1. Basis of Presentation, Business Operations and Recent Accounting Pronouncements
The foregoing financial information has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and rules and regulations of the Securities and Exchange Commission for interim financial reporting. The preparation of the financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. In the opinion of management, the financial information reflects all adjustments (consisting of items of a normal recurring nature) necessary for a fair presentation of financial position, results of operations and cash flows in conformity with GAAP. These interim financial statements should be read in conjunction with the consolidated financial statements for the year ended October 31, 2013, and related notes thereto contained in Champion Industries, Inc.’s Form 10-K filed January 29, 2014. The accompanying interim financial information is unaudited. The results of operations for the period are not necessarily indicative of the results to be expected for the full year. The balance sheet information as of October 31, 2013 was derived from our audited financial statements.
Reclassifications and Revisions:
Certain prior-year amounts have been reclassified to conform to the current year financial statement presentation
.
The Company's operations comprising its former Donihe Graphics division, Blue Ridge Printing division and the Herald-Dispatch Newspaper segment were classified as discontinued operations in the consolidated statements of operations for all periods presented. (see Note 11).
Newly Issued Accounting Standards
Effective July 1, 2009, changes to the ASC are communicated through an ASU. As of January 31, 2014, the FASB has issued ASU’s 2009-01 through 2014-05. The Company reviewed each ASU and determined that they will not have a material impact on the Company’s financial position, results of operations or cash flows, other than related disclosures to the extent applicable.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
2. Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted average shares of common stock outstanding for the period and excludes any dilutive effects of stock options and warrants. 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 and warrants using the treasury stock method. There was no dilutive effect for the three months ended January 31, 2014 and 2013.
3. Accounts Receivable, Allowance for Doubtful Accounts and Revenue Recognition
Accounts Receivable
: Accounts receivable are stated at the amount billed to customers. Accounts receivable are ordinarily due 30 days from the invoice date. 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 and performs a comprehensive assessment periodically utilizing a variety of historical information and specific account review. The allowance for doubtful accounts is assessed 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.
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 for the former newspaper segment (reflected as discontinued operations). Circulation revenues are recognized when purchased newspapers are distributed (reflected as discontinued operations). Revenue generally is recognized net of any taxes collected from customers and subsequently remitted to government authorities.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
4. Inventories
Inventories are principally stated at the lower of first-in, first-out cost or market. Manufactured finished goods and work in process inventories include material, direct labor and overhead based on standard costs, which approximate actual costs. The Company utilizes an estimated gross profit method for determining cost of sales in interim periods at certain divisions.
Inventories consisted of the following:
|
|
|
January 31,
2014
|
|
|
October 31,
2013
|
|
|
Printing:
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
1,330,826
|
|
|
$
|
1,375,675
|
|
|
Work in process
|
|
|
719,187
|
|
|
|
756,861
|
|
|
Finished goods
|
|
|
1,247,800
|
|
|
|
1,218,233
|
|
|
Office products and office furniture
|
|
|
1,403,098
|
|
|
|
1,533,810
|
|
|
|
|
$
|
4,700,911
|
|
|
$
|
4,884,579
|
|
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt
Long-term debt consisted of the following:
|
|
|
January 31,
|
|
|
October 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Term Note A dated October 7, 2013, due in monthly installments of $50,000 plus interest payments equal to
the
prime rate of interest plus 2% maturing April 1, 2015, collateralized by substantially all of the assets of
the
Company.
|
|
$
|
10,300,000
|
|
|
$
|
10,450,000
|
|
|
Installment notes payable to banks and Lessor, due in monthly installments plus interest at rates approximating
the bank’s prime rate or the prime rate subject to various floors maturing in various periods ranging from
December 2013-January 2016, collateralized
by equipment and vehicles.
|
|
|
453,198
|
|
|
|
440,281
|
|
|
Notes payable to shareholders. The shareholder note of $2.5 million plus all accrued interest was initially due
in
one balloon payment in September 2014 pursuant to Term Note A maturity adjusted to April 2015.
Interest is
equal to the prime rate.
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
C
apital lease obligation for printing equipment at an imputed interest rate of 6.02% per annum
|
|
|
53,003
|
|
|
|
56,380
|
|
|
Unamortized debt discount
|
|
|
(391,832
|
)
|
|
|
(477,387
|
)
|
|
|
|
|
12,914,369
|
|
|
|
12,969,274
|
|
|
Less current portion long-term debt
|
|
|
915,097
|
|
|
|
902,565
|
|
|
Less current portion obligation under capital lease
|
|
|
14,025
|
|
|
|
13,817
|
|
|
Long-term debt, net of current portion and capital lease obligation
|
|
$
|
11,985,247
|
|
|
$
|
12,052,892
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
9,376,658
|
|
|
$
|
9,494,727
|
|
|
Long-term capital lease obligation
|
|
|
38,978
|
|
|
|
42,563
|
|
|
Current portion of long-term debt
|
|
|
915,097
|
|
|
|
902,565
|
|
|
Long-term notes payable to related party
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
Current portion of capital lease obligation
|
|
|
14,025
|
|
|
|
13,817
|
|
|
Debt discount
|
|
|
(391,832
|
)
|
|
|
(477,387
|
)
|
|
Total debt from continuing operations
|
|
|
12,452,926
|
|
|
|
12,476,285
|
|
|
Liabilities held for sale/discontinued operations - debt (see Note 11)
|
|
|
461,443
|
|
|
|
492,989
|
|
|
Total indebtedness
|
|
$
|
12,914,369
|
|
|
$
|
12,969,274
|
|
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company has determined in accordance with applicable provisions of GAAP that indebtedness that is required to be repaid as a result of a disposal transaction should be allocated to discontinued operations. The specific allocation of sale proceeds would typically be allocated at the discretion of the Administrative Agent for the Company's Previous Secured Lenders between the revolving credit facility and term debt. The proceeds from assets held for sale are required to be remitted to the Administrative Agent for the extinguishment of debt. Therefore, the debt allocated to liabilities held for sale/discontinued operations reflects actual or estimated debt pay downs based on either proceeds received or the carrying amount of the related assets held for sale, net of associated liabilities held for sale prior to debt allocated to liabilities held for sale/discontinued operations. The Company utilized estimated, or if available, actual debt payments required to be made associated with the held for sale/discontinued operations classification. The prior period amounts were equivalent to the allocations or payments in the applicable period.
Maturities of long-term debt and capital lease obligations from continuing and discontinued operations for each of the next five years beginning February 1, 2014:
|
2014
|
|
$
|
929,122
|
|
|
2015
|
|
|
11,961,159
|
|
|
2016
|
|
|
15,809
|
|
|
2017
|
|
|
8,279
|
|
|
2018
|
|
|
-
|
|
|
|
|
$
|
12,914,369
|
|
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Debt 2014:
The Company is currently operating under the provisions of the Third Amended and Restated Credit Agreement (the “October 2013 Credit Agreement”) as further discussed herein.
Debt 2013:
Effective October 7, 2013 the Company began operating under a October 2013 Credit Agreement as further discussed herein. The following is a sequential summary of the various debt actions in 2013:
The Company operated under the provisions of the Restated Credit Agreement until the event of default notice received on March 25, 2013. Since that date the Company operated under an event of default pursuant to two default notifications defined herein.
The Company received a notice of default on March 25, 2013 in a letter dated March 22, 2013, which was reported pursuant to item 2.04 of Form 8-K filed March 26, 2013. This notice of default advised that the Administrative Agent had not waived any event of default and the Lender Parties expressly reserve all rights and remedies available to them under the Restated Credit Agreement.
The Company received a notice of default on April 30, 2013 in a letter dated April 25, 2013, which was reported pursuant to item 2.04 of Form 8-K filed May 3, 2013. This notice of default advised that the Administrative Agent had not waived any event of default and the Lender Parties expressly reserved all rights and remedies available to them under the Restated Credit Agreement.
The Notices of Default and Reservation of Rights specifically advised that Events of Default had occurred and continued to exist for the Company under Section 7.1(b) of the Credit Agreement by reason of: (a) Borrower's noncompliance with the minimum EBITDA covenant, set forth in Section 6.20(d) of the Credit Agreement, for the Test Periods ended February 28 and March 31, 2013 and for the Notices of Default filed May 3, 2013 (b) the Company's failure to perform the covenant set forth in Section 6.31(d) of the Credit Agreement (failure to complete, no later than March 31, 2013, the Designated Transaction).
On May 31, 2013, the Administrative Agent, the Lenders, all of its subsidiaries and Marshall T. Reynolds entered into the May 2013 Forbearance Agreement which provided, among other things, that during a forbearance period commencing on May 31, 2013, and ending on September 30, 2013 (unless terminated sooner by default of the Company under the May 2013 Forbearance Agreement), the Lenders were 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 Restated Credit Agreement. The Company acknowledged in the May 2013 Forbearance Agreement that as a result of the existing defaults, the Lenders were 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 May 2013 Forbearance Agreement provided that during the forbearance period, so long as the Company met the conditions of the May 2013 Forbearance Agreement, it could continue to request credit under the revolving credit line.
The May 2013 Forbearance Agreement required the Company to:
|
(a)
|
|
Enter into various Designated Transactions referred to as Designated Transaction No. 1 and Designated Transaction No. 2 pursuant to applicable approvals from secured lenders regarding pricing or other actions, including letters of intent no later than June 14, 2013 setting forth the terms and conditions for Designated Transaction No. 1 that shall be satisfactory to the Required Lenders. The Company was also required to use its reasonable best efforts to enter into a letter of intent, no later than June 7, 2013, for Designated Transaction No. 2. There were also various targeted dates upon acceptance of applicable letters of intent for Designated Transactions which would result in various actions to be achieved by the applicable milestone dates or if not achieved might be considered an event of default.
|
|
(b)
|
|
Acknowledge in a writing, satisfactory to the Required Lenders, that approval of the Company’s shareholders shall not be required for Designated Transaction No. 1, whether considered separately or together with Designated Transaction No. 2.
|
|
(c)
|
|
The Company was subject to a minimum EBITDA covenant commencing with the month ended June 30, 2013 based on a buildup starting April 1, 2013 of $1,378,394 at June 30, 2013, $2,198,509 at July 31, 2013 and $2,506,722 at August 31, 2013
|
|
(d)
|
|
Continued retention of Timothy D. Boates, RAS Management Advisors, LLC as its Chief Restructuring Officer who shall continue to be subject to the sole authority, direction and control of the Company’s Board of Directors and to report directly to the Board.
|
|
(e)
|
|
Expenditure limitations as defined in CRO report and under direct control of the CRO.
|
|
(f)
|
|
The requirement of a general reserve of $1,000,000 in the definition of “Borrowing Base” in the Restated Credit Agreement shall be waived for the duration of the Forbearance Period.
|
|
(g)
|
|
Removal of requirement to maintain $750,000 concentration account minimum balances.
|
|
(h)
|
|
Temporary Overadvance on the borrowing base in an amount not to exceed $1,200,000 subject to the aggregate revolving credit commitment limit of $10,000,000. Overadvance shall be repaid upon receipt of project receivables and such repayment shall be a permanent reduction in the Temporary Overadvance. Such Overadvance shall be repaid in full upon the earliest Designated Transaction No.1 or Designated Transaction No.2 or September 30, 2013.
|
|
(i)
|
|
Excess availability of $500,000.
|
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
On August 28, 2013, the Administrative Agent, the Lenders, all of its subsidiaries and Marshall T. Reynolds entered into a First Limited Forbearance and Waiver Agreement and Second Amendment to Amended and Restated Credit Agreement (“August 2013 Forbearance Amendment”). This Agreement decreased the Revolving Credit Commitments from $10,000,000 in the aggregate to $8,000,000 in the aggregate, modified certain financial covenants and provided the consent to the sale of certain assets.
The Company, various Company subsidiaries, as Guarantors, Marshall T. Reynolds, as shareholder and Big 4 Investments, LLC (“Administrative Agent and Lender”) as Lender and Administrative Agent entered into a Third Amended and Restated Credit Agreement dated October 7, 2013. Administrative Agent and Lender purchased the Company’s outstanding syndicated debt from Fifth Third Bank and the other Lenders (“Previous Secured Lenders”) for a price of $10.0 million. The Administrative Agent and Lender then simultaneously entered into the October 2013 Credit Agreement with the Company pursuant to the provisions of Term Note A for $10.0 million and related Guaranty Agreement and Stock Pledge and Security Agreement all dated October 7, 2013. The indebtedness immediately prior to the note sale reflected a balance pursuant to the Loan Purchase Agreement between Administrative Agent and Lender and the Previous Secured Lenders of approximately $19.9 million representing Term Loan A, Term Loan B and Revolving Loans plus accrued deferred fee and accrued interest of approximately $1.2 million.
The October 2013 Credit Agreement and related Term Note A, Guaranty Agreement and Stock Pledge and Security Agreement as further described herein amended various provisions of the Restated Credit Agreement dated October 19, 2012, including but not limited to:
|
●
|
|
October 2013 Credit Agreement maturity of April 1, 2015.
|
|
●
|
|
Existing debt restructured from Term Loan A, Term Loan B, and Revolving Credit Facility to Term Note A in the amount of $10,000,000.
|
|
●
|
|
The Company's debt will not have a revolving credit facility component.
|
|
●
|
|
Interest rate at the Wall Street Journal prime rate of interest plus two percent.
|
|
●
|
|
Principal payments due monthly at $50,000 per month.
|
|
●
|
|
$500,000 maturity or prepayment premium.
|
|
●
|
|
Financial covenant of maximum capital expenditures of $3,000,000 during any fiscal year.
|
|
●
|
|
Personal guaranty of Marshall T. Reynolds.
|
|
●
|
|
Stock Pledge and Security Agreement providing a third party credit enhancement to support the credit facility underwritten by the Administrative Agent.
|
|
●
|
|
In consideration for the personal Guaranty Agreement of Marshall T. Reynolds and Stock Pledge and Security Agreement, the warrants held by the Previous Secured Lenders were assigned to Marshall T. Reynolds. The warrants represent $0.001 per share warrants issued for up to 30% (on a post-exercise basis) of the outstanding common stock of the Company in the form of non-voting Class B common stock and associated Investor Rights Agreement.
|
The Company reviewed applicable GAAP and determined that extinguishment accounting should be applied in relation to the October 2013 Credit Agreement.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Other debt provisions:
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, 60-day and 90-day rates plus the applicable margin (effective with the Second Amendment, the primary interest rate was LIBOR 30-day and 60-day rates plus the applicable margin) (after the Restated Credit Agreement effective date, the primary interest rate was LIBOR plus the applicable margin). Concurrent with the October 2013 Credit Agreement the prime rate plus the applicable margin is the primary interest rate on the Company's indebtedness. Prime rate approximated 3.25% at January 31, 2014 and 2013 while the LIBOR rate approximated 0.25% at January 31, 2013. The Company had accrued interest of approximately $161,000 and $142,000 at January 31, 2014 and October 31, 2013 recorded as accrued expenses on the balance sheet. Deferred financing costs and debt discount are amortized under the interest method over the life of the related credit facilities and are reported as part of interest expense. In 2014 and 2013, $125,000 and $614,000 of debt discount and/or deferred financing costs were included as interest expense. In addition, certain period costs associated with these credit facilities are recorded as a component of interest including administrative agent fees and costs. The Company amortized under the interest method the debt discount associated with the issuance of warrants as well as lender fees and other costs associated with the Restated Credit Agreement and is amortizing under the interest method the costs and maturity prepayment premium associated with the October 2013 Credit Agreement. Interest paid from total operations during the three months ended January 31, 2014 and 2013 approximated $138,000 and $666,000.
Champion Industries, Inc. and Subsidiaries
The nature of The Company’s business results in a certain amount of claims, litigation, investigations, and other legal and administrative cases and proceedings, all of which are considered incidental to the normal conduct of business. When the Company determines it has meritorious defenses to the claims asserted, it vigorously defends itself. The Company will consider settlement of cases when, in Management’s judgment, it is in the best interests of both the Company and its shareholders to do so.
The Company periodically assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. The Company would accrue a loss on legal contingencies in the event the loss is deemed probable and reasonably estimable. The accrual is adjusted as appropriate to reflect any relevant developments regarding the legal contingency. In the event of a legal contingency where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established.
In certain cases, exposure to loss may exist in excess of the accrual to the extent such loss is reasonably possible, but not probable. Management believes an estimate of the aggregate of reasonably possible losses, in excess of amounts accrued, for current legal proceedings not covered by insurance is not greater than $0.4 million at January 31, 2014 and may be substantially lower than this amount. Any estimate involves significant judgment, given the varying stages of the proceedings (including cases in preliminary stages), as well as numerous unresolved issues that may impact the outcome of a proceeding. Accordingly, Management’s estimate will change from time-to-time, and actual losses may be
more or less than the current estimate. The current loss estimate excludes legal and professional fees associated with defending such proceedings. These fees are expensed as incurred and may be material to the Company's Consolidated Financial Statements in a particular period.
While the final outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel, and available insurance coverage, Management believes that there is no accrual for legal contingencies required at this time. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be greater than the current range of estimates discussed above and may be material to the Company’s Consolidated Financial Statements in a particular period.
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
In accordance with the provisions of the Restated Credit Agreement, the Company issued $0.001 per share warrants issued for up to 30% (on a post-exercise basis) of the outstanding common stock of the Company in the form of non-voting Class B common stock and associated Investor Rights Agreement for the benefit of the Previous Secured Lenders under the Restated Credit Agreement. The warrants expire after October 19, 2017.
The Warrants entitle the Holders thereof to purchase that number of shares of Company Class B Common Stock equal to thirty percent (30%) of the then issued and outstanding Common Stock of the Company, on a fully diluted, post-exercise basis. Based on the 11,299,528 shares of Company Common Stock currently issued and outstanding, exercise in full of the Warrants would result in the Company’s issuance of an additional 4,842,654 shares to the Warrant Holders. In the event a greater number of issued and outstanding common shares exist at the time of option exercise, a greater number of options of shares of Class B Common Stock would be issuable. The Previous Secured Lenders assigned the warrants to Marshall T. Reynolds in consideration for his personal guaranty and stock pledge and security agreement to assist in facilitating the consummation of the October 2013 Credit Agreement. The Previous Secured Lenders, as Warrant Holders, were subject to the ownership limitations of the Bank Holding Company Act of 1956, as amended and regulations promulgated thereunder (the "Bank Holding Company Act") which placed limitations on their ability to control other companies. The Previous Secured Lenders/Warrant Holders requested, and the Company agreed to create a non-voting class of Common Stock, to be designated as "Class B Common Stock". The Warrants constitute the right to purchase Class B Common Stock. The warrants are exercisable solely for shares of Class B Common Stock. However, because any Class B Common Stock issuable pursuant to the Warrants may be sold by the Warrant Holders to entities not subject to the Bank Holding Company Act, or because one or more Warrant Holders may be permitted to own a limited number of voting shares of Company Class A Common Stock, the articles of amendment provide that those shares of Class B Common Stock are convertible into shares of Class A Common Stock, and vice versa, without charge. Marshall T. Reynolds, as the current Warrant Holder is entitled to convert Class B Common Shares into shares of Class A Common Stock.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, information derived from the Consolidated Statements of Operations as a percentage of total revenues.
|
|
|
Three Months Ended January 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
$
|
9,358,608
|
|
|
60.7
|
%
|
$
|
|
|
|
|
%
|
|
Office products and office furniture
|
|
|
6,064,090
|
|
|
39.3
|
|
|
7,209,019
|
|
|
39.4
|
|
|
Total revenues
|
|
|
15,422,698
|
|
|
100.0
|
|
|
|
|
|
100.0
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
|
7,226,610
|
|
|
46.8
|
|
|
|
|
|
45.0
|
|
|
Office products and office furniture
|
|
|
4,435,766
|
|
|
28.8
|
|
|
|
|
|
27.0
|
|
|
Total cost of sales
|
|
|
11,662,376
|
|
|
75.6
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,760,322
|
|
|
24.4
|
|
|
|
|
|
28.0
|
|
|
Selling, general and administrative expenses
|
|
|
4,120,474
|
|
|
26.7
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
0.0
|
|
|
2,226,837
|
|
|
12.2
|
|
|
(Loss) from operations
|
|
|
(360,152
|
)
|
|
(2.3
|
)
|
|
|
)
|
|
|
)
|
|
Interest expense - related party
|
|
|
(20,764
|
)
|
|
(0.1
|
)
|
|
(20,764
|
)
|
|
(0.1
|
)
|
|
Interest expense
|
|
|
(263,761
|
)
|
|
(1.8
|
)
|
|
(1,315,066
|
)
|
|
(7.2
|
)
|
|
Other income
|
|
|
14,494
|
|
|
0.1
|
|
|
|
|
|
0.1
|
|
|
(Loss)
before taxes
|
|
|
(630,183
|
)
|
|
(4.1
|
)
|
|
(3,569,378
|
)
|
|
(19.5
|
)
|
|
Income tax benefit
|
|
|
-
|
|
|
0.0
|
|
|
|
|
|
0.1
|
|
|
Net (loss) continuing operations
|
|
|
(630,183
|
)
|
|
(4.1
|
)%
|
|
(3,545,855
|
)
|
|
(19.4
|
)%
|
|
Discontinued operations
|
|
|
-
|
|
|
|
|
|
3,978
|
|
|
|
|
|
Net (loss)
|
|
$
|
(630,183
|
)
|
|
|
|
$
|
(3,541,877
|
)
|
|
|
|
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Three Months Ended January 31, 2014 Compared to Three Months Ended January 31, 2013 (Continuing Operations)
Revenues
Total revenues decreased 15.8% in the first quarter of 2014 compared to the same period in 2013, to $15.4 million from $18.3 million. Printing revenue decreased $1.7 million or 15.7% when compared to the first quarter of 2013.
The printing revenue reduction was reflective of revenue decreases within most of the Company's operating divisions driven primarily by certain
customer specific turnover, sales and other personnel turnover prompted in part by various restructuring actions required by the Previous Secured Lenders and general market conditions
.
Office products and office furniture revenue decreased 15.9% in the first quarter of 2014 to $6.1 million from $7.2 mi
llion in the first quarter of 2013. Office products and office furniture sales decreased in the first quarter of 2014 when compared to the first quarter of 2013, due to lower office furniture sales and a reduction in office products related sales.
The reasons for reductions mirrored, in part, the reasons for the sales reductions in the printing segment.
The Company was notified by the State of West Virginia on May 31, 2013 that it was cancelling the Company's state contract for office furniture, panel systems, chairs, etc. effective July 1, 2013. This was due, the Company believes, as part of an overall review of all secondary bid contracts within the state and was not a specific action against the Company and was related to numerous product categories and services. West Virginia is currently in the process of studying purchasing regulations and may have future modifications in future periods. The secondary bid process has historically allowed state agencies to buy products and services quickly, bypassing formal and comprehensive competitive bid purchasing protocols. This change does not preclude the Company from selling office furniture to state agencies and the Company has continued to pursue and be awarded state business subsequent to this change.
Cost of Sales
Total cost of sales decreased 11.5% in the first quarter of 2014, to $11.7 million from $13.2 million in the first quarter of 2013. Printing cost of sales in the first quarter of 2014 decreased over the prior year but increased as a percentage of printing sales from 74.2% in 2013 to 77.2% in 2014. The printing gross margin dollars decreased when compared to the comparable period in the prior year due to lower sales coupled with gross margin percent compression. Office products and office furniture cost of sales decreased in 2014 from 2013 levels due to lower sales partially offset by higher cost of goods sold as a percentage of office products and office furniture sales of 68.6% in 2013 to 73.1% in 2014, thus representing gross margin percent compression in the office products and office furniture segment.
Operating Expenses
In the first quarter of 2013, selling, general and administrative (SG&A) expenses decreased on a gross dollar basis to $4.1 million from $5.1 million in 2013, a decrease of $1.0 million or 19.9%. As a percentage of total sales, the SG&A decreased on a quarter to quarter basis in 2014 to 26.7% from 28.1% in 2013.
The decrease in SG&A in total was reflective of reduced professional fees in 2014 and lower personnel and related expenses associated in part with various restructuring initiatives implemented by the Company.
During the first quarter of 2013, as part of a process of addressing the Company’s debt status with its Previous Secured Lenders as well as first quarter 2013 performance to budget, the Company performed a comprehensive reassessment of its initial fiscal year 2013 budget. The Company as part of this process identified at least one customer in the printing segment from which it anticipated a substantial revenue decline in the second quarter of 2013 and beyond and associated profitability declines in 2013 and beyond. As a result of this process, it was determined that an impairment test between annual impairment tests was warranted for the printing segment as a result of the potential near term challenges facing the Company, anticipated customer specific revenue decreases and softness in the Company’s core West Virginia market. The Company performed Step 1 of the Goodwill impairment test for the printing segment with the assistance of a third party valuation specialist using the income approach and the testing indicated a value less than the carrying value of the segment at January 31, 2013.
As a result of the Step 1 test, the Company determined it was required to proceed to Step 2 of goodwill impairment testing for the printing segment in the first quarter of 2013. The Step 2 test results were completed in the second quarter of 2013 with the assistance of a third party valuation specialist and supported the conclusion to record an impairment charge in the first quarter of 2013 of $2.2 million. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited once the measurement of that loss is recognized, in accordance with applicable standards.
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Segment Operating (Loss) Income
The printing segment reported an operating loss in the first quarter of 2014 of $(0.3) million compared to an operating loss of $(2.5) million in the first quarter of 2013. The decrease in operating loss was primarily attributable to pre-tax goodwill impairment charges of $2.2 million in 2013. The decrease in operating loss was partially offset by gross profit percent compacting and reduced gross profit contribution due to lower sales and margin compression partially offset by lower SG&A expenses which were primarily reflective of lower personnel and related expenses associated in part with various restructuring initiatives implemented by the Company and reduced professional fees in 2014.
The office products and office furniture segment reported an operating loss of $(0.1) million in the first quarter of 2014 compared to income of $0.2 million in the first quarter of 2013. This represented a decrease in profitability of approximately $0.3 million. This decrease is primarily the result of lower gross profit contribution on reduced sales and gross profit compaction partially offset by lower selling, general and administrative expenses in the first quarter of 2014, when compared to the comparable period of the prior year.
(Loss) income from Operations
The loss from operations in the first quarter of 2014 was $(0.4) million compared to a loss from operations of $(2.2) million in the first quarter of 2013. This change is primarily the result of a $2.2 million goodwill impairment charge in the printing segment in 2013.
Other Income (expense)
Other (expense), net decreased approximately $1.1 million, primarily due to lower interest expense in the first quarter of 2014 due to lower interest rates and lower average borrowings and lower amortization expenses associated with debt discount in 2014 compared to 2013.
Income Taxes
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers a multitude of factors in assessing the utilization of its deferred tax assets including the reversal of deferred tax liabilities, projected future taxable income and other assessments, which may have an impact on financial results. The Company had determined that a full valuation allowance was warranted at October 31, 2013. The Company reassessed it's previous determination regarding its valuation allowance and determined that a full valuation allowance was warranted at January 31, 2014. The amount of deferred tax asset considered realizable could be adjusted in future periods based on a multitude of factors, including but not limited to a reassessment of our credit position, and such adjustments may be material to the Consolidated Financial Statements.
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Company’s effective tax rate for continuing operations for 2014 was 0.0% compared to an effective tax benefit of 0.7% for 2013. The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate and may be impacted by increases or decreases in the valuation allowance for deferred tax assets. The Company recorded a tax benefit from continuing operations in 2013 resulting from the application of certain provisions of ASC 740 regarding interim implications of intra-period tax allocations for discontinued operations when there is a loss from continuing operations to maintain financial statement neutrality and to recognize the tax components between continuing operations and discontinued operations on a discrete basis. There is no incremental income tax for continuing operations or discontinued operations in 2014 due to losses in continuing operations and no results for discontinued operations in 2014 and the Company's total current year expected income tax provision of zero.
Net (loss)
Net (loss) for the first quarter of 2014 was $(0.6) million compared to a net loss of $(3.5) million in the first quarter of 2013. Basic and diluted (loss) per share for the three months ended January 31, 2014 and 2013 were a loss of $(0.06) and of $(0.31).
Discontinued Operations
The Company reported net income from discontinued operations of $0 and $4,000 for the three months ended January 31, 2014 and 2013. The 2013 results were impacted by various restructuring charges of approximately $144,000 associated with the sale of substantially all of the property, plant and equipment of Donihe Graphics Inc. and the associated costs to cease production at this facility including the liquidation of certain inventory. The divisions classified as discontinued operations were sold in 2013 and thus there were no operating results to report in 2014.
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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.
Our operating results depend on the relative strength of the economy on both a regional and national basis. Recessionary conditions applicable to the economy as a whole and specifically to our core business segments have had a significant adverse impact on the Company's business. A continuing or a deepening of the recessionary conditions we are experiencing could significantly affect our revenue categories and associated profitability.
Seasonality
Historically, the Company has experienced a greater portion of its profitability in the second and fourth quarters than in the first and third quarters. The second quarter generally reflects increased orders for printing of corporate annual reports and proxy statements. A post-Labor Day increase in demand for printing services and office products coincides with the Company’s fourth quarter. The global economic crisis as well as other macro-economic factors and customer demand has impacted this general trend in recent years. In addition, recent restructuring initiatives, asset disposals and other actions may have an impact on historical trends due to product mix and operational charges. The Company is unable to predict if this trend has fundamentally shifted until such time a more stable economic climate is present and the Company's continuing operations are assessed in light of its restructuring initiatives.
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Liquidity and Capital Resources
Statement of Cash Flows (Continuing Operations)
Net cash (used in) operations for the three months ended January 31, 2014, was $(1.0) million compared to net cash provided by operations of $2.9 million during the same period in 2013. This change in net cash from operations is due primarily to changes in assets and liabilities.
Net cash (used in) provided by investing activities for the three months ended January 31, 2014 was $(0.1) million compared to $0.8 million during the same period in 2013. The net cash used in investing activities during the first three months of 2014 primarily related to the purchase of equipment and vehicles. The net cash provided by investing activities in the first three months of 2013 was primarily related to the sale of equipment at the Company's Merten division.
Net cash (used in) financing activities for the three months ended January 31, 2014 was $(0.1) million compared to $(1.8)
million during the same period in 2013. In 2014, the net cash used in financing activities primarily related to scheduled payments of long term debt. In 2013, the net cash used in financing activities primarily related to payments made on Bullet Loan A resulting from certain assets sales as well as scheduled payments of debt.
Statement of Cash Flows (Discontinued Operations)
The Company has reported cash flows from discontinued operations as discrete single items of operating, investing and financing activities.
Net cash provided by operating activities of discontinued operations were $32,000 and $135,000 in 2014 and 2013.
Net cash provided by investing activities of discontinued operations were $0 and $0.4 million in 2014 and 2013. In 2013, the Company sold certain assets at its Donihe division for approximately $0.4 million which were used to pay debt.
Net cash (used in) financing activities of discontinued operations was $0 and $(0.4) million for 2014 and 2013. The net cash used in financing activities represented debt payments from the sale of various assets of Donihe.
Liquidity and Capital Resources
The Company incurred substantial indebtedness as a result of the acquisition of The Herald-Dispatch in September of 2007. The country entered a recession in December of 2007 and the residual effects of the recession have continued within the former newspaper and the printing segments of the Company. The debt was structured as a cash flow credit, which typically indicates that the primary repayment source for debt will be income from operations in lieu of a collateral based loan. The Company had continued to service its debt and has made every scheduled payment of principal and interest, including during various periods, default interest. In addition, the Company had paid substantial sums for fees to the secured lenders as well as to various advisors pursuant to applicable credit and credit related agreements. The Company had paid approximately $65.6 million in principal through September 30, 2013 to the Previous Secured Lenders. Thus, the Company had demonstrated the ability to generate cash flow and has continued to service its debt commitments under the most difficult conditions in recent history.
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
In the fourth quarter of 2013 the Previous Secured Lenders sold the outstanding credit commitments representing substantially all of the Company's debt to Big 4 Investments, LLC ("Big 4") a private company. As a result of this sale the Company simultaneously entered into a new credit facility with Big 4 under the terms of the October 2013 Credit Agreement.
Prior to the October 2013 Credit Agreement the Company operated under the provisions of the May 2013 Forbearance Agreement effective May 31, 2013 which expired September 30, 2013 as amended August 28, 2013. The May 2013 Forbearance Agreement required the Company to achieve a multitude of targeted goals and covenants to remain in compliance. Many of these requirements were beyond the control of the Company although at the date of the agreement, the Company determined there was at least a reasonable possibility of achieving compliance through the September 30, 2013 contractual maturity date. The Company was also required, under the terms of the May 2013 Forbearance Agreement, to comply with financial covenants, which are non-GAAP financial measures. Prior to the October 2013 Credit Agreement and primarily as a result of the credit situation with the Previous Secured Lenders there was significant uncertainty about our ability to operate as a going concern. In recent years, the Company operated for extended periods both in default and under forbearance agreements as it navigated its way through the continued challenges and residual effects of the global economic crisis. The Company believes that there has been a fundamental shift in the way in which financial institutions, in general, evaluate cash flow credits and that the amount of leverage in which the financial institutions are willing to lend has decreased generally over the last several years. In addition, two of the Company’s operating segments, specifically the printing segment and newspaper segment (now classified as a discontinued operation), have declined both internally and on a macro basis both during the recession and post-recession. Therefore, even though the Company has reduced its borrowings in accordance with contractually scheduled amortizations, the Previous Secured Lenders had expressed a desire to have lower leverage associated with various earnings measures related to funded indebtedness. The end result of these actions was the Company was impacted operationally and financially by the numerous actions required in part as a result of the numerous Credit and Forbearance Agreements with the Previous Secured Lenders. These actions strained resources operationally and financially including trade vendor challenges. Therefore, three primary dynamics have faced the Company: lower earnings, two operating segments that have faced secular hurdles and what the Company believes to be a changed credit culture regarding cash flow type loans and the residual impact of the Previous Secured Lender credit requirements on our current operations.
The Company's October 2013 Credit Agreement expires April 1, 2015. The Company intends to primarily focus its efforts operationally after an extended period of challenges with the Previous Secured Lenders. The Company also intends to identify options regarding a longer term financing solution for its existing debt and evaluating liquidity options that may be available.
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
As a result of the Company’s current credit situation and the challenges within the economic climate faced by the Company, the Company faces substantial liquidity related challenges for fiscal 2014 and beyond. The liquidity factors we face include:
· Implementation of an operating plan to rationalize and improve our cost and operating structure.
· Management of our receipts and disbursements to improve days sales outstanding for trade receivables and manage our days outstanding for trade payables as well as maintain our trade credit availability.
· Managing our credit relationships.
· Carefully monitor capital expenditures to assure cash flow is maximized.
· Manage our customer relationships in light of the ongoing credit challenges faced by the Company
· The potential for our interest costs and other credit related expenses to exceed our ability to generate sufficient cash to meet other obligations including scheduled principal amortization payments to secured lenders.
· The scheduled maturity of the Company’s Credit Facilities on April 1, 2015.
· Operating the Company on a working capital basis without a revolving line of credit.
As of January 31, 2014, the Company had a $0.2 million book cash balance, compared with October 31, 2013 when the Company had a $1.4 million book cash balance. The working capital as of October 31, 2013 was $5.7 million, and working capital of $5.5 million at January 31, 2014.
The Company had historically used cash generated from operating activities and debt to finance capital expenditures. Management plans to continue making required investments in equipment based on available liquidity. For the foreseeable future, including through Fiscal 2014, the Company's ability to fund operations, meet debt service requirements and make planned capital expenditures is contingent on the Company's ability to manage its working capital and to maintain sufficient trade credit availability. The Company does not currently believe it will generate sufficient cash flow from operations to meet both scheduled principal and interest payments and pay off the entire credit facility which matures April 1, 2015 and anticipates the need to refinance the October 2013 Credit Agreement prior to maturity.
The Company prior to the October 2013 Credit Agreement had available a line of credit which was subject to various Credit and Forbearance Agreement provisions as well as borrowing base limitations and reserves and minimum excess availability thresholds pursuant to applicable agreements.
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Company, various Company subsidiaries, as Guarantors, Marshall T. Reynolds, as shareholder and Big 4 Investments, LLC (“Administrative Agent and Lender”) as Lender and Administrative Agent entered into a Third Amended and Restated Credit Agreement dated October 7, 2013. Administrative Agent and Lender purchased the Company’s outstanding syndicated debt from Fifth Third Bank and the other Lenders (“Previous Secured Lenders”) for a price of $10.0 million. The Administrative Agent and Lender then simultaneously entered into the October 2013 Credit Agreement with the Company pursuant to the provisions of Term Note A for $10.0 million and related Guaranty Agreement and Stock Pledge and Security Agreement all dated October 7, 2013. The indebtedness immediately prior to the note sale reflected a balance pursuant to the Loan Purchase Agreement between Administrative Agent and Lender and the Previous Secured Lenders of approximately $19.9 million representing Term Loan A, Term Loan B and Revolving Loans plus accrued deferred fee and accrued interest of approximately $1.2 million.
The October 2013 Credit Agreement and related Term Note A, Guaranty Agreement and Stock Pledge and Security Agreement as further described herein amended various provisions of the Restated Credit Agreement dated October 19, 2012, including but not limited to:
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October 2013 Credit Agreement maturity of April 1, 2015.
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Existing debt restructured from Term Loan A, Term Loan B, and Revolving Credit Facility to Term Note A in the amount of $10,000,000.
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●
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The Company's debt will not have a revolving credit facility component.
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Interest rate at the Wall Street Journal prime rate of interest plus two percent.
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Principal payments due monthly at $50,000 per month.
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$500,000 maturity or prepayment premium.
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Financial covenant of maximum capital expenditures of $3,000,000 during any fiscal year.
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Personal guaranty of Marshall T. Reynolds.
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Stock Pledge and Security Agreement providing a third party credit enhancement to support the credit facility underwritten by the Administrative Agent.
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●
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In consideration for the personal Guaranty Agreement of Marshall T. Reynolds and Stock Pledge and Security Agreement, the warrants held by the Previous Secured Lenders were assigned to Marshall T. Reynolds. The warrants represent $0.001 per share warrants issued for up to 30% (on a post-exercise basis) of the outstanding common stock of the Company in the form of non-voting Class B common stock and associated Investor Rights Agreement.
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The Company reviewed applicable GAAP and determined that extinguishment accounting should be applied in relation to the October 2013 Credit Agreement.
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Environmental Regulation
The Company is subject to the environmental laws and regulations of the United States, and the states in which it operates, concerning emissions into the air, discharges into the waterways and the generation, handling and disposal of waste materials. The Company’s past expenditures relating to environmental compliance have not had a material effect on the Company. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they may have upon the capital expenditures, earnings, and competitive position of the Company in the future. Based upon information currently available, management believes that expenditures relating to environmental compliance will not have a material impact on the financial position of the Company.
Special Note Regarding Forward-Looking Statements
Certain statements contained in this Form 10-Q, including without limitation statements including the word “believes,” “anticipates,” “intends,” “expects” or words of similar import, constitute “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, changes in business strategy or development plans and other factors referenced in this Form 10-Q, including without limitations under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
