic and diluted basis, in 2009 from net income of $4.7 million for 2008, or $0.47 and $0.46 per share on a basic and diluted basis.
Year Ended October 31, 2008 (Restated) Compared to Year Ended October 31,
Revenues
Consolidated net revenues were $165.8 million for the year ended October 31, 2008 compared to $148.5 million in the prior fiscal year. This change represents an increase in revenues of approximately $17.3 million, or 11.6%. Printing revenues increased by $0.8 million or 0.7% from $104.5 million in 2007 to $105.3 million in 2008. The increase in printing sales was primarily due to incremental printing sales associated with the acquisition of The Herald-Dispatch. Office products and office furniture revenue increased from $41.4 million in 2007 to $ 41.5 million in 2008. The increase in revenues for the office products and office furniture segment was primarily attributable to continued strong office furniture sales, partially offset by a reduction in office supply and data sales. In 2008, newspaper revenues were composed of approximately $14.7 million in advertising revenue and $4.2 million in circulation revenue. During the approximately six weeks period of 2007 in which the Company owned The Herald-Dispatch, the newspaper revenues were composed of approximately $2.0 million in advertising revenue and $0.6 million in circulation revenues.
Cost of Sales
Total cost of sales for the year ended October 31, 2008 totaled $113.5 million compared to $105.6 million in the previous year. This change represented an increase of $7.9 million or 7.5% in cost of sales. Printing cost of sales decreased $27,000 to 75.6 million in 2008 compared to $75.6 million in 2007. Printing cost of sales was lower due to an overall decrease in printing sales. Printing cost of sales as a percentage of printing sales decreased to 71.8 % as a percent of printing sales in 2008 from 72.4% in 2007. This decrease was primarily the result of improved material and absorption overhead partially offset by higher labor costs as a percent of printing sales. Office products and office furniture cost of sales decreased $377,000 to $28.5 million in 2008 from $28.8 million in 2007. The decrease in office products and office furniture cost of sales is attributable to improved gross margins in the office supply and office furniture categories. The decrease in office products and office furniture cost of sales as a percent of office products and office furniture sales is primarily reflective of lower furniture and office products costs as a percent of furniture and office products sales. The increase in newspaper cost of sales and operating costs is reflective of a full year operation for The Herald-Dispatch in 2008 compared to six weeks in 2007.
Operating Expenses and Income
Selling, general and administrative (S,G&A) expenses increased $7.2 million to $39.5 million in 2008 from $32.3 million in 2007. S,G&A as a percentage of net sales represented 23.8% of net sales in 2008 compared with 21.8% of net sales in 2007. This increase in S,G&A costs is primarily due to higher S,G&A expenses from a full year of operations for The Herald-Dispatch in 2008 compared to six weeks in 2007.
Other Income (Expense)
Other expense increased approximately $4,367,000 from $1,231,000 in 2007 to $ 5,598,000 in 2008. This was primarily due to an increase in interest expense of $4.3 million from $1,455,000 in 2007 to $5,734,000 in 2008. The increase in interest expense was attributed to the acquisition of The Herald-Dispatch which was completed on September 14, 2007.
Income Taxes
Income taxes as a percentage of income before taxes were 34.6% in 2008 compared with 34.5% in 2007. The tax rate in 2008 is reflective of deferred tax liabilities representing timing changes associated with goodwill and other non-amortizing assets with indefinite lives being recorded as deferred tax liabilities.
The effective income tax rate in 2008 and 2007 approximates the combined federal and state, net of federal benefit, statutory income tax rate.
Net Income
For reasons set forth above, net income for 2008 decreased approximately $1.4 million to $4.7 million, or $0.47 per share on a basic and $0.46 per share on a diluted basis, from net income of $6.1 million for 2007, or $0.61 per share on a basic basis and $0.60 on a diluted basis.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2009, the Company had $1.2 million book cash balance, a net increase in cash and cash equivalents of $2.1 million from the prior year when the Company had a (1.0) million negative book cash balance. Working capital as of October 31, 2009 was $(42.6) million, and $20.4 million at October 31, 2008. The decrease in working capital is associated with the classification as a current liability of approximately $60.5 million of debt which was previously classified as long term. This debt was reclassified due to the company's inability to remain in compliance with certain of its financial covenants.
The Company had 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 required investments in equipment. The Company has two available lines of credit totaling up to $21.0 million, of which $20.0 million is subject to borrowing base limitations reserves which may be initiated by the Administrative Agent for Lenders in its sole discretion and are subject to a minimum excess availability threshold (See Note 3 of the Consolidated Financial Statements). For the foreseeable future including through Fiscal 2010, 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, subject to continued availability of the aforementioned credit facilities. The Company may incur costs in 2010 related to facility consolidations, employee termination costs and other restructuring related activities. These costs may be incurred, in part, as a response to the Company's efforts to overcome the impact of the global economic crisis.
Additionally, the Company has future contracted obligations (See Note 3 and Note 6 of the Consolidated Financial Statements). The Company is not a guarantor of indebtedness of others.
On December 29, 2009, the Administrative Agent and Lenders under the Company's Credit Agreement dated September 14, 2007 ("Credit Agreement"), the Company and Marshall T. Reynolds entered into a Forbearance Agreement (the "Forbearance Agreement") which provides, among other things, that during a standstill period commencing on December 29, 2009 and ending on March 31, 2010 (unless sooner terminated by default of Champion under the Forbearance Agreement or the Credit Agreement), the Required Lenders are willing to temporarily forbear exercising certain rights and remedies available to them, including acceleration of the obligations or enforcement of any of the liens provided for in the Credit Agreement. The Company acknowledged in the Forbearance Agreement that as a result of the existing defaults, the Lenders are entitled to decline to provide further credit to the Company, to terminate their loan commitments, to accelerate the outstanding loans, and to enforce their liens. The Company does not believe it will be in compliance with certain financial covenants in the Credit Agreement during 2010.
The Forbearance Agreement provides that during the standstill period, so long as the Company has excess availability equal to or greater than $1,000,000 (and will continue to have after any request for credit) and meets the conditions of the Forbearance Agreement, it may continue to request credit under the revolving credit line.
The Forbearance Agreement imposes various reporting and disclosure requirements on the Company, requires it to submit to a third party financial review, maintain certain account levels, submit to field audits and inspections and reduce outstanding term loans to $49,632,442. The reduction in the principal outstanding obligations of the term loan will be accomplished through the elimination of various borrowing base reserves established by the Administrative Agent, the release of $3.0 million in cash collateral that was being held in escrow subsequent to year end pursuant to previous actions by the Administrative Agent and the $3.0 million in cash proceeds received by the Company from issuing an unsecured promissory note.
The Forbearance Agreement also required Marshall T. Reynolds to lend to the Company $3,000,000 in exchange for a subordinated unsecured promissory note in like amount, payment of principal and interest on which is prohibited until payment of all liabilities under the Credit Agreement. This $3,000,000 was applied to prepayment of $3,000,000 of the Company's loans. This subordinated unsecured promissory note bearing interest at the Wall Street Journal prime rate (currently 3.25%) and maturing September 14, 2014, and a debt subordination agreement, both dated December 29, 2009, have been executed and delivered, and Mr. Reynolds has advanced $3,000,000 to the Company. The Company paid to the Administrative Agent a nonrefundable forbearance fee of $100,000 upon closing of the Forbearance Agreement.
The Company had borrowed under its $20.0 million line of credit approximately $8.7 million at October 31, 2009 which encompassed refinancing of existing indebtedness prior to The Herald-Dispatch acquisition and to partially fund the purchase of The Herald-Dispatch. Pursuant to the borrowing base calculation and reflective of the terms of the Forbearance Agreement and the Credit Agreement and exclusive of any reserves which may be implemented by the Administrative Agent in its sole discretion (the Company was notified pursuant to the filing of its December 31, 2009 borrowing base of an additional $1.5 million reserve being instituted by the Administrative Agent), the Company had $8.9 million in additional availability under its $20.0 million revolving credit line subject to the $1.0 million excess availability threshold pursuant to the terms of the Forbearance Agreement as of October 31, 2009. The Company has an additional $1.0 million unsecured Line of Credit available with another Bank that expires in July 2010.
As of October 31, 2009, the Company had contractual obligations in the form of leases and debt as follows:
The Company is required to make certain mandatory payments on its credit facilities related to (1) net proceeds received from a loss subject to applicable thresholds, (2) equity proceeds and (3) effective January 31, 2009, the Company is required to prepay its credit facilities by 75% of excess cash flow for its most recently completed fiscal year. The excess cash flow for purposes of this calculation is defined as the difference (if any) between (a) EBITDA for such period and (b) federal, state and local income taxes paid in cash during such period plus capital expenditures during such period not financed with indebtedness plus interest expense paid in cash during such period plus the aggregate amount of scheduled payments made by the Borrower and its Subsidiaries during such period in respect of all principal on all indebtedness (whether at maturity, as a result of mandatory sinking fund redemption, or otherwise), plus restricted payments paid in cash by the Borrower during such period in compliance with the credit agreement. The Company has no prepayment obligation due January 31, 2010 pursuant to the applicable calculations.
Cash Flows from Operating Activities
Cash flows from operating activities for the years ended October 31, 2009, 2008 and 2007 were $11.3 million, $10.3 million, and $8.7 million. The increase in cash flows from operating activities for fiscal 2009 compared to 2008 was primarily associated with a decrease in accounts receivable. The increase in cash flows from operating activities for the fiscal year 2008 compared to 2007 was primarily associated with higher depreciation and amortization, deferred financing costs, deferred income taxes, and bad debt expense. The impairment costs associated primarily with the acquisition of The Herald-Dispatch had no impact on cash flows from operating activities.
Cash Flows from Investing Activities
Cash used in investing activities was $(1.0) million, $(3.8) million, and $(4.1) million for the years ended October 31, 2009, 2008 and 2007. Cash flows used in investing activities were down approximately $2.9 million in 2009 from 2008. The cash used in investing activities in 2009 was primarily related to capital expenditures offset by proceeds from cash surrender value of life insurance policies. Cash flows used in investing activities decreased in 2008 compared to 2007 and for both periods the cash flows were primarily associated with purchases of property and equipment and payments for businesses acquired in previous periods.
Cash Flows from Financing Activities
Net cash flows used in financing activities for the years ended October 31, 2009, 2008 and 2007 were $(9.2) million, $(12.3) million, and $(4.2) million. The decrease in cash used in financing activities was primarily associated with less payments made on the Company's outstanding indebtedness associated with its revolving credit facility and the elimination of the Company's dividend in the second quarter of 2009. The $12.3 million utilized for financing activities in 2008 was primarily reflective of net payments on debt and dividends partially offset by negative book cash balances and stock option proceeds. During 2009, the Company reduced net borrowings by approximately $6.8 million after adjusting for non-cash investing and financing activities. This, coupled with dividend payments of $600,000 was reflective of net cash used in financing activities during 2009. Dividends paid in 2009, 2008, and 2007 were $0.6 million, $2.4 million, and $2.4 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, an increase in energy costs should not have a significant impact on the Company.
SEASONALITY
Our business is subject to seasonal fluctuations that we expect to continue to be reflected in our operating results in future periods.
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.
On a historical basis The Herald-Dispatch's first and third calendar quarters of the year tended to be the weakest because advertising volume is at its lowest levels following the holiday season and a seasonal slowdown in the summer months. Correspondingly, on a historical basis the fourth calendar quarter followed by the second calendar quarter tended to be the strongest quarters. The fourth calendar quarter includes heavy holiday season advertising. Other factors that affect our quarterly revenues and operating results may be beyond our control, including changes in the pricing policies of our competitors, the hiring and retention of key personnel, wage and cost pressures, distribution costs, changes in newsprint prices and general economic factors.
The United States economy has been in a recession since December 2007, according to the National Bureau of Economic Research, and it is widely believed that certain elements of the economy, such as housing, were in decline before that time. The duration and depth of an economic recession in markets in which the Company operates may further reduce its future advertising and circulation revenue, operating results and cash flows.
NEWLY ISSUED ACCOUNTING STANDARDS
FASB ASC Topic
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, "The Hierarchy of Generally Accepted Accounting Principles"- a replacement of SFAS No. 162. This statement establishes two levels of U.S. generally accepted accounting principles ("GAAP"), authoritative and not. The FASB Accounting Standards Codification ("the Codification") became the source of authoritative, nongovernmental GAAP, with the exceptions of rules and interpretive guidelines issued by the SEC, which are authoritative for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became non-authoritative for interim and annual reporting as of September 15, 2009. The Company began using the Codification, for financial reporting, as of the fiscal year ended October 31, 2009. As the Codification is not intended to change any standards outlined in GAAP, but only to organize and unify existing standards, this did not have an impact on the Company's financial statements.
FASB ASC Topic 805
"Business Combinations" (ASC 805) (formerly SFAS No. 141 and its revision 141(R)) changes how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. ASC 805 as it relates to recognizing all (and only) the assets acquired and liabilities assumed in a business combination, costs an acquirer expects but it not obligated to incur in the future to exit an activity of an acquiree or to terminate or relocate an acquiree's employees are not liabilities at the acquisition date but must be expensed in accordance with other applicable generally accepted accounting principles. Additionally, during the measurement period, which should not exceed one year from the acquisition date, any adjustments that are needed to assets acquired and liabilities assumed to reflect new information obtained about facts and circumstances that existed as of that date will be adjusted retrospectively. The acquirer will be required to expense all acquisition-related costs in the periods such costs are incurred other than costs to issue debt or equity securities. ASC 805 will have no impact on our results of operations, financial position or cash flows at the date of adoption, but it could have a material impact on our results of operations, financial position or cash flows in the future when it is applied to acquisitions which occur in the fiscal year beginning November 1, 2009.
FASB ASC Topic 350-30-35
In April 2008, the FASB issued staff position FSP FAS 142-3 (FSP 142-3), "Determination of the Useful Life of Intangible Assets", and has subsequently been codified under FASB ASC 350-30-35, "Determining the Useful Life of an Intangible Asset" and is hereon referred to as ASC 350-30-35, amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of ASC 350-30-35 is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset as outlined by the U.S. generally accepted accounting principles (GAAP). ASC 350-30-35 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and should be applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. Accordingly, we will adopt ASC 350-30-35 as of November 1, 2009. We do not expect this to have an impact on our results of operations, financial position or cash flows at the date of adoption, but it could have a material impact on our results of operations, financial position or cash flows in future periods.
FASB ASC Topic 815
"Derivatives and Hedging" (ASC 815) (formerly SFAS No. 161- an amendment of FASB Statement No. 133) changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under the former Statement 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. ASC 815 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company does not expect the implementation of requirements outlined in ASC 815 to have a material impact on its consolidated financial statements.
FASB ASC Topic 820-10-35
In October 2008, the FASB issued FSP FAS 157-3 (FSP 157-3), “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP 157-3). FSP 157-3 clarifies the application of SFAS 157, “Fair Value Measurements,” in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective upon issuance, including prior periods for which financial statements have not been issued.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any significant exposure relating to market risk.
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 included in Item 15 and listed in the index on page of this report.
ITEM 9A(T)
ITEM 9A(T) - CONTROLS AND PROCEDURES
a) Evaluation of Disclosure 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.
b) Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
(1) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the Company's financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has used the framework set forth in the report entitled "Internal Control - Integrated Framework" published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company's internal control over financial reporting. Management has concluded that the Company's internal control over financial reporting was effective as of the end of the most recent fiscal year.
There were no changes in internal controls over financial reporting during the fourth fiscal quarter that have materially affected or are reasonably likely to materially affect the company's internal controls over financial reporting.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
/s/ Marshall T. Reynolds
Marshall T. Reynolds
Chairman and Chief Executive Officer
/s/
Toney K. Adkins
Toney K. Adkins
President and Chief Operating Executive
/s/
Todd R. Fry
Todd R. Fry
Senior Vice President and Chief Financial Officer
PART III
ITEM 10
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information relating to the directors and corporate governance of the Company is contained under the captions “Elections of Directors”, “Meetings, Committees and Attendance”, “Section 16a Beneficial Ownership Reporting Compliance” and “Code of Ethics” in the Company’s definitive Proxy Statement, expected to be dated February 12, 2010, with respect to the Annual Meeting of Shareholders to be held on March 15, 2010, which will be filed pursuant to regulation 14(a) of the Securities Exchange Act of 1934 and which is incorporated herein by reference. Certain information concerning executive officers of the Company appear in “EXECUTIVE OFFICERS OF CHAMPION” at Part I of this report.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The information called for by this Item is contained under the captions "Executive Compensation" including "Compensation Discussion and Analysis", "Compensation Committee Report", "Summary Compensation Table", "Outstanding Equity Awards at Fiscal Year-End" and "Director Compensation" in the Company’s definitive Proxy Statement, expected to be dated February 12, 2010, with respect to the Annual Meeting of Shareholders to be held on March 15, 2010, 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 AND RELATED STOCKHOLDER MATTERS
The information called for by this Item is contained under the captions “Equity Compensation Plan Information” and “Ownership of Shares” in the Company’s definitive Proxy Statement, expected to be dated February 12, 2010, with respect to the Annual Meeting of Shareholders to be held on March 15, 2010, 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, AND DIRECTOR INDEPENDENCE
The information called for by this Item is contained under the captions “Transactions with Directors, Officers and Principal Shareholders” and "Meetings, Committees and Attendance" in the Company’s definitive Proxy Statement, expected to be dated February 12, 2010, with respect to the Annual Meeting of Shareholders to be held on March 15, 2010, which will be filed pursuant to regulation 14(a) of the Securities Exchange Act of 1934 and which is incorporated herein by reference.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by this Item is contained under the caption “Independent Auditors” in the Company’s definitive Proxy Statement, expected to be dated February 12, 2010, with respect to the Annual Meeting of Shareholders to be held on March 15, 2010, 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 15
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2)
The Consolidated Financial Statements and Schedule, required by Item 8, are listed on the index on page and included as part of Item 15.
All other Schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
3. EXHIBITS
(2)
Plan of Acquisition
Stock Purchase Agreement between Company and William G. Williams, Jr., sole shareholder of Syscan Corporation, dated September 7, 2004 filed as Exhibit 2.1 to Form 8-K dated September 7, 2004, filed September 10, 2004, is incorporated herein by reference.
(3)
3.1
Articles of Incorporation
Filed as Exhibit 3.1 to Form 10-Q dated June 16, 1997, filed on June 16, 1997, incorporated herein by reference.
3.2
By Laws
Filed as Exhibit 3.2 to Form 10-K dated January 21, 2008, filed on January 25, 2008, incorporated herein by reference.
(4)
Instruments defining the rights of security holders, including debentures.
See Exhibit 3.1 above.
(10)
Material Contracts
Realty Lease dated January 28, 1993 between ADJ Corp. and Company regarding 2450 1st Avenue, Huntington, West Virginia, filed as Exhibit 10.1 to Form 10-K dated January 27, 1994, filed January 31, 1994, is incorporated herein by reference.
Realty Lease dated January 28, 1993 between The Harrah and Reynolds Corporation and Company regarding 615 4th Avenue, Huntington, West Virginia, filed as Exhibit 10.2 to Form 10-K dated January 27, 1994, filed January 31, 1994, is incorporated herein by reference.
Realty Lease dated January 28, 1993 between ADJ Corp. and Company regarding 617-619 4th Avenue, Huntington, West Virginia, filed as Exhibit 10.3 to Form 10-K dated January 27, 1994, filed January 31, 1994, is incorporated herein by reference.
Realty Lease dated January 28, 1993 between The Harrah and Reynolds Corporation and Company regarding 1945 5th Avenue, Huntington, West Virginia, filed as Exhibit 10.4 to Form 10-K dated January 27, 1994, filed January 31, 1994, is incorporated herein by reference.
Realty Lease dated January 28, 1993 between Printing Property Corp. and Company regarding 405 Ann Street, Parkersburg, West Virginia, filed as Exhibit 10.5 to Form 10-K dated January 27, 1994, filed January 31, 1994, is incorporated herein by reference.
Realty Lease dated January 28, 1993 between Printing Property Corp. and Company regarding 890 Russell Cave Road, Lexington, filed as Exhibit 10.6 to Form 10-K dated January 27, 1994, filed January 31, 1994, is incorporated herein by reference.
Form of Indemnification Agreement between Company and all directors and executive officers, filed as Exhibit 10.4 to Registration Statement on Form S-1, File No. 33-54454, filed on November 10, 1992, is incorporated herein by reference.
Executive Compensation Plans and Arrangements
Company's 1993 Stock Option Plan, effective March 22, 1994, filed as Exhibit 10.14 to Form 10- K dated January 27, 1994, filed January 31, 1994, is incorporated herein by reference.
Company’s 2003 Stock Option Plan, filed as Exhibit A to proxy statement dated February 12, 2004, filed February 13, 2004, is incorporated herein by reference.
Form of Stock Option Agreement pursuant to Company’s 2003 Stock Option Plan filed as Exhibit 10.2 to form 10-Q dated September 10, 2004 filed September 13, 2004, is incorporated herein by reference.
Employment Agreement dated September 7, 2004 among William G. Williams, Jr., Syscan Corporation and the Company, filed as Exhibit 10.1 to Form 8-K dated September 7, 2004, filed September 10, 2004, is incorporated herein by reference.
Confidentiality and Non-Competition Agreement dated September 7, 2004 among William G. Williams, Jr., Syscan Corporation and the Company, filed as Exhibit 10.2 to Form 8-K dated September 7, 2004, filed September 10, 2004, is incorporated herein by reference.
$10,000,000 revolving credit agreement by and among the Company and its subsidiaries and National City Bank dated as of April 1, 1999, filed as Exhibit 10.2 to Form 10-K dated January 25, 2000, filed January 28, 2000, is incorporated herein by reference.
Lease Agreement dated November 1, 1999 between Randall M. Schulz, successor trustee of The Butterfield Family Trust No. 2 and Smith & Butterfield Co., Inc. regarding 2800 Lynch Road, Evansville, Indiana, filed as Exhibit 10.3 to Form 10-K dated January 25, 2000, filed January 28, 2000, is incorporated herein by reference.
Agreement of Lease dated September 25, 1998 between Ronald H. Scott and Frank A. Scott dba St. Clair Leasing Co. and Interform Corporation, regarding 1901 Mayview Road, Bridgeville, Pennsylvania, filed as Exhibit 10.4 to Form 10-K dated January 25, 2000, filed January 28, 2000, is incorporated herein by reference.
First Amendment of Real Estate Lease Agreement dated May 6, 2003 by and between Ronald H. Scott and Frank J. Scott dba St. Clair Leasing Company and Interform Corporation, filed as Exhibit 10.1 to Form 8-K filed October 4, 2004, is incorporated herein by reference.
Agreement of Lease dated September 1, 2002 between Marion B. and Harold A. Merten, Jr. and The Merten Company regarding 1515 Central Parkway, Cincinnati, Ohio, filed as Exhibit (10.1) to form 10-K dated January 21, 2002, Filed January 25, 2002 is incorporated herein by reference.
Agreement Amending and Extending term of lease dated May 24, 2002 between Earl H. and Elaine D. Seibert and Smith and Butterfield Co., Inc. Filed as Exhibit (10.2) to form 10-K dated January 20, 2003, Filed January 24, 2003 is incorporated herein by reference.
Business Loan Agreement, $1,440,000 commercial loan between Bourque Printing Company and Hibernia National Bank together with promissory note dated as of March 19, 2003,filed as Exhibit 10.1 to form 10-K dated January 19, 2004 filed January 26, 2004, is incorporated herein by reference.
Commercial Security Agreement, $450,050 commercial loan between Champion Industries, Inc. and First Century Bank dated as of March 2, 2003, filed as Exhibit 10.2 to form 10-K dated January 19, 2004 filed January 26, 2004, is incorporated herein by reference.
Business Loan Agreement, $351,000 commercial loan between Champion Industries, Inc. and City National Bank together with promissory note dated as of August 14, 2003, filed as Exhibit 10.3 to form 10-K dated January 19, 2004 filed January 26, 2004, is incorporated herein by reference.
Revolving Credit Agreement, $10,000,000 revolving line of credit between Champion Industries, Inc. and United Bank, Inc. dated as of August 1, 2003, filed as Exhibit 10.4 to form 10-K dated January 19, 2004 filed January 26, 2004, is incorporated herein by reference.
Agreement Amending and Extending term of lease dated May 9, 2003 between Champion Industries, Inc. dba, Upton Printing and AMB Property, L.P, filed as Exhibit 10.5 to form 10-K dated January 19, 2004 filed January 26, 2004, is incorporated herein by reference.
Agreement Amending and Extending term of lease dated October 1, 2003 between Bourque Printing dba, Upton Printing and M. Field Gomila Et. Al. , filed as Exhibit 10.6 to form 10-K dated January 19, 2004 filed January 26, 2004, is incorporated herein by reference.
Promissory Note, $122,500 between Champion Industries, Inc. and Community Trust Bank dated as of January 9, 2003, filed as Exhibit 10.7 to form 10-K dated January 19, 2004 filed January 26, 2004, is incorporated herein by reference.
Agreement of Lease dated as of September 1, 2004, between Williams Land Corporation and Syscan Corporation regarding North Hills Drive and Washington Street, Charleston, West Virginia, filed as Exhibit 10.3 to Form 8-K dated September 7, 2004, filed September 10, 2004, is incorporated herein by reference.
Agreement of Lease dated as of September 1, 2004, between Williams Land Corporation and Syscan Corporation regarding 2800 Seventh Avenue, Charleston, West Virginia, filed as Exhibit 10.4 to Form 8-K dated September 7, 2004, filed September 10, 2004, is incorporated herein by reference.
Agreement of Purchase and Sale dated September 7, 2004, between Syscan Corporation and Williams Properties, LLC regarding 811 Virginia Street, East, Charleston, West Virginia, filed as Exhibit 10.5 to Form 8-K dated September 7, 2004, filed September 10, 2004, is incorporated herein by reference.
Exercise of Lease renewal option for 2800 Lynch Road Evansville, Indiana dated as of September 22, 2003, filed as Exhibit 10.1 to form 10-K dated January 17, 2005 filed January 31, 2005, is incorporated herein by reference.
$1,000,000 Business Loan Agreement and promissory note by and between the Company and Community Trust Bank, N.A. as of March 19, 2004, filed as Exhibit 10.2 to form 10-K dated January 17, 2005 filed January 31, 2005, is incorporated herein by reference.
$1,000,000 revolving line of credit between Stationers, Inc. and First Sentry Bank dated as of April 7, 2004, filed as Exhibit 10.3 to form 10-K dated January 17, 2005 filed January 31, 2005, is incorporated herein by reference.
$600,075 term note between Bourque Printing, Inc. and First Century Bank dated as of September 9, 2004, filed as Exhibit 10.4 to form 10-K dated January 17, 2005 filed January 31, 2005, is incorporated herein by reference.
$3,920,000 promissory note and security agreement between Champion Industries, Inc. and United Bank, Inc. dated as of October 26, 2004, filed as Exhibit 10.5 to Form 10-K dated January 17, 2005 filed January 31, 2005, is incorporated herein by reference.
Modification letter to promissory note between Bourque Printing and Hibernia National Bank, Inc. dated December 28, 2004, filed as Exhibit 10.6 to Form 10-K dated January 17, 2005 filed January 31, 2005, is incorporated herein by reference.
First Amendment to Revolving Credit Agreement between Champion Industries, Inc. and United Bank, Inc. Filed as Exhibit 10.1 to Form 8-K dated February 15, 2005, filed February 16, 2005, is incorporated herein by reference.
Second Amendment to Revolving Credit Agreement between Champion Industries, Inc. and United Bank, Inc. Filed as Exhibit 10.1 to form 8-K dated July 11, 2005, filed July 11, 2005, is incorporated herein by reference.
$605,095 term note between Champion Industries, Inc. and First Century Bank dated as of July 27, 2005. Filed as Exhibit 10.1 to Form 10-Q dated September 9, 2005, filed September 9, 2005, is incorporated herein by reference.
$1,000,000 revolving line of credit between Stationers, Inc. and First Sentry Bank dated as of October 7, 2005, filed as exhibit 10.1 to Form 10-K dated January 16, 2006 filed January 27, 2006, is incorporated herein by reference.
Lease Agreement dated October 31, 2005, between SANS LLC and Champion Industries, Inc. dba Chapman Printing Company regarding 951 Point Marion Road Morgantown, West Virginia, filed as Exhibit 10.2 to Form 10-K dated January 16, 2006, filed January 27, 2006, is incorporated herein by reference.
Lease Agreement dated June 28, 2006, between White Properties No. II, LLC and Champion Industries, Inc. regarding 120 Hills Plaza Charleston, West Virginia, filed as Exhibit 10.1 to Form 8-K dated July 3, 2006, filed July 3, 2006 is incorporated herein by reference.
$1,200,000 term note between Champion Industries, Inc. and Community Trust Bank, Inc. dated as of July 28, 2006, filed as Exhibit 10.1 to Form 10-K dated January 15, 2007 filed January 28, 2007, is incorporated herein by reference.
$642,831.68 term note between Champion Industries, Inc. and First Bank of Charleston, Inc. dated as of August 30, 2006, filed as Exhibit 10.1 to Form 10-K dated January 15, 2007 filed January 28, 2007, is incorporated herein by reference.
$10,000,000 promissory note between Champion Industries, Inc. and United Bank, Inc., filed as Exhibit 10.2 to form 8-K dated March 20, 2007 filed March 22, 2007, is incorporated herein by reference.
$324,408.00 promissory note between Champion Industries, Inc. and First Bank of Charleston, Inc. dated as of March 23, 2007, filed as Exhibit 10.1 to Form 10-Q dated June 8, 2007 filed June 8, 2007, is incorporated herein by reference.
$1,000,000 revolving line of credit between Stationers, Inc. and First Sentry Bank dated as of April 7, 2007, filed as exhibit 10.2 to Form 10-Q dated June 8, 2007 filed June 8, 2007, is incorporated herein by reference.
$267,013 master loan agreement between Champion Industries, Inc. and US Bancorp Equipment Finance dated as of May 30, 2007, filed as Exhibit 10.1 to Form 10-Q dated September 10, 2007 filed September 11, 2007, is incorporated herein by reference.
$1,750,000 promissory note between Champion Industries, Inc. and Community Trust Bank, Inc. dated as of June 12, 2007, filed as Exhibit 10.2 to Form 10-Q dated September 10, 2007 filed September 11, 2007, is incorporated herein by reference.
Credit agreement between Champion Industries, Inc. and Fifth Third Bank, filed as Exhibit 10.1 to Form 8-K dated September 14, 2007 filed September 19, 2007, is incorporated herein by reference.
$767,852 term loan between Champion Industries, Inc. and First Bank of Charleston, Inc. dated April 22, 2008, filed as Exhibit 10.1 to Form 8-K dated April 25, 2008 filed April 25, 2008, is incorporated herein by reference.
Agreement of lease dated November 1, 2008 between ADJ Corporation and Champion Publishing, Inc. regarding 100 Industrial Lane Property, Huntington, West Virginia. Filed as exhibit 10.1 to Form 10-K dated January 19, 2009, is incorporated herein by reference.
$1,000,000 revolving line of credit between Stationers, Inc. and First Sentry Bank dated as of January 13, 2009. Filed as Exhibit 10.2 to Form 10-K dated January 19, 2009, is incorporated herein by reference.
Forbearance Agreement and related Promissory Note and Debt Subordination Agreement dated December 19, 2009 between Champion Industries Inc., Marshall Reynolds and Fifth Third Bank as Lender, L/C Issuer and Administrative Agent for Lenders. Filed as Exhibits 10.1, 10.2 and 10.3 to Form 8-K dated January 4, 2010, is incorporated herein by reference.
(31.3)
Principal Operating Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Toney K. Adkins
Exhibit 31.3
Page Exhibit 31.3-p1
(32)
Marshall T. Reynolds, Todd R. Fry and Toney K. Adkins Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley act of 2002
Exhibit
Page Exhibit 32-p1
(b) Exhibits - Exhibits are filed as a separate section of this report.
(c) Financial Statement Schedules - Filed as separate section on page.
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/ Toney K. Adkins
Toney K. Adkins
President and Chief Operating Officer
By /s/ Todd R. Fry
Todd R. Fry
Senior Vice President and Chief Financial Officer
Date: January 27, 2010
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
/s/ Louis J. Akers
January 27, 2010
Louis J. Akers, Director
/s/ Philip E. Cline
January 27,
Philip E. Cline, Director
/s/ Harley F. Mooney, Jr.
January 27, 2010
Harley F. Mooney, Jr., Director
/s/ A. Michael Perry
January 27, 2010
A. Michael Perry, Director
/s/ Marshall T. Reynolds
January 27,
Marshall T. Reynolds, Director
/s/ Neal W. Scaggs
January 27, 2010
Neal W. Scaggs, Director
/s/ Glenn W. Wilcox, Sr.
January 27, 2010
Glenn W. Wilcox, Sr., Director
Champion Industries, Inc.
Audited Consolidated Financial Statements and Schedule
October 31, 2009
Contents
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Shareholders
Champion Industries, Inc.
Huntington, West Virginia
We have audited the accompanying consolidated balance sheets of Champion Industries, Inc. and Subsidiaries (the “Company”) as of October 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2009. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based upon our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 financial position of the Company as of October 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the 2008 consolidated financial statements have been restated to correct a misstatement of deferred tax expense associated with deferred tax liability attributes relating to goodwill and other intangible assets.
As more fully discussed in Note 12 to the consolidated financial statements, in connection with the Company’s annual impairment evaluation of recorded goodwill and other intangible assets, the Company recorded a noncash charge of approximately $41.1 million ($25.5 million, net of deferred tax benefit) for impairment of the value of the goodwill and other intangible assets, which resulted from the 2007 acquisition of the Company’s newspaper segment. Additionally, as more fully discussed in Note 14 to the consolidated financial statements, the Company recorded a charge of approximately $600,000 resulting from the discontinuation of hedge accounting for the hedge ineffectiveness of the Company’s interest rate swap agreement.
Additionally, as more fully discussed in Note 3 to the consolidated financial statements, the Company as of, and during the year ended October 31, 2009, was not in compliance with certain of its financial covenants arising under a credit agreement involving several lending financial institutions. The Company has been unable to obtain a waiver or negotiate amendments to correct the covenant violations. The Company has been negotiating with the financial institutions’ administrative agent for the credit agreement to restructure the existing arrangement; however, terms satisfactory to the Company and all lending parties involved have not been reached. The Company and the administrative agent entered into a Forbearance Agreement that concludes on March 31, 2010, which provides, among other things, a standstill period that temporarily forbears exercising certain rights available to the lending institutions including acceleration of the obligations and enforcement of any of the liens, unless sooner terminated by default by the Company. Should the Company and the administrative agent for the lending institutions not reach mutually agreeable arrangements to amend or waive the current lending agreement’s financial covenants, and the Company is unable to comply with those covenants subsequent to the conclusion of the Forbearance Agreement, the entire debt obligation could become due and payable immediately and the Company would be forced to refinance or repay its debt obligations or seek other remedial alternatives. Management’s plans concerning these matters are also discussed in Note 3 to the consolidated financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty, except that certain debt obligations have been reflected as current liabilities as of October 31, 2009.
We were not engaged to examine management's assessment of the effectiveness of Champion Industries, Inc.’s internal control over financial reporting as of October 31, 2009, included in the accompanying Management’s Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.
/s/ Arnett & Foster, P.L.L.C.
Charleston, West Virginia
January 28, 2010
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 Statements of Operations
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
Champion is a commercial printer, business forms manufacturer and office products and office furniture supplier in regional markets in the United States of America, east of the Mississippi. Champion also publishes The Herald-Dispatch daily newspaper in Huntington, WV with a total daily and Sunday circulation of approximately 24,000 and 30,000 respectively.
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 (GAAP) require 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.
As of July 1, 2009, FASB (Financial Accounting Standards Board) Accounting Standards Codification became the single reference source of authoritative non-governmental U.S. GAAP. In the succeeding footnotes references to GAAP issued by the FASB are to the FASB Accounting Standards Codification which is denoted here forth as ASC. The following is a summary of the more significant accounting and reporting policies which include updated references to GAAP as stated by the ASC which became effective for financial reporting purposes as of September 15, 2009.
Restatement of Prior Year
In the fourth quarter of fiscal year 2009, the Company identified approximately $1.4 million or $0.14 per share on a basic and diluted basis of non-cash deferred tax related adjustments for 2008. Accordingly, the Consolidated Financial statements for October 31, 2008 presented in this Form 10-K have been restated to increase deferred income tax expense and to increase deferred income tax liability. This adjustment is related to the goodwill, tradename and masthead associated with the acquisition of The Herald-Dispatch. This deferred tax liability will remain on the balance sheet until such time as the associated intangible assets are impaired, sold or otherwise disposed of. As a result of the impairment charge recorded in 2009 this deferred tax liability is now reflected as a deferred tax asset due to the non-cash benefit associated with the impairment of goodwill, tradename and masthead.
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, 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., Diez Business Machines, Transdata Systems, Inc., Syscan Corporation and Champion Publishing, Inc.
Significant intercompany transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist principally of cash on deposit with banks and repurchase agreements for government securities, all highly liquid investments with an original maturity of three months or less. At October 31, 2009 and 2008, the Company held overnight repurchase agreements for $ 0 and $30,000 of Eurodollar Sweep Investments with stated interest rates of 0.40% and 1.22%, respectively. The Company's cash deposits in excess of federally insured amounts are primarily maintained at a large well-known financial institution.
Accounts Receivable
Accounts receivable are stated at the amount billed to customers. Accounts receivable are ordinarily due 30 days from the invoice date.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company encounters risks associated with sales and the collection of the associated accounts receivable. As such, the Company records a monthly provision for accounts receivable that are considered to be uncollectible. In order to calculate the appropriate monthly provision, the Company primarily utilizes a historical rate of accounts receivable written off as a percentage of total revenue. This historical rate is applied to the current revenues on a monthly basis. The historical rate is updated periodically based on events that may change the rate such as a significant increase or decrease in collection performance and timing of payments as well as the calculated total exposure in relation to the allowance. Periodically, the Company compares the identified credit risks with the allowance that has been established using historical experience and adjusts the allowance accordingly.
During 2009, 2008 and 2007, $876,000, $854,000, and $492,000 of bad debt expense was incurred and the allowance for doubtful accounts was $1,353,000, $1,851,000, and $1,511,000 as of October 31, 2009, 2008 and 2007. The actual write-offs for the periods were $1,375,000, $514,000, and $657,000 during 2009, 2008 and 2007. The actual write-offs occur when it is determined an account will not be collected. General economic conditions and specific geographic and customer concerns are major factors that may affect the adequacy of the allowance and may result in a change in the annual bad debt expense.
No individual customer represented greater than 3.0% of the gross outstanding accounts receivable at October 31, 2009 and 2008. The Company’s ten largest accounts receivable balances represented 13.8% and 18.1% of gross outstanding accounts receivable at October 31, 2009 and 2008.
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.
FASB ASC Topic 330, "Inventories" (ASC 330) (formerly SFAS No.151, an amendment of ARB No.43, chapter 4) clarifies the accounting for items such as abnormal freight, handling costs, and amounts of wasted material (spoilage). ASC 330 requires such items to be treated as current period charges rather than as a portion of the inventory cost. This did not have a material effect on the Company's financial statement.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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:
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 $4,199,000, $4,324,000 and $3,538,000 for the years ended October 31, 2009, 2008 and 2007 and is reflected as a component of cost of sales and newspaper operating costs and selling, general and administrative expenses.
Long-lived property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. This evaluation includes the review of operating performance and estimated future undiscounted cash flows of the underlying assets or businesses.
Goodwill and Other Intangibles
The excess cost over fair value of net assets of acquired businesses, goodwill, was in years prior to 2002 being amortized by the straight-line method over periods ranging from 15 to 25 years. The other intangible assets are being amortized over 5 to 20 years representing the future benefit of the intangible. The fair values of these intangible assets are estimated based on management's assessment as well as independent third party appraisals in some cases.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
FASB ASC Topics 805, “Business Combinations” and 350, “Intangibles- Goodwill and Other” (formerly SFAS No. 141 and 142 respectively) express that Goodwill shall not be amortized. Instead, Goodwill shall be tested for impairment at a level of reporting referred to as a reporting unit. The first step of impairment analysis is a screen for potential impairment and was to be completed within six months of adopting the former SFAS No. 142. The second step, if required, measures the amount of the impairment. The Company completed step one of the initial impairment analysis and subsequent annual analysis during the second and fourth quarters of 2002. Additionally, this analysis was performed in the fourth quarter of each year thereafter.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the years ended October 31, 2009, 2008 and 2007 approximated $791,000, $978,000, and $609,000.
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 basis 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. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
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 using the treasury stock method. The effect of dilutive stock options increased weighted average shares outstanding by 0, 38,000 and 146,000 for the years ended October 31, 2009, 2008 and 2007.
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. The Company’s operating segments are more fully described in Note 9.
Accounting for Web Site Development Costs
Certain external costs and internal payroll and payroll-related costs have been capitalized during the application, development and implementation stages of the Company’s web site. The costs regarding the ongoing operation and maintenance are expensed in the period incurred. The Company’s internet sales are based on a cooperative effort with the Company’s direct sales force as an optional ordering alternative.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Revenue Recognition
Revenues are recognized when products are shipped or ownership is transferred and when services are rendered to customers. The Company acts as a principal party in sales transactions, assumes title to products and assumes the risks and rewards of ownership including risk of loss for collection, delivery or returns. The Company typically recognizes revenue for the majority of its products upon shipment to the customer and transfer of title. Under agreements with certain customers, custom forms may be stored by the Company for future delivery. In these situations, the Company may receive a logistics and warehouse management fee for the services provided. In these cases, delivery and bill schedules are outlined with the customer and product revenue is recognized when manufacturing is complete and the product is received into the warehouse, title transfers to the customer, the order is invoiced and there is reasonable assurance of collectability. Since the majority of products are customized, product returns are not significant. Therefore, the Company records sales on a gross basis. Advertising revenues are recognized, net of agency commissions, in the period when advertising is printed or placed on websites. Circulation revenues are recognized when purchased newspapers are distributed. Amounts received from customers in advance of revenue recognized are recorded as deferred revenue. The deferred revenue associated with The Herald-Dispatch approximated $611,000 and $684,000 at October 31, 2009 and 2008.
Accounting for Costs Associated with Exit or Disposal Activities
FASB ASC Topic 420, “Exit or Disposal Cost Obligations” (formerly SFAS No. 146) states that a liability for a cost associated with an exit or disposal activity shall be measured initially at its fair value in the period in which the liability is incurred. The adoption of this standard has been effective for exit or disposal activities that were initiated after December 31, 2002.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Accounting for Stock-Based Compensation
FASB ASC Topic 718, “Compensation- Stock Compensation” (formerly FASB SFAS No. 123R) states that an entity shall recognize the services received in a share-based payment transaction with an employee as services are received. Employee services themselves are not recognized before they are received. The entity shall recognize either a corresponding increase in equity or a liability, depending on whether the instruments granted satisfy the equity or liability classification criteria. As the services are consumed, the entity shall recognize the related cost. This Topic uses the terms compensation and payment in their broadest senses to refer to the consideration paid for employee services. This standard has been effective as of the interim and annual periods beginning after June 15, 2005. Therefore this was in effect for the Company as of November 1, 2005. Since the Company’s employee stock options vest immediately in the year granted, the initial adoption did not have any effect on the Company’s financial statements. However, the Company will be required to expense the value of employee stock options when future options are granted. There were no stock option grants in 2009, 2008 or 2007.
Before the adoption of the former SFAS 123R, the Company had 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 was recognized.
Historically, 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 regarding risk-free interest rates; dividend yields; volatility factors of the expected market price of the Company's common stock; and a weighted-average expected life of the option of 4 years.
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 was expensed in the year granted since the options vested immediately. The Company's pro forma information for the years ended October 31 are as follows:
(1) Not applicable, since the Company adopted the former SFAS 123R on November 1, 2005 and there were no stock options granted during 2007, 2008 and 2009.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
FASB ASC Topic 250
In September 2006, the SEC Staff issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. SAB 108 is now subsequently codified under FASB ASC 250, “Accounting Changes and Error Corrections”.
Traditionally, there have been two widely-recognized methods for quantifying the effects of financial statement misstatements: the “rollover” method and the “iron curtain” method. The rollover method focuses primarily on the impact of a misstatement on the income statement-including the reversing effect of prior year misstatements- but its use can lead to the accumulation of misstatements in the balance sheet. The iron curtain method, on the other hand, focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement. We currently use the rollover method for quantifying identified financial statement misstatements.
In SAB 108, the SEC Staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach” because it requires quantification of errors under both the iron curtain and the rollover methods.
SAB 108 permits existing public companies to initially apply its provisions by (i) restating prior financial statements as if the “dual approach” had always been used or (ii) recording the cumulative effect of initially applying the “dual approach” as adjustments to the carrying value of assets and liabilities as of November 1, 2006, with an offsetting adjustment recorded to the opening balance of retained earnings. Use of the “cumulative effect” transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose.
We adopted the provisions of SAB 108 using the cumulative effect transition method in connection with the preparation of our annual financial statements for the year ended October 31, 2007. As a result of the adoption of SAB 108, the Company recorded an increase in net fixed assets of approximately $95,000, an increase in accounts receivable of approximately $101,000, a decrease in accrued payroll of approximately $68,000, a decrease in accrued professional fees of approximately $83,000, reductions in accounts receivable and inventory of approximately $65,000, other accrual increases of $68,000 and an increase in retained earnings of approximately $128,000, net of tax, as of November 1, 2006. The accompanying financial statements reflect these adjustments.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
FASB ASC Topic 605-45-50
FASB ASC Topic 605-45-50 “Taxes Collected from Customers and Remitted to Governmental Authorities” (ASC 605-45-50) (formerly EITF 06-03) clarifies the proper treatment in accounting for taxes collected and remitted to government authorities. This standard states that taxes should be, within the scope of the issue, reported on either a gross basis (included in revenues and costs) or a net basis (excluded from revenues). For any such taxes that are reported on a gross basis, an entity shall disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. The disclosure of those taxes can be done on an aggregate basis. The Company adopted the former EITF 06-03 on February 1, 2007 and records sales tax on a net basis. The adoption of this standard did not have a material impact on our results of operations, financial position or cash flows.
FASB ASC Topic 820
FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (ASC 820) (formerly SFAS No. 157) defines fair value, establishes methods used to measure fair value and expands disclosure requirements about fair value measurements. In September 2006, the FASB issued the former FAS No. 157, “Fair Value Measurements.” ASC 820 provides guidance for using fair value to measure assets and liabilities and only applies when other standards require or permit the fair value measurement of assets and liabilities. It does not expand the use of fair value measurements. ASC 820, as issued, is effective for fiscal years beginning after November 15, 2007. The former FASB Staff Position (FSB) FAS No. 157-2 was issued in February 2008 and deferred the effective date of ASC 820 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities. Accordingly, as of November 1, 2008, the Company adopted ASC 820 for financial assets and liabilities only. The Company's interest rate swap derivative liability is based on third party valuation models, and is therefore classified as having Level 2 inputs. The adoption of ASC 820 for financial assets and financial liabilities did not have a material impact on the Company's results of operations, financial condition or liquidity. The full adoption of ASC 820 for nonfinancial assets and nonfinancial liabilities is also not expected to have a significant impact on the Company's results of operations, financial condition or liquidity.
FASB ASC Topic 825-10-35
FASB ASC Topic 825-10-35, “Fair Value Option” (ASC 825-10-35) (formerly SFAS No. 159) states that a business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. ASC 825-10-35 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. ASC 825-10-35 has been effective for the Company since the adoption of ASC 825-10-35 beginning November 1, 2008. The Company elected to not apply the provisions of ASC 825-10-35; therefore the adoption of ASC 825-10-35 did not affect our consolidated financial position, results of operations or cash flows.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
FASB ASC Topic
FASB ASC Topic 805, “Business Combinations” (ASC 805) (formerly SFAS No. 141 and its revision 141(R)) changes how business acquisitions are accounted and will impact financial statements both on the acquisition date and in subsequent periods. ASC 805 as it relates to recognizing all (and only) the assets acquired and liabilities assumed in a business combination, costs an acquirer expects but it not obligated to incur in the future to exit an activity of an acquiree or to terminate or relocate an acquiree's employees are not liabilities at the acquisition date but must be expensed in accordance with other applicable generally accepted accounting principles. Additionally, during the measurement period, which should not exceed one year from the acquisition date, any adjustments that are needed to assets acquired and liabilities assumed to reflect new information obtained about facts and circumstances that existed as of that date will be adjusted retrospectively. The acquirer will be required to expense all acquisition-related costs in the periods such costs are incurred other than costs to issue debt or equity securities. ASC 805 will have no impact on our results of operations, financial position or cash flows at the date of adoption, but it could have a material impact on our results of operations, financial position or cash flows in the future when it is applied to acquisitions which occur in the fiscal year beginning November 1, 2009.
FASB ASC Topic 50-30-35
In April 2008, the FASB issued staff position FSP FAS 142-3 (FSP 142-3), "Determination of the Useful Life of Intangible Assets", and has subsequently been codified under FASB ASC 350-30-35, “Determining the Useful Life of an Intangible Asset” and is hereon referred to as ASC 350-30-35, amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of ASC 350-30-35 is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset as outlined by the U.S. generally accepted accounting principles (GAAP). ASC 350-30-35 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and should be applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. Accordingly, we have adopted ASC 350-30-35 as of November 1, 2009. We do not expect this to have an impact on our results of operations, financial position or cash flows at the date of adoption, but it could have a material impact on our results of operations, financial position or cash flows in future periods.
FASB ASC Topic
FASB ASC 815, “Derivatives and Hedging” (ASC 815) (formerly SFAS No. 161- an amendment of FASB Statement No. 133) changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under ASC 815 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. ASC 815 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The implementation of requirements outlined in ASC 815 did not have a material impact on the Company's consolidated financial statements.
FASB ASC Topic 820-10-35-15A
FASB ASC Topic 820-10-35 paragraph 15A, “Financial Assets in a Market that is Not Active” (ASC 820-10-35-15A) (formerly FSP FAS No. 157-3) describes the proper determination of fair market value in a situation where there is little, if any, market activity. For additional guidance on measurement of fair value in such situations ASC 820-10-35-15A references ASC Topics 820-10-35-3 and 820-10-35-53. This has been in effect for the Company since the issuance of ASC 820-10-35-15A, including prior periods for which financial statements have not been issued.
FASB ASC Topic 105
In June 2009, The FASB issued the former SFAS No.168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of the former FASB Statement No. 162 ("SFAS 162"). SFAS 168 replaces the former SFAS 162 and establishes The FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the SEC under federal securities laws are sources of authoritative GAAP for SEC registrants. The former SFAS 168 will become effective for the Company for interim and annual periods ending after September 15, 2009. The Company has adopted the Codification for the year ending October 31, 2009.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
FASB ASC Topic 820-10-35
In October 2008, the FASB issued FSP FAS 157-3 (FSP 157-3), “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP 157-3). FSP 157-3 clarifies the application of SFAS 157, “Fair Value Measurements,” in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective upon issuance, including prior periods for which financial statements have not been issued.
FASB ASC Topic 855
Effective July 31, 2009, the Company adopted the former SFAS No. 165, "Subsequent Events" ("SFAS 165"). ASC 855 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, whether that date represents the date the financial statements were issued or were available to be issued. The Company will recognize in its consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing its financial statements. Events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date will be disclosed in a footnote. In accordance with ASC 855, the Company has evaluated events and transactions after the close of its balance sheet on October 31, 2009, until the date of the Company's 10-K filing with the SEC on January 29, 2010, for potential recognition or disclosure in the Company's consolidated financial statements
FASB ASC Topic 805
"BusinessCombinations" (ASC 805) (formerly SFAS No. 141 and its revision 141(R)) changes how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. ASC 805 as it relates to recognizing all (and only) the assets acquired and liabilities assumed in a business combination, costs an acquirer expects but it not obligated to incur in the future to exit an activity of an acquiree or to terminate or relocate an acquiree's employees are not liabilities at the acquisition date but must be expensed in accordance with other applicable generally accepted accounting principles. Additionally, during the measurement period, which should not exceed one year from the acquisition date, any adjustments that are needed to assets acquired and liabilities assumed to reflect new information obtained about facts and circumstances that existed as of that date will be adjusted retrospectively. The acquirer will be required to expense all acquisition-related costs in the periods such costs are incurred other than costs to issue debt or equity securities. ASC 805 will have no impact on our results of operations, financial position or cash flows at the date of adoption, but it could have a material impact on our results of operations, financial position or cash flows in the future when it is applied to acquisitions which occur in the fiscal year beginning November 1, 2009.
FASB ASC Topic 350-30-35
In April 2008, the FASB issued staff position FSP FAS 142-3 (FSP 142-3), "Determination of the Useful Life of Intangible Assets", and has subsequently been codified under FASB ASC 350-30-35, "Determining the Useful Life of an Intangible Asset" and is hereon referred to as ASC 350-30-35, amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of ASC 350-30-35 is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset as outlined by the U.S. generally accepted accounting principles (GAAP). ASC 350-30-35 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and should be applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. Accordingly, we have adopted ASC 350-30-35 as of November 1, 2009. We do not expect this to have an impact on our results of operations, financial position or cash flows at the date of adoption, but it could have a material impact on our results of operations, financial position or cash flows in future periods.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Reclassification
Certain prior-year amounts have been reclassified to conform to the current year Financial Statement Presentation.
2. Inventories
Inventories consisted of the following:
3. Long-term Debt
Long-term debt consisted of the following:
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
On December 29, 2009, the Administrative Agent and Lenders under the Company's Credit Agreement dated September 14, 2007 ("Credit Agreement"), the Company and Marshall T. Reynolds entered into a Forbearance Agreement (the "Forbearance Agreement") which provides, among other things, that during a standstill period commencing on December 29, 2009 and ending on March 31, 2010 (unless sooner terminated by default of Champion under the Forbearance Agreement or the Credit Agreement), the Required Lenders are willing to temporarily forbear exercising certain rights and remedies available to them, including acceleration of the obligations or enforcement of any of the liens provided for in the Credit Agreement. The Company acknowledged in the Forbearance Agreement that as a result of the existing defaults, the Lenders are entitled to decline to provide further credit to the Company, to terminate their loan commitments, to accelerate the outstanding loans, and to enforce their liens.
The Forbearance Agreement provides that during the standstill period, so long as the Company has excess availability equal to or greater than $1,000,000 (and will continue to have after any request for credit) and meets the conditions of the Forbearance Agreement, it may continue to request credit under the revolving credit line.
The Forbearance Agreement imposes various reporting and disclosure requirements on the Company, requires it to submit to a third party financial review, maintain certain account levels, maintain a cash concentration account with a balance of at least $750,000 at all times, submit to field audits and inspections and reduce outstanding term loans to $49,632,442. The reduction in the principal outstanding obligations of the term loan will be accomplished through the elimination of various borrowing base reserves established by the Administrative Agent, the release of $3.0 million in cash collateral that was being held in escrow subsequent to year end pursuant to previous actions by the Administrative Agent and the $3.0 million in cash proceeds received by the Company from issuing an unsecured promissory note.
The Forbearance Agreement also required Marshall T. Reynolds to lend to the Company $3,000,000 in exchange for a subordinated unsecured promissory note in like amount, payment of principal and interest on which is prohibited until payment of all liabilities under the Credit Agreement. This $3,000,000 was applied to prepayment of $3,000,000 of the Company's loans. This subordinated unsecured promissory note bearing interest at the Wall Street Journal prime rate (currently 3.25%) and maturing September 14, 2014, and a debt subordination agreement, both dated December 29, 2009, have been executed and delivered, and Mr. Reynolds has advanced $3,000,000 to the Company. The Company paid to the Administrative Agent a nonrefundable forbearance fee of $100,000 upon closing of the Forbearance Agreement.
The secured and unsecured credit facilities contain restrictive financial covenants requiring the Company to maintain certain financial ratios. The Company was unable to remain in compliance with certain of its financial covenants arising under substantially all of its long-term note agreements. The creditors have not waived the financial covenant requirements. The Company received a notice of default on March 25, 2009 which was reported pursuant to item 2.04 of Form 8-K filed March 27, 2009. This notice of default advised that the administrative agent had not waived the event of default and reserves all rights and remedies thereof. These remedies include, under the credit agreement, the right to accelerate and declare due and immediately payable the principal and accrued interest on all loans outstanding under the credit agreement. The notice of default further stated that any extension of additional credit under the credit agreement would be made by the lenders in their sole discretion without any intention to waive any event of default. The Company has been working with the different creditors to restructure the existing debt; however, an agreement satisfactory to the Company has not been reached. Upon the expiration of the Forbearance Agreement, a total of $65,357,938 of long-term debt and outstanding revolving line of credit borrowing are subject to accelerated maturity and, as such, the creditors may, at their option, give notice to the Company that amounts owed are immediately due and payable. As a result, the full amount of the related long-term debt has been classified as a current liability in the accompanying Balance Sheet at October 31, 2009 representing $60,457,938. Regardless of the non-compliance with financial covenants, the Company has made every scheduled payment of principal and interest, including an excess cash flow recapture payment of approximately $2.0 million in January 2009 and net payments of $400,000 on the Company's revolving line of credit in 2009.
The Company is required to make certain mandatory payments on its credit facilities related to (1) net proceeds received from a loss subject to applicable thresholds, (2) equity proceeds and (3) effective January 31, 2009, and continuing each year thereafter under the terms of the agreement the Company is required to prepay its credit facilities by 75% of excess cash flow for its most recently completed fiscal year. The excess cash flow for purposes of this calculation is defined as the difference (if any) between (a) EBITDA for such period and (b) federal, state and local income taxes paid in cash during such period plus capital expenditures during such period not financed with indebtedness plus interest expense paid in cash during such period plus the aggregate amount of scheduled payments made by the Borrower and its Subsidiaries during such period in respect of all principal on all indebtedness (whether at maturity, as a result of mandatory sinking fund redemption, or otherwise), plus restricted payments paid in cash by the Borrower during such period in compliance with the credit agreement. The Company paid its prepayment obligation of approximately $2.0 million in January 2009 and had no balance due under its prepayment obligation for fiscal 2009 that would have been payable January 2010.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Maturities of long-term debt for each of the next five years follow:
The Company was previously permitted to borrow a maximum of $30,000,000 under its revolving line of credit subject to a borrowing base limitation with interest payable monthly at the prime rate of interest and/or LIBOR plus a margin. In November of 2009 the Administrative Agent advised the Company that the aggregate availability under its revolving credit commitments would be $20,000,000. In December of 2009, the Administrative Agent notified the Company that Eurodollar loans would no longer be permitted. Therefore, all future borrowings will be indexed from the base rate (prime rate based) plus the applicable margin. The Company had borrowed $8,725,496 under this facility at October 31, 2009 and $9,125,496 at October 31, 2008. Pursuant to its borrowing base calculation applicable at the time the Company had $9.1 million in additional availability under its $30.0 million revolving credit line at October 31, 2008. The minimum excess availability and cash and cash equivalents at October 31, 2008 were subject to $3.0 million minimum excess availability threshold. Pursuant to the terms of the Forbearance Agreement the borrowing base certificate at October 31, 2009 would have reflected minimum excess availability of approximately $8.9 million. The minimum excess availability and cash and cash equivalents threshold at October 31, 2009, reflective of the terms of the Forbearance Agreement, was subject to a $1.0 million minimum excess availability threshold. Any reserves, which may be applied at the sole discretion of the Administrative Agent, are not reflected in the availability calculations. In 2009, the Administrative Agent revised the borrowing base calculation, which limited the eligibility of certain accounts receivable and pursuant to the filing of its December 31, 2009 borrowing base the Company was notified of an additional $1.5 million reserve being instituted by the Administrative Agent. The line of credit expires in September 2012 and contains certain restrictive financial covenants, is subject to borrowing base limitations and is collateralized by substantially all of the assets of the Company.
The prime rate was the primary interest rate on the above loans prior to September 14, 2007. After this date, the primary interest rate consisted primarily of LIBOR 30-day and 90-day rates plus the applicable margin. Prime rate approximated 3.25% and 4.00% at October 31, 2009 and 2008, while the 30-day LIBOR rate approximated 0.24% and 3.12% at October 31, 2009 and 2008. The Company has entered into a hedging arrangement to convert $25.0 million of variable interest rate debt to fixed interest rate debt the current balance outstanding subject to the hedge was $21,062,500 and $22,812,500 at October 31, 2009 and 2008 (see Note 14). Interest paid during the years ended October 31, 2009, 2008 and 2007 approximated $4,345,000, $5,713,000, and $1,168,000. The Company had accrued interest of approximately $532,000 and $8,000 at October 31, 2009 and 2008. Deferred financing costs are amortized over the life of the related credit facilities and are reported as part of interest expense. In 2009, 2008 and 2007, $309,000, $309,000 and $46,000 of deferred financing costs were included as interest expense.
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. This line of credit expires in July 2010 is subject to a floor of 4.25% and contains certain financial covenants. There were no borrowings outstanding under this facility at October 31, 2009 or 2008.
The Company may incur costs in 2010 related to facility consolidations, employee termination costs and other restructuring related activities. These costs may be incurred, in part, as a response to the Company's efforts to overcome the impact of the global economic crisis.
The Company’s non-cash activities for 2009, 2008 and 2007 included equipment purchases of approximately $818,000, $0, and $1,738,000 which were financed by a bank. The Company recorded non-cash investing and financing activities for the acquisition of The Herald-Dispatch of approximately $78.5 million in 2007. The Company also accrued approximately $1.6 million for a final working capital payment for the acquisition of The Herald-Dispatch. The working capital payment was made in the first quarter of 2008 totaling approximately $1.6 million.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Employee Benefit Plan
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 $445,000, $525,000 and $428,000 for the years ended October 31, 2009, 2008 and 2007.
The Company's accrued vacation liability as of October 31, 2009 and 2008 was approximately $615,000 and $645,000. This item is classified as a component of accrued expenses on the financial statements.
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. In March 2004, the Company’s 2003 stock option plan was adopted to provide for the granting of both incentive and non-qualified stock options to management personnel for up to 475,000 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, 2009 ranged from $4.24 to $4.66. 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 0.96 years.
A summary of the Company’s stock option activity and related information for the years ended October 31 follows:
A summary of stock options outstanding and exercisable at October 31, 2009, follows:
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company had a deferred compensation agreement with one employee of Blue Ridge Printing Co., Inc. providing for payments totaling approximately $500,000 over a ten year period after retirement. During fiscal year 2007, a one-time payment to this employee of $375,000 was made by the Company satisfying its obligation in full. To assist in the funding of the payment, the Company had invested in life insurance policies which were monetized to effectuate this transaction. There was no expense for years ended October 31, 2009, 2008 and 2007.
5. Income Taxes
Income tax expense consisted of the following:
Deferred tax assets and liabilities are as follows:
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The above net deferred tax asset (liability) is presented on the balance sheet as follows:
A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows:
Income taxes (refunded) paid during the years ended October 31, 2009, 2008 and 2007 approximated $(572,000), $412,000, and $5,084,000. The Company recorded an income tax refund at October 31, 2009 and 2008 of $1,911,000 and $711,000 .
The Company has available for income tax purposes net operating loss carryforwards from acquired companies of approximately $827,000, of which $794,000 expires in 2012 and $33,000 in 2013. The Company has available for state income tax purposes net operating loss carryforwards from acquired companies of approximately $1,181,000, $203,000 expires in 2019, $478,000 expires in 2020, $98,000 expires in 2023, $120,000 expires in 2024 and $281,000 expires in 2025. In 2007, the valuation allowance decreased by approximately $12,000, which is primarily reflective of the usage of net operating losses in the state of Mississippi. In 2009, the Company had additional net operating losses of $3,308,000 which a valuation allowance of approximately $162,000 in tax benefits was recorded. In addition, the Company increased its valuation allowance associated with net operating losses of acquired companies pursuant to the expiration of such carry forward periods in the amount of $65,000 representing an increase in valuation allowance of approximately $26,000. The Company did not record a change in the valuation allowance in 2008.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
In June 2006, the FASB issued the former FASB Interpretation No. 48 (FIN 48) (ASC 740) , this interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with the former SFAS No. 109, "Accounting for Income Taxes" (SFAS 109). This interpretation is effective for fiscal years beginning after December 15, 2006. The Company adopted the standard addressing "Accounting for Uncertainty in Income Taxes" effective November 1, 2007 with no effect on the Company's consolidated financial statements. As of the date of adoption, the Company had approximately $150,000 of unrecognized tax benefits, all of which would impact the effective tax rate if recognized. The Company was notified in April 2008 and an examination began in May 2008 by the IRS covering our fiscal year-end 2005 federal tax return. This audit was completed and settled during the third quarter of 2008. As of October 31, 2009, the Company is subject to U.S. Federal income tax examination for the fiscal tax years ended October 31, 2007, 2008 and 2009. State Income Tax returns are generally subject to a period of examination for a period of three to five years. We have one state income tax return covering our fiscal years ended 2004 and 2005 currently under examination. Tax interest and penalties are classified as income taxes in the accompanying statements of income and were insignificant for all periods presented. The unrecognized tax benefit at October 31, 2009 and 2008 was approximately $0 and $36,000. The Company is currently unable to assess whether any significant increase or decrease to the unrecognized tax benefit will be recorded during the next 12 months.
The Company's unrecognized tax benefit activity for the fiscal year ended October 31, 2009 was a follows:
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 as well as facilities controlled by a Company owned by the former sole owner of Syscan pursuant to the acquisition of Syscan (see note 8). The original terms of these leases, which are accounted for as operating leases, range from two to fifteen years.
A summary of significant related party transactions follows:
In addition, the Company leases property and equipment from unrelated entities under operating leases. Rent expense amounted to $1,060,000, $912,000, and $819,000 for the years ended October 31, 2009, 2008 and 2007.
Under the terms and conditions of the above-mentioned leases, the Company is primarily responsible for all taxes, assessments, maintenance, repairs or replacements, utilities and insurance. The Champion Output Solutions' lease excludes taxes and insurance during the initial lease term. Champion Output Solutions subleases approximately 8,500 square feet at an annual rate of approximately $38,000 through June 30th, 2011. The Company has renewal options for certain leases covering varying periods.
In addition, the Company purchased vehicles from an entity controlled by family members of its Chief Executive Officer in the amounts of $58,000, $150,000 and $105,000 for the years ended October 31, 2009, 2008 and 2007.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Future minimum rental commitments for all noncancelable operating leases including related party commitments with initial terms of one year or more consisted of the following at October 31, 2009:
The Company participates in a self-insurance program for employee health care benefits with affiliates controlled by its Chief Executive Officer and as such is responsible for paying claims of Company participants as required by the plan document. The Company is allocated costs primarily related to the reinsurance premiums 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, 2009, 2008 and 2007 was approximately $5,196,000, $5,017,000, and $3,493,000.
During 2009, 2008 and 2007, the Company utilized an aircraft from an entity controlled by its Chief Executive Officer and reimbursed the controlled entity for the use of the aircraft, fuel, aircrew, ramp fees and other expenses attendant to the Company’s use, in amounts aggregating $49,000, $56,000, and $91,000. The Company believes that such amounts are at or below the market rate charged by third-party commercial charter companies for similar aircraft.
The Company exercised its option to purchase a building at 3000 Washington Street, Charleston, WV on June 16, 2009. The Company assigned its option to a related party purchaser and leased the building back from the related party for a period of five years with a call option to purchase the building within the new five year lease period which commenced October 27, 2009 for $1.5 million.
On December 29, 2009, the Company, Marshall T. Reynolds, Fifth Third Bank, as administrative agent for lenders under the Company's credit agreement dated September 14, 2007, and the other lenders entered into a Forbearance Agreement. The Forbearance Agreement, among other provisions, required Marshall T. Reynolds to lend to the Company $3,000,000 in exchange for a subordinated unsecured promissory note in like amount, payment of principal and interest on which is prohibited until payment of all liabilities under the credit agreement. The subordinated unsecured promissory note, bearing interest at a floating Wall Street Journal prime rate and maturing September 14, 2014, and a debt subordination agreement, both dated December 29,2009, were executed and delivered, and Mr. Reynolds advanced $3,000,000 to the Company. The $3,000,000 was applied to prepayment of $3,000,000 of the Company's loans.
The Company believes that the terms of its related party transactions are no less favorable to the Company than could be obtained with an independent third party.
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 as well as various governmental audits and examinations. In the opinion of management, after consulting with legal counsel where applicable, the Company believes that the ultimate resolution of these claims, audits and legal actions will not have a material effect on the consolidated financial statements of the Company.
8. Acquisitions
On September 14, 2007, the Company completed, pursuant to an asset purchase agreement, the acquisition of The Herald-Dispatch daily newspaper in Huntington, WV. The purchase price was $77.0 million and subject to a working capital payment of $837,554 plus or minus any change in working capital from the index working capital base of $1,675,107 at the closing date of September 14, 2007. The working capital payment totaled approximately $1.6 million.
Approximately six weeks of the operations of The Herald-Dispatch are included in the Company's Statement of Operations commencing concurrent with the acquisition in 2007.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company acquired substantially all of the net assets of The Herald-Dispatch for a purchase price of $77.0 million consisting of cash. The purchase price included a cash payment of $77.0 million plus acquisition costs of approximately $373,000 and a working capital adjustment of approximately $1,616,000. The working capital adjustment was recorded under accrued expenses at October 31, 2007. The purchase price was financed by the Company through a term debt facility and a revolving credit facility. The purchase of The Herald-Dispatch was consummated based on certain specifically identified synergies due in part to duplicative functions, to achieve cash flow diversity, to capitalize on a unique investment opportunity in the Company's core territory, and to provide a platform for future growth and expansion opportunities. The following is a condensed balance sheet indicating the amount assigned to each major asset and liability caption of The Herald-Dispatch at September 14, 2007:
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following table summarizes the unaudited consolidated pro forma results of operations and pro forma net income per share for the years ended October 31, 2007, assuming The Herald-Dispatch acquisition had occurred at the start of the Company's fiscal year for the period represented below. The pro forma results below were derived from The Herald-Dispatch internal financial statements representing the periods approximating the Company's fiscal year and are reflective of adjustments associated with additional interest expense and associated deferred financing costs not recorded on the Company's financial statements of approximately $5.2 million for 2007. The Company recorded pro forma adjustments resulting from additional amortization expense of $614,000 for 2007, additional depreciation of $524,000 for 2007 and adjustments associated with retirement plans and postretirement benefits other than pensions which were not assumed by the Company totaling $398,000 in 2007.
The identifiable intangible assets of The Herald-Dispatch are being amortized on a straight-line basis over a period of 20 and 25 years for the subscriber and advertiser base, respectively. The weighted average life of the amortizable intangible assets for the acquisition of The Herald-Dispatch at the acquisition date was approximately 20 years. The trademarks and masthead for the acquisition of The Herald-Dispatch was determined to have an indefinite life. The remaining allocation of the purchase price of The Herald-Dispatch was assigned to goodwill. The Company expects to achieve tax deductions associated with non-amortizing intangibles and goodwill of approximately $3.6 million per year for a period of 15 years. In 2009, the Company recorded asset impairment charges of $41.1 million ($25.5 million, net of deferred tax benefit) associated with the acquisition of The Herald-Dispatch (see Note 12).
On September 7, 2004, the Company acquired all the issued and outstanding capital stock of Syscan Corporation (“Syscan”), a West Virginia corporation, for a cash price of $3,500,000 and a contingent purchase price, dependent upon satisfaction of certain conditions, not to exceed the amount of $1,500,000. On December 14, 2006, the Company paid the contingent purchase price in the amount of $1,350,725. This amount was accrued at October 31, 2006. The Company also purchased a building from an entity controlled by Syscan’s sole shareholder for $117,000 concurrent with the Syscan acquisition. After considering the cash received, the acquisition of a building and acquisition costs the net assets acquired totaled approximately $2,688,000. Syscan Corporation is a provider of integrated business products, with a primary emphasis on office and data products, printing, mailing and fulfillment services, and office furniture. The acquisition was consummated based on significant identified synergies which could be achieved due to a duplication of market territory. The acquisition brought additional supply chain management and mailing expertise to the Company and allowed Syscan to offer a broader array of printing services to its existing customer base.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Williams Land Corporation had the option to put the 3000 Washington Street building occupied by Syscan to the Company for a purchase price of $1.5 million and the Company had the option to purchase the building for $1.5 million at the conclusion of the five year lease term ending September 1, 2009. This option may be exercised no later than 60 days prior to the end of the lease and closing of said purchase cannot exceed 45 days from the end of the lease. The Company exercised its option to purchase this building on June 16, 2009. The Company assigned its option to a related party to purchase the building and leased the building back from the related party for a period of five years with a call option to purchase the building within the new five year lease period which commenced October 27, 2009 for $1.5 million.
All of the above transactions have been accounted for using the purchase method of accounting.
9. Industry Segment Information
The Company operates principally in three 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); the sale of office products and office furniture including interior design services; and publication of The Herald-Dispatch daily newspaper in Huntington, West Virginia with a total daily and Sunday circulation of approximately 24,000 and 30,000 respectively. Approximately six weeks of the operations of The Herald-Dispatch are included in the Company's Statement of Operations commencing concurrent with the acquisition in 2007. The Company employs approximately 790 people, of whom approximately 50, or 6%, are covered by collective bargaining agreements, which expire on May 31, 2010 and December 31, 2010, respectively.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The table below presents information about reported segments for the years ended 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 ended October 31, 2009, 2008 and 2007 is as follows:
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Restructuring of Operations
On May 22, 2009 the Company announced a reduction in force at its Champion Publishing Subsidiary resulting in the elimination of 24 positions and recorded a charge of approximately $144,000 associated with employee related separation costs. The Company incurred an additional $68,000 in restructuring related expenses in 2009 primarily associated with employee related separation costs. Inclusive of the Champion Publishing charges the Company incurred a total of $211,000 in employee related separation costs in 2009.
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 long-term debt was estimated using discounted cash flows and it approximates its carrying value.
ASC 820 (Formerly SFAS No.157) provides guidance for using fair value to measure assets and liabilities and only applies when other standards require or permit the fair value measurement of assets and liabilities. It does not expand the use of fair value measurements. The former FAS No. 157, as issued, is effective for fiscal years beginning after November 15, 2007. The former FASB Staff Position (FSB) FAS No. 157-2 was issued in February 2008 and deferred the effective date of ASC 820 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities. Accordingly, as of November 1, 2008, the Company adopted ASC 820 for financial assets and liabilities only. The Company's interest rate swap derivative liability is based on third party valuation models, and is therefore classified as having Level 2 inputs. The adoption of ASC 820 for financial assets and financial liabilities did not have a material impact on the Company's results of operations, financial condition or liquidity. The full adoption of ASC 820 for nonfinancial assets and nonfinancial liabilities is also not expected to have a significant impact on the Company's results of operations, financial condition or liquidity.
ASC 825-10-35 previously the former SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of the former FASB Statement No. 115." ASC 825-10-35 permits entities to choose to measure at fair value many financial instruments and certain other items at fair value that are not currently required to be measured. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. ASC 825-10-35 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. ASC 825-10-35 is effective for fiscal years beginning after November 15, 2007. The Company elected to not apply the provisions of ASC 825-10-35 ; therefore the adoption ASC 825-10-35 did not affect our consolidated financial position, results of operations or cash flows.
The Company measures and records in the accompanying consolidated financial statements certain liabilities at fair value on a recurring basis. SFAS No.157 establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). The hierarchy consists of three levels:
Level 1 - Quoted market prices in active markets for identical assets or liabilities
Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3 - Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use.
The following table summarizes the financial instruments measured at fair value in the accompanying consolidated balance sheet as of October 31, 2009 and recorded as other liabilities (current):
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Acquired Intangible Assets and Goodwill
In accordance with ASC Topic 350, a two-step impairment test is performed on goodwill. In the first step, a comparison is made of the estimated fair value of a reporting unit to its carrying value. If the carrying value of a reporting unit exceeds the estimated fair value, the second step of the impairment test is required. In the second step, an estimate of the current fair values of all assets and liabilities is made to determine the amount of implied goodwill and consequently the amount of any goodwill impairment.
In connection with our annual impairment testing of goodwill and other intangible assets conducted in the fourth quarter of 2009 in accordance with ASC Topic 350, we recorded a charge of $41.1 million ($25.5 million, net of deferred tax benefit) for impairment of the value of the goodwill and other intangible assets, which resulted from the 2007 acquisition of The Herald-Dispatch daily newspaper in Huntington, WV. This charge resulted in impairment charges of trademarks, masthead $8.5 million, subscriber base asset of $2.2 million, advertiser base asset $6.8 million and goodwill $23.6 million. The associated deferred tax benefit of these charges approximated $15.6 million.
During 2009, the U.S. recession had a negative impact on the Company's operations across multiple segment lines. The newspaper operating segment reflected lower operating revenues in both advertising and circulation. In response to this difficult operating environment Champion initiated a cost reduction plan and eliminated 24 employee positions or approximately 15% of the workforce at the Champion Publishing subsidiary.
The Company determined that it should perform impairment testing of goodwill and intangible assets during the fourth quarter of 2009, due, in part, to declines in our stock price, increased volatility in operating results and declines in market transactions in the industry. The valuation methodology utilized to estimate the fair value of the newspaper operating segment was based on both the market and income approach. The Company then undertook the next step in the impairment testing process by determining the fair value of assets and liabilities within this reporting unit. The implied fair values of goodwill for this reporting unit was less than the carrying amount by $41.1 million ($25.5 million net of deferred tax benefit) based on the analysis by the Company and with assistance of third party valuation specialists, and therefore an impairment charge in this amount was taken. The goodwill and other intangible assets will continue to be amortized for tax purposes over its remaining life in accordance with applicable internal revenue service standards.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company has other reporting units within Goodwill. The Company evaluated these reporting units during the fourth quarter of 2009, and while the estimated fair value of these reporting units declined from 2008, the estimated carrying value of each of our other reporting units exceeded their carrying values in 2009. As a result, no additional testing or impairment charges were necessary.
Amortization expense for the years ended October 31, 2009, 2008 and 2007 was $1,034,000, $1,048,000 and $443,000 respectively. A non-compete agreement is being amortized over a period of seven years and the customer relationships are being amortized over a period of 20 years. These items are both related to the acquisition of Syscan in 2004. The advertising and subscribers bases related to the acquisition of The Herald-Dispatch are being amortized over 25 and 20 years respectively. The trademark and masthead associated with the acquisition of The Herald-Dispatch are non-amortizing assets. The weighted average remaining life of the Company's amortizable intangible assets was approximately 13 years. Estimated amortization expense for each of the following years is:
The changes in the carrying amount of goodwill for the years ended October 31, 2009 and 2008 were:
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The changes in the carrying amounts of goodwill and other intangibles attributed to each segment at October 31, 2009 and 2008 are as follows:
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Certain Significant Estimates
Our estimates that influence the financial statements are normally based on knowledge and experience about past and current events and assumptions about future events. The following estimates affecting the financial statements are particularly sensitive because of their significance and it is at least reasonably possible that a change in these estimates will occur in the near term.
Goodwill and Intangible Assets
We evaluate the recoverability of the goodwill and intangible assets of each of our reporting units as required under ASC 350 by comparing the fair value of each reporting unit with its carrying value. The fair values of our reporting units are determined using a combination of a discounted cash flow analysis and market multiples based on historical and projected financial information. We apply our best judgment when assessing the reasonableness of the financial projections used to determine the fair value of each reporting unit.
Allowance for Doubtful Accounts
The Company encounters risks associated with sales and the collection of the associated accounts receivable. As such, the Company records a monthly provision for accounts receivable that are considered to be uncollectible. In order to calculate the appropriate monthly provision, the Company primarily utilizes a historical rate of accounts receivables written off as a percentage of total revenue. This historical rate is applied to the current revenues on a monthly basis. The historical rate is updated periodically based on events that may change the rate such as a significant increase or decrease in collection performance and timing of payments as well as the calculated total exposure in relation to the allowance. Periodically, the Company compares the identified credit risks with the allowance that has been established using historical experience and adjusts the allowance accordingly. The underlying assumptions used for the allowance can change from period to period and could potentially cause a material impact to the income statement and working capital.
Financial Instruments
In managing interest rate risk exposure, the Company enters into interest rate swap agreements. An interest rate swap is a contractual exchange of interest payments between two parties. A standard interest rate swap involves the payment of a fixed rate times a notional amount by one party in exchange for a floating rate times the same notional amount from another party. As interest rates change, the difference to be paid or received is accrued and recognized as interest expense or income over the life of the agreement. These instruments are not entered into for trading purposes. Counter Parties to the Company’s interest rate swap agreements are major financial institutions. In accordance with guidance outlined in FASB ASC 815, “Derivatives and Hedging” (formerly SFAS No. 133 , “Accounting for Derivative Instruments and Certain Hedging Activities”, as amended by SFAS No. 137 and 138), the Company recognizes interest rate swap agreements on the balance sheet at fair value.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Derivative Instruments and Hedging Activities
The Company manages exposure to changes in market interest rates. The Company’s use of derivative instruments is limited to highly effective fixed and floating interest rate swap agreements used to manage well-defined interest rate risk exposures. The Company monitors its positions and the credit ratings of its counterparties and does not anticipate non-performance by the counterparties. Interest rate swap agreements are not entered into for trading purposes.
At September 28, 2007, the Company was party to an interest rate swap agreement which terminates on October 29, 2010. The swap agreement is with a major financial institution and aggregates an initial $25 million in notional principal amount $21 million and $23 million of outstanding notional principal at October 31, 2009 and 2008. This swap agreement effectively converted $25 million of variable interest rate debt to fixed rate debt. The swap agreement requires the Company to make fixed interest payments based on an average effective rate of 4.78% and receive variable interest payments from its counterparties based on one-month LIBOR (actual rate of 0.24 and 3.12% at October 31, 2009 and 2008). The remaining term of this swap agreement is approximately one year. In fiscal 2009, 2008 and 2007, the Company recorded a net change in the fair value of the fixed interest rate swap agreement in the amount of $19,823, $546,563 and $11,350, net of income tax as other comprehensive loss. In 2009 ineffectiveness resulting in a $0.6 million loss, was charged to other expense on the Consolidated Statements of Operations. This loss resulted from the termination of LIBOR borrowing eligibility from the Administrative Agent. The net additional interest payments made or received under this swap agreement are recognized in interest expense.
15. Earnings Per Share
(Loss) earnings per share (EPS) were computed as follows:
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Quarterly Results of Operations (unaudited)
The following is a summary of the quarterly results of operations for the years ended October 31, 2009 and 2008.
Champion Industries, Inc. and Subsidiaries
Schedule II
Valuation and Qualifying Accounts
Years Ended October 31, 2009, 2008 and 2007
(1) Uncollectible accounts written off, net of recoveries.