10-Q 1 form10q1.htm FORM 10-Q form10q1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, DC 20549
 
FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended April 30, 2013 
 
OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to_________
 
Commission File No. 000-21084
                                                                                                                       
Champion Industries, Inc.
(Exact name of Registrant as specified in its charter)
 
West Virginia
 
55-0717455
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
2450-90 1st Avenue
P.O. Box 2968
Huntington, WV 25728
(Address of principal executive offices)
(Zip Code)
 
(304) 528-2700
(Registrant’s telephone number,
including area code)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No _____.
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   ü No _____.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer o
 Accelerated filer  o
 Non-accelerated filer o
Smaller reporting company þ
   
 (Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes _____ No  ü .
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
 Class
 
 Outstanding at April 30, 2013
 Common stock, $1.00 par value per share
 
11,299,528 shares

Champion Industries, Inc.
 
 
INDEX
 
 
 
 Page No.
 Part I.   Financial Information
 
  Item 1.  Financial Statements
 
    Consolidated Balance Sheets (Unaudited)
3
    Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
5
    Consolidated Statements of Cash Flows (Unaudited)
6
    Notes to Consolidated Financial Statements
8
  Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
  Item 3.  Quantitative and Qualitative Disclosure About Market Risk
48
  Item 4.  Controls and Procedures
48
 Part II. Other Information
 
    Item 1. Legal Proceedings 49
  Item 1A.  Risk Factors 49
    Item 3. Defaults upon Senior Securities 49
    Item 4. Mine Safety Disclosure  49
    Item 5. Other Information
 49
  Item 6.  Exhibits
49
 Signatures
50
 
 
2

 
PART I - FINANCIAL INFORMATION
 
 
Item 1. Financial Statements
Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
 
ASSETS     
 April 30,
       October 31,  
     
 2013
(Unaudited)
      2012  
Current assets:
               
Cash and cash equivalents   2,545,749     $ 1,844,797  
Accounts receivable, net of allowance of $838,000 and $1,157,000
    11,267,540       11,906,228  
Inventories
    5,727,897       6,187,920  
Other current assets
    817,792       480,043  
Current portion assets held for sale/discontinued operations (see Note 12)     571,391       2,705,280  
Total current assets
    20,930,369       23,124,268  
                 
Property and equipment, at cost:
               
Land
    1,468,505       1,468,505  
Buildings and improvements
    9,647,186       9,599,951  
Machinery and equipment
    44,790,069       47,479,066  
Equipment under capital lease     72,528       72,528  
Furniture and fixtures
    4,007,919       4,071,328  
Vehicles
    2,896,676       2,874,664  
      62,882,883       65,566,042  
Less accumulated depreciation
    (49,670,632 )     (51,157,165
)
      13,212,251       14,408,877  
                 
Goodwill
    1,230,485       3,457,322  
Deferred financing costs
    80,122       324,692  
Other intangibles, net of accumulated amortization
    4,341,661       4,485,294  
Trademark and masthead
    2,091,022       2,091,022  
Other assets
    74,362       75,116  
      7,817,652       10,433,446  
Total assets
  41,960,272    
$
47,966,591  
 
See notes to consolidated financial statements.
 
3

 
Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
   April 30,       October 31,
   
 2013
(Unaudited)
   
 
2012
 
Current liabilities:
             
Notes payable, line of credit (see Note 5)
 $ 8,825,496    
$
8,425,496  
Accounts payable
  6,308,743       3,682,147  
Deferred revenue
  862,610       764,010  
Accrued payroll and commissions
  926,965       1,351,067  
Taxes accrued and withheld
  1,075,502       1,031,297  
Accrued expenses
  1,932,154       2,192,171  
Current portion liabilities held for sale/discontinued operations (see Note 5 and Note 12)
  571,391       2,705,280  
Debt discount (see Note 5)   (323,006 )     (1,287,527 )
Notes payable (see Note 5)
   24,907,720       27,813,064  
Capital lease obligations (see Note 5)   13,410       13,014  
Total current liabilities
  45,100,985       46,690,019  
Long-term debt, net of current portion:
             
    Notes payable - related party (see Note 5)
  2,500,000       2,500,000  
    Notes payable (see Note 5)   52,530       99,291  
    Capital lease obligations (see Note 5)   49,575       52,705  
Other liabilities
  1,050       1,950  
Total liabilities
  47,704,140       49,343,965  
               
Shareholders’ (deficit):
             
Common stock, $1 par value, 20,000,000 Class A voting shares authorized;
11,299,528 shares issued and outstanding
  11,299,528       11,299,528  
Common Stock, Class B nonvoting stock, $1 par value, 5,000,000 shares authorized, -0- shares issued and outstanding   -       -  
Additional paid-in capital
  23,874,377       23,874,377  
Retained deficit
  (40,917,773 )    
(36,551,279
)
Total shareholders’ (deficit)
  (5,743,868 )    
(1,377,374
)
Total liabilities and shareholders’ (deficit)
 $  41,960,272    
$
47,966,591  
 
See notes to consolidated financial statements.
 
4

 
Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
      
   
Three Months Ended
April 30,
Six Months Ended
April 30,
 
                           
     
2013
   
2012
   
2013
   
2012
 
Revenues:
                         
   Printing
 
$
11,721,440  
$
14,753,972
 
$
23,570,479  
$
29,215,975  
   Office products and office furniture
     7,024,572    
9,126,619
    14,233,591     17,317,220  
   Newspaper      3,037,690     3,412,941      6,589,932     7,285,988  
   Total revenues
     21,783,702    
27,293,532
     44,394,002     53,819,183  
                           
Cost of sales & newspaper operating costs:
                         
   Printing
     8,608,498    
10,669,292
     17,459,044    
21,209,844
 
   Office products and office furniture
     4,806,359     6,388,342      9,750,305    
12,130,455
 
   Newspaper cost of sales & operating costs      1,912,102     2,026,018      3,987,860     4,194,051  
   Total cost of sales & newspaper operating costs
     15,326,959     19,083,652      31,197,209    
37,534,350
 
Gross profit
     6,456,743    
8,209,880
    13,196,793    
16,284,833
 
                                       
    Selling, general and administrative expenses
    5,672,139     7,137,402     11,885,292    
14,567,609
 
Goodwill impairments
   
-
   
9,510,933
     2,226,837     9,510,933  
(Loss) income from operations     784,604     (8,438,455 )   (915,336   (7,793,709 )
                           
Other income (expenses):
                         
   Interest expense - related party
    (20,087 )   (16,250
)
 
(40,851
)
 
(22,389
)
   Interest expense
     (1,499,076
)
 
(822,306
)
  (3,033,520
)
  (1,614,702
)
   Other
    11,370     4,629     20,993    
8,760
 
      (1,507,793
)
  (833,927
)
  (3,053,378
)
  (1,628,331
)
                           
(Loss) from continuing operations before income taxes
    (723,189
)
  ( 9,272,382
)
  (3,968,714
)
  (9,422,040
Income tax expense
    -
 
 
(11,769,302
)
  -
 
  (11,702,610
)
Net (loss) from continuing operations
 
 
 (723,189
)
 
(21,041,684
)
 
 (3,968,714
)
 
(21,124,650
Net (loss) income from discontinued operations      (101,427   25,228     (397,780   22,206  
Net (Loss)      (824,616   (21,016,456 )   (4,366,494   (21,102,444 )
Other comprehensive income (loss)      -      -     -     -  
Comprehensive (loss)     (824,616  (21,016,456 )
$
 (4,366,494
$
(21,102,444 )
                           
(Loss) per share
                         
   Basic and diluted (loss) from continuing operations
 
$
(0.06
)
$
(1.86
)
$
(0.35
)
$
(1.87
)
   Basic and diluted (loss) income from discontinued operations      (0.01 )   -     (0.04 )   -  
Total (loss) per common share   $  (0.07 ) $  (1.86 ) $  (0.39 )  (1.87 )
                           
Weighted average shares outstanding:
                         
   Basic
    11,300,000    
11,300,000
    11,300,000    
11,300,000
 
   Diluted
 
 
11,300,000
 
 
11,300,000
 
 
11,300,000
 
 
11,300,000  
 
See notes to consolidated financial statements.
 
5

 
Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
 
    Six Months Ended April 30,
    2013  
2012
 
Cash flows from operating activities:
         
Net (loss)
$ (4,366,494 )
$
(21,102,444 )
Net (loss) from discontinued operations   (397,780 )   22,206  
Net (loss) from continuing operations   (3,968,714 )   (21,124,650 )
             
Adjustments to reconcile net (loss) from continuing
operations to cash provided by operating activities:
           
Depreciation and amortization
  1,588,294     1,880,675  
(Gain) on sale of assets
  (20,253 )   (1,810
)
Allowance for doubtful accounts
  (27,477 )   709,540
     
                Deferred financing costs / debt discount   1,209,091     220,335  
                Accrued deferred fee   533,311     -  
                Deferred income tax   -     11,758,267  
                Goodwill impairment   2,226,837     9,510,933  
                Changes in assets and liabilities:            
Accounts receivable
  666,165     1,204,453  
Inventories
  460,023     (245,688 )
Other current assets
  (337,749 )   (364,157 )
Accounts payable
  2,626,596     301,317  
                        Deferred revenue   98,600     111,517  
Accrued payroll and commissions
  (474,102 )   (60,054
)
Taxes accrued and withheld
  44,205     162,479  
                       Accrued income taxes    -     9,293  
Accrued expenses
  (210,017 )   (139,912
)
Other liabilities
  (900 )   (900
)
Net cash provided by operating activities
continuing operations
  4,413,910     3,931,638  
Net cash provided by operating activities
discontinued operations
  68,408     1,075,638  
    4,482,318     5,007,276  
 
See notes to consolidated financial statements.
 
6

 
Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
 
 
 
    Six Months Ended April 30,
    2013     2012  
Cash flows from investing activities:
           
Purchase of property and equipment
  (298,530 )   (405,819
)
Proceeds from sale of fixed assets
  70,748     131,908  
Proceeds from assets held for sale
  816,667     -  
                Other assets   754     (51,737 )
Net cash provided by (used in) investing activities
continuing operations
  589,639     (325,648 )
Net cash provided by (used in) investing activities
discontinued operations
  408,333     (68,985 )
    997,972     (394,633 )
Cash flows from financing activities:
           
            Borrowings on line of credit
  400,000     3,140,000  
            Payments on line of credit
  -     (2,860,000
)
Proceeds from term debt
  79,087     65,915  
Principal payments on term debt
  (4,850,092 )   (2,985,467
)
            Financing costs paid   -     (122,042 )
            Change in negative book cash    -     (1,153,931 )
Net cash used in financing activities
continuing operations
  (4,371,005 )   (3,915,525 )
Net cash used in financing activities
discontinued operations
  (408,333 )   -  
 
  (4,779,338 )   (3,915,525
)
Net increase in cash and cash equivalents
  700,952     697,118  
Cash and cash equivalents at beginning of period
  1,844,797     -  
Cash and cash equivalents at end of period
$ 2,545,749  
$
697,118
 
 
See notes to consolidated financial statements.
 
 
  
 
7

Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
 
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, 2012, and related notes thereto contained in Champion Industries, Inc.’s Form 10-K filed January 29, 2013. 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, 2012 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 CGC division and Donihe operations were classified as discontinued operations in the consolidated statements of operations for all periods presented.
 
Newly Adopted Accounting Standards
 
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05 “Comprehensive Income: Presentation of comprehensive income.” The amendment to ASC 220 “Comprehensive Income” requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. In December 2011, the FASB issued ASU 2011-12 “Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This amendment to ASC 220 “Comprehensive Income” will defer the adoption of presentation of reclassification items out of accumulated other comprehensive income until November 1, 2012. We adopted the new guidance beginning November 1, 2012, and the adoption of the new guidance did not impact our financial position, results of operations or cash flows, other than the related disclosures.
 
In September 2011, the FASB issued ASU 2011-08 “Intangibles—Goodwill and Other: Testing Goodwill for Impairment” which provides an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test for goodwill impairment. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt even if its annual test date is before the issuance of the final standard, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. We adopted the new guidance, but it will not affect our annual goodwill impairment testing which is performed during the fourth quarter, and the adoption of the new guidance is not expected to impact our financial position, results of operations, comprehensive income or cash flows, other than related disclosures.
 
In July 2012, the FASB issued ASU 2012-02 “Intangibles—Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment” which provides an entity the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. We adopted the new guidance, but it will not affect our annual intangible asset impairment testing which is performed during the fourth quarter, and the adoption of the new guidance is not expected to impact our financial position, results of operations, comprehensive income or cash flows, other than related disclosures.
 

 
8

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
Recently Issued Accounting Standards
 
Effective July 1, 2009, changes to the ASC are communicated through an ASU. The FASB has issued ASU’s 2009-01 through 2013-05. We have reviewed each ASU and determined that each ASU applicable to us will not have a material impact on our financial position, results of operations, comprehensive income or cash flows, other than the related disclosures to the extent applicable.
 
In February 2013, the FASB issued ASU 2013-02 “Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This amendment does not change the current requirements for reporting net income or other comprehensive income in Financial Statements. These amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional details about those amounts. We expect to adopt the new guidance beginning on November 1, 2013, and the adoption of the new guidance is not expected to impact our financial position, results of operations, comprehensive income or cash flows, other than the related disclosures to the extent applicable.
 
In April 2013, the FASB issued ASU 2013-07, “Presentation of Financial Statements: Topic Liquidation Basis of Accounting “(“ASU 2013-07”). ASU 2013-07 requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is considered imminent when the likelihood is remote that the organization will return from liquidation and either: (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties; or (b) a plan for liquidation is being imposed by other forces. ASU 2013-07 will be effective for the Company beginning on November 1, 2014. The Company expects that the adoption of ASU 2013-07 will not have a material impact on its financial statements or disclosure.
 
 
 
9

 
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 six months ended April 30, 2013 and 2012.
 
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. 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.
 
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.

 
10

 
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.
 
Inventories consisted of the following:

   
April 30,
2013
   
October 31,
2012
 
Printing and Newspaper:
           
Raw materials
 
$
1,867,030
   
$
2,049,447
 
Work in process
   
822,137
     
834,678
 
Finished goods
   
1,291,648
     
1,383,094
 
Office products and office furniture
   
1,747,082
     
1,920,701
 
   
$
5,727,897
   
$
6,187,920
 
 
 
 
11

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
 
5. Long-Term Debt
 
Long-term debt consisted of the following:
 
   
 April 30,
   
October 31,
    2013    
2012
 
    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 November 2012-April 2015, collateralized by  equipment and vehicles (0% interest on Lessor note) (see Note 10)
$ 278,563    
$
677,167
 
Notes payable to shareholders. The shareholder note of $2.5 million plus all accrued interest is due in one
balloon payment in September 2014. Interest is at the prime rate (3.25% at April 30, 2013 and October 31, 2012)
   2,500,000      
2,500,000
 
    Term loan A with a syndicate of banks, due in monthly installments of $238,000 plus interest payments equal to
    LIBOR plus the applicable margin (currently 8%) maturing September 2013, collateralized by substantially all of the assets of the Company.
   18,334,000      
19,762,000
 
Term loan B with a syndicate of banks, due September 30, 2013, interest (deferred fee) at a rate of 16%, with aggregate unpaid deferred fee itself bearing interest collateralized by substantially
all of the assets of the Company
   6,277,744      
6,277,744
 
Bullet loan A with a syndicate of Banks, due in installments of $1.9 million on or before December 31, 2012 and
$2.1 million on or before March 31, 2013 with interest at LIBOR plus the applicable margin (currently 8%),
collateralized by substantially all of the assets of the Company.
   -      
3,350,000
 
Revolving line of credit loan facility with a syndicate of banks, interest payments based on LIBOR plus the
applicable margin (currently 6%) maturing in September 2013, collateralized by substantially all of the assets
of the Company.
   8,825,496      
8,425,496
 
Accrued Deferred fee (interest) Bullet loan B, Due September 30, 2013
   564,482      
31,171
 
Capital lease obligation for printing equipment at an imputed interest rate of 6.02% per annum
   62,985      
65,719
 
Unamortized debt discount
   (323,006 )    
(1,287,527
)
    36,520,264      
39,801,770
 
Less current portion revolving line of credit
   8,825,496      
8,425,496
 
Less current portion long-term debt
   25,402,259      
29,998,791
 
Less current portion obligation under capital lease
   13,410      
13,014
 
Less debt discount
   (323,006    
(1,287,527
)
Long-term debt, net of current portion and revolving line of credit, capital lease obligation and notes payable to related party
$
2,602,105
   
$
2,651,996
 
               
Continuing operations:
             
Long-term debt, net of current portion and revolving line credit
$ 52,530    
$
99,291
 
Long-term capital lease obligation
   49,575      
52,705
 
Current portion of long-term debt and revolving line of credit
  33,733,216      
36,238,560
 
Long-term notes payable to related party
   2,500,000      
2,500,000
 
Current portion of capital lease obligation
   13,410      
13,014
 
Debt Discount
  (323,006 )    
(1,287,527
)
Total debt from continuing operations
  36,025,725      
37,616,043
 
Liabilities held for sale/discontinued operations - debt
  494,539      
2,185,727
 
Total indebtedness
$ 36,520,264    
$
39,801,770
 
 
 
12

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 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, capital lease obligations and revolving line of credit from continuing and discontinued operations for each of the next five years beginning May 1, 2013 (includes unamortized debt discount):
 
2013
 
$
33,918,159
 
2014
   
2,566,767
 
2015
   
15,115
 
2016
   
16,047
 
2017
   
4,176
 
   
$
36,520,264
 
 
13

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
 
Debt 2013:
 
Effective May 31, 2013 the Company began operating under a First Limited Forbearance and Waiver Agreement and First Amendment to Amended and Restated Credit Agreement (the “May 2013 Forbearance 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 has 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 reserve 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 have occurred and continue 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 provides, 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 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 Restated Credit Agreement. The Company acknowledged in the May 2013 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 May 2013 Forbearance Agreement provides that during the forbearance period, so long as the Company meets the conditions of the May 2013 Forbearance Agreement, it may continue to request credit under the revolving credit line.
 
The May 2013 Forbearance Agreement requires 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 is 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 are also various targeted dates upon acceptance of applicable letters of intent for Designated Transactions which will result in various actions to be achieved by the applicable milestone dates or if not achieved may 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 shall be 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 threshold of $500,000.
   
 
14

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
 
 
Debt 2012:
 
Effective October 19, 2012, the Company began operating under the provisions of the Restated Credit Agreement as further discussed herein. The following is a sequential summary of the various debt actions in 2012.
 
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 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 December 12, 2011, which was reported pursuant to item 2.04 of Form 8-K filed December 15, 2011. 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.
 
On December 28, 2011, the Administrative Agent, the Lenders, the Company, all of its subsidiaries and Marshall T. Reynolds entered into a Limited Forbearance Agreement and Third Amendment to Credit Agreement (the "Limited Forbearance Agreement") which provided, among other things, that during a forbearance period commencing on December 28, 2011, and ending on April 30, 2012 (unless terminated sooner by default of the Company under the Limited Forbearance Agreement or Credit 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 Credit Agreement. The Company acknowledged in the Limited 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 Limited Forbearance Agreement provided that during the forbearance period, so long as the Company met the conditions of the Limited Forbearance Agreement, it could continue to request credit under the revolving credit line.
 
The Limited Forbearance Agreement required the Company to:
 
(a) engage a chief restructuring advisor to assist in developing a written restructuring plan for the Company's business operations;
(b) submit a restructuring plan to the Administrative Agent by February 15, 2012;
(c) provide any consultant retained by the Administrative Agent with access to the operations, records and employees of the Company;
(d) attain revised minimum EBITDA covenant targets; and
(e) provide additional financial reports to the Administrative Agent.
 
The Limited Forbearance Agreement provided that the credit commitment under the Credit Agreement was $15,000,000 and provided for a $1,450,000 reserve against the Credit Agreement borrowing base. The Company had borrowed under its $15.0 million line of credit approximately $9.7 million at December 28, 2011, which encompassed working capital requirements, refinancing of existing indebtedness prior to The Herald-Dispatch acquisition and to partially fund the purchase of The Herald-Dispatch.
 
On December 28, 2011, pursuant to the terms of the Limited Forbearance Agreement, a draw of $2.0 million was made on the cash collateral and $2.0 million was funded in the form of the subordinated unsecured promissory note.
 
The Company received a notice of default and reservation of rights letter on May 2, 2012, which was reported pursuant to Item 2.04 of Form 8-K filed May 4, 2012.
 
In a Current Report on Form 8-K filed May 4, 2012, Champion Industries, Inc. (“Champion”) advised that on May 2, 2012, Fifth Third Bank, as Administrative Agent (the “Administrative Agent”) for lenders under Champion’s Credit Agreement dated September 14, 2007, as amended (the “Credit Agreement”) had sent Champion a Notice of Default and Reservation of Rights (“Notice of Default”), advising that Champion’s default under provisions of the Credit Agreement requiring it to maintain certain financial ratios constituted an Event of Default under the Credit Agreement. The default related to Sections 6.20(a) and 6.20(b) of the Credit Agreement.
 
The Notice of Default also advised that the Administrative Agent had not waived the Event of Default and reserved all rights and remedies as a result thereof. Those 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.
 
15

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
 
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.
 
On July 31, 2012, the Administrative Agent, the Lenders, Champion, all its subsidiaries and Marshall T. Reynolds entered into a First Amended and Restated Limited Forbearance Agreement and Fourth Amendment to Credit Agreement dated July 13, 2012 (the “Forbearance Agreement”) which provided, among other things, that during a forbearance period commencing on July 13, 2012 and ending on August 15, 2012 (unless sooner terminated by default of Champion under the Forbearance Agreement or the Credit Agreement), the Required 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 Credit Agreement. Champion acknowledged in the Forbearance Agreement that as a result of the existing defaults, the Lenders were entitled to decline to provide further credit to Champion, to terminate their loan commitments, to accelerate the outstanding loans, and to enforce their liens.
 
The Forbearance Agreement provided that during the forbearance period, so long as Champion met the conditions of the Forbearance Agreement, it could continue to request credit under the revolving credit line.
 
The Forbearance Agreement required Champion to:
 
continue to engage a chief restructuring advisor to assist in developing a written restructuring plan for Champion’s business operations;
submit an updated proposed restructuring plan to the Administrative Agent by July 16, 2012;
provide any consultant retained by the Administrative Agent with access to the operations, records and employees of Champion and their advisors;
attain revised minimum EBITDA covenant targets;
provide additional financial reports to the Administrative Agent;
make a good faith effort to effectuate certain transaction initiatives identified by the Company;
permit Administrative Agent to retain a media transaction expert and allow access to Company personnel and advisors; and
forbearance fee of 0.25%.
 
The Forbearance Agreement provided that the credit commitment under the Credit Agreement was $13,600,000 and provided for a $1,450,000 reserve against the Credit Agreement borrowing base. The applicable margin had been increased to 6.0% if utilizing the base rate or 4% if utilizing the amended base rate as well as a PIK compounding Forbearance Fee of 2% of the outstanding amount of term loans. The default rate was an additional 2% for outstanding term loans.
 
On August 20, 2012 the Company received a Notice of Forbearance Termination, Additional Defaults and Reservation of Rights ("Notice of Default") letter from the Administrative Agent for its secured lenders which was reported pursuant to Item 2.04 of Form 8-K filed August 21, 2012. This Notice of Default resulted from the expiration of the Forbearance Agreement on August 15, 2012. The Company references to minimum excess availability and other credit availability related to the Forbearance Agreement were not applicable after July 31, 2012 through the effective date of the September Forbearance Agreement due to the expiration of the Forbearance Agreement. The Company had been notified that any extension of additional credit would be made by the Lenders in their sole discretion without any intention to waive any Event of Default. The Lenders had continued to provide the Company with access to the applicable revolving credit facilities during this default period.
 
On September 12, 2012, the Company entered into a Second Amendment to the Limited Forbearance Agreement and Fifth Amendment to Credit Agreement ("September Forbearance Agreement") which extended the maturity of the credit facility through October 15, 2012. The September Forbearance Agreement provided that during the forbearance period, so long as the Company met the conditions of the September Forbearance Agreement, it may continue to request credit under the revolving credit line.
 
16

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
 
The September Forbearance Agreement required the Company to/or changed as follows:
 
 
pay a 0.10% extension fee based on the then-outstanding loans, interests in Letters of Credit and Unused Revolving Credit Commitments;
 
continue services of bank group consultant as well as continued retention of Company advisors;
 
release and term debt pay down of remaining $500,000 under the provisions of the Contribution Agreement hereinafter described;
 
continue actions to effectuate certain transactions, including the financing of certain receivables and finalizing the Safeguard transaction;
 
agree to terms on a debt restructuring by September 15, 2012 subject to credit approval and documentation;
 
minimum EBITDA covenant for August 2012 of $400,000;
 
aggregate revolving credit commitments of $13,000,000.
 
On October 19, 2012, the Company, the Administrative Agent and other lenders all party to the Company's Credit Agreement dated September 14, 2007 (as previously supplemented and amended, the "Original Credit Agreement") entered into a First Amended and Restated Credit Agreement ("Restated Credit Agreement") dated October 19, 2012 and Side Letter Agreement dated October 19, 2012. The Company reviewed the applicable requirements associated with debt modifications and restructurings to determine the applicable accounting for the Company's Restated Credit Agreement. The Company determined that modification accounting was appropriate based on the facts and circumstances of the Company's analysis as applied to applicable GAAP. A primary determining factor was the imputed effective interest rate of the Company's debt being substantially higher after the modification than was present prior to the modification. This was a key determining factor in assessing whether the Company's secured lender's had granted a concession. The Restated Credit Agreement and Side Letter Agreement amended various provisions of the Original Credit Agreement and added various provisions as further described herein, including but not limited to the following provisions of the Restated Credit Agreement:
 
·
Restated Credit Agreement maturity at June 30, 2013, subject to Champion's compliance with terms of the Restated Credit Agreement and Side Letter Agreement.
·
$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 benefits of the Lenders, subject to shareholder approval. The Company has various milestone dates, which may reduce the number of warrants outstanding upon satisfaction of certain conditions. The Company is working with its outside advisors regarding these items but is unable to predict the outcomes or likelihood of success regarding the achievement of such milestones. The warrants expire after October 19, 2017.
·
Various Targeted Transactions which may require the sale of various assets, divisions or segments upon the achievement of agreed upon value benchmarks among other considerations and if not successfully completed by the applicable milestone dates will be considered an event of default.
·
Existing debt restructured into a $20,000,000 Term Loan A, $6,277,743.89 Term Loan B, $4,000,000 Bullet Loan and $9,025,496.00 Revolver Loan.
·
A $10,000,000 revolving credit facility with a sublimit of up to $3,000,000 for swing loans. Outstanding borrowings thereunder may not exceed the sum of (1) up to 85% of eligible receivables (reduced to 80% of eligible receivables effective December 30, 2012) plus (2) up to the lesser of $5,000,000 or 50% of eligible inventory.
·
Targeted interest rates as follows based on a LIBOR borrowing option; Term Note A at LIBOR plus 8%, Term Note B at 0% (subject to a deferred fee of 16% per annum with various milestone dates reducing or forgiving such fees upon successful completion of such milestones.), revolving loans at LIBOR plus 6% and Bullet Loans A at a rate of LIBOR plus 8%.
·
At Champion’s option, interest at a LIBOR Rate plus the applicable margin.
·
Post default increase in interest rates of 2%.
·
Amendment of various covenants as further described in the Restated Credit Agreement.
·
Fixed Charge Coverage Ratio is required to be 1.0 to 1.0 as of January 31, 2013 and 1.10 to 1.0 as of April 30, 2013 based on a buildup model commencing October 1, 2012.
·
Leverage Ratio is required to be 3.30 to 1.00 as of January 31, 2013 and 3.10 to 1.00 as of April 30, 2013 based on a trailing twelve month EBITDA calculation.
·
Minimum EBITDA pursuant to a monthly build up commencing with the month ended October 31, 2012 of $600,000 increasing to $1,100,000 for November 30, 2012, $1,600,000 at December 31, 2012, $2,600,000 at January 31, 2013, $3,350,000 at February 28, 2013, $4,100,000 at March 31, 2013, $5,200,000 at April 30, 2013, $5,550,000 at May 31, 2013 and $5,900,000 at June 30, 2013.
·
Maximum Capital expenditures are limited to $1,000,000 for fiscal years commencing after October 31, 2012.
·
Enhanced reporting by Champion to Administrative Agent.
·
Continued retention of a Chief Restructuring Advisor and Raymond James & Associates, Inc. as well as continued retention by Secured Lenders of their advisor.
·
$100,000 fee due at closing plus monthly Administrative Agent fees of $15,000 monthly through June 30, 2013.
 
17

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
 
Other debt provisions:
 
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 Company 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 Company during such period in compliance with the Credit Agreement. Pursuant to the terms of the Limited Forbearance Agreement, there would be no excess cash flow payment due based on the contractual provisions regarding the application of cash collateral. The Company had no balance due under its prepayment obligation for fiscal 2011 and 2012 that would have been payable January 2012 and 2013 pursuant to the applicable calculations of the applicable credit agreements. The Company is required to maintain a minimum of $750,000 of compensating balances with the Administrative Agent under the terms of its Credit Agreement.
 
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). Prime rate approximated 3.25% at April 30, 2013 and 2012, while the LIBOR rate approximated 0.15% at April 30, 2013 and the 30-day LIBOR rate approximated 0.24% at April 30, 2012. The Company had accrued interest of approximately $167,000 and $129,000 at April 30, 2013 and October 31, 2012 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 2013 and 2012, $1,209,000 and $220,000 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 is amortizing under the interest method the discount debt associated with the issuance of warrants as well as lender fees and other costs associated with the Restated Credit Agreement.
 
The Company may incur costs in 2013 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 and may occur pursuant to certain initiatives being reviewed in accordance with the provisions of the Restated Credit Agreement and May 2013 Forbearance Agreement and initiatives to improve operating performance.
 
The Company had no non-cash activities for 2013 and 2012.
 
The Company achieved its first Bullet payment threshold as required prior to December 31, 2012 in the amount of $1.9 million of which $650,000 was paid prior to October 31, 2012. The Company's secured lenders utilized the Company's liquidity and coupled with a temporary release of certain compensating balance requirements and borrowing base reserves, the $2.1 million payment due March 31, 2013 was achieved.
 
 
18

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
 
Status of Debt Refinancing and Liquidity
 
Due in part to the reasonable possibility of a default by the Company prior to the contractual maturity of its Restated Credit Agreement and the May 2013 Forbearance Agreement and the Company's inability to achieve a longer term financing solution, which was contemplated upon the commencement of the Limited Forbearance Agreement, there is significant uncertainty about our ability to operate as a going concern.
 
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 challenges for fiscal 2013 and beyond. The Company named Timothy D. Boates of RAS Management Advisors, LLC ("RAS") to serve as Chief Restructuring Officer to assist the Company in dealing with its restructuring process. Mr. Boates’s responsibilities include directing the management of the Company’s operations, evaluation of the Company’s cash and liquidity requirements, directing the efforts of Company’s management and employees in connection with any sale or restructuring initiatives, directing negotiations with and reporting to the Company’s significant creditors, directing all cash management matters and assisting in the development and implementation of a plan of reorganization, if appropriate. Mr. Boates will have full responsibility for all of Company’s operations, including but not limited to day to day management, and will report directly to the Company’s board of directors. The Company has continued to engage the investment banking group of Raymond James & Associates, Inc. (Raymond James) to assist it with a potential restructuring or refinancing of the existing debt and other potential transaction alternatives. The Company continues to have an ongoing dialogue with the Administrative Agent and the syndicate of banks with respect to its credit facilities.
 
 
 
 
19

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
6. Income taxes
 
The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence was the cumulative loss incurred over the four-year period ended October 31, 2012 and over a seven-year period ended October 31, 2012. However, when these losses are adjusted for certain aberrations, rather than continuing conditions, the Company is able to represent that cumulative losses are not present in either the four year look back period or the seven year look back period.
 
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 determined in the second quarter of 2012 that, primarily as a result of its inability to enter into an amended credit facility upon the expiration of the Limited Forbearance Agreement on April 30, 2012, as well as the potential for a substantial increase in interest rates and fees coupled with the uncertainty regarding future interest rate increases that the secured lenders may impose on the Company that a full valuation allowance of the Company's deferred tax assets, net of deferred tax liabilities, is necessary to measure the portion of the deferred tax asset that more likely than not will not be realized. As a result of the Restated Credit Agreement entered into on October 19, 2012, the Company reassessed its valuation allowance and determined that due to the relative short term maturity of the Restated Credit Agreement, coupled with the increase in interest rates, a full valuation was warranted at April 30, 2013 and October 31, 2012. The subsequent default under the Restated Credit Agreement and entry into the associated May 2013 Forbearance Agreement and the short term nature of the May 2013 Forbearance Agreement was not deemed to be of a sufficient time period to warrant a modification regarding the full valuation allowance. The Company currently intends to maintain a full valuation allowance on our deferred tax assets until sufficient positive evidence related to our sources of future taxable income exists and the Company is better able to identify a longer term solution to our current credit situation with our secured lenders. Therefore, 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 refinancing of the Company’s existing credit agreement with its secured lenders, and such adjustments may be material to the Consolidated Financial Statements.
 
The Company’s effective tax rate for continuing operations for the three and six months ended April 30, 2013 was 0.0% compared to an effective tax rate of a negative (126.9)% and (124.2)% for the three and six months ended April 30, 2012. The primary difference in tax rates between 2013 and 2012 and for 2012 between the effective tax rate and the statutory tax rate is a result of the valuation allowance taken against our deferred tax assets in the second quarter of 2012 in the amount of $15.2 million. There is no incremental income tax for continuing operations or discontinued operations in 2013 due to losses in each component and the Company's total current year expected income tax provision of zero. The Company intends to maintain a full valuation allowance for deferred tax assets as further described herein. 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.
 

 
20

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
7. Commitments and Contingencies
 
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 does not currently believe there are any reasonably possible losses, in excess of amounts accrued, for current legal proceedings not covered by insurance at April 30, 2013. 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.
 
 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 Lenders. 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.
 
As of April 30, 2013 the Company had contractual obligations in the form of leases and debt as follows:
 
   
Payments Due by Fiscal Year
Contractual Obligations
 
2013
 
2014
 
2015
 
2016
  2017  
Residual
   
Total
 
                                 
Non-cancelable operating leases
 
$
516,567
 
$
600,904
 
$
162,975
 
$
157,217    $ 97,307  
$
-
 
$
1,534,970
 
                                             
Revolving line of credit
   
8,825,496
   
-
   
-
   
-
     -    
-
   
8,825,496
 
                                             
Term debt
     25,300,611    
140,301
    13,877    
-
     -    
-
    25,454,789  
                                             
Obligations under capital lease      6,605      13,817      14,669     15,574     12,320      -     62,985  
                                             
Debt discount      (323,006    -      -      -     -      -     (323,006 )
                                             
Notes payable - related party      -      2,500,000      -      -      -      -     2,500,000   
                                             
   
$
34,326,273
 
$
3,255,022
 
$
191,521
 
$
172,791
  $ 109,627  
$
-
 
$
38,055,234
 
 
 
21

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
8. 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 23,000 and 28,000, respectively.
 
The Company reports segment information in a manner consistent with the way that our Management, including our chief operating decision maker, the Company’s Chief Executive Officer, assesses performance and makes decisions regarding allocation of resources in accordance with the Segment Disclosures Topic of the ASC.
 
Our Financial Reporting systems present various data, which is used to operate and measure our operating performance. Our chief operating decision maker utilizes various measures of a segment’s profit or loss including historical internal reporting measures and reporting measures based on product lines with operating income (loss) as the key profitability measure within the segment. Product line reporting is the basis for the organization of our segments and is the most consistent measure used by the chief operating decision maker and conforms with the use of segment operating income or (loss) that is the most consistent with those used in measuring like amounts in the Consolidated Financial Statements. During the third quarter of 2012, the Company realigned personnel and divisional responsibilities between the printing segment and office products and office furniture segments primarily in one location, resulting in additional SG&A costs of approximately $0.1 million and $0.2 million being allocated to the office products and office furniture segment for the second quarter of 2013 and the six months ended April 30, 2013 which were previously a component of the printing segment.
 
The identifiable assets are reflective of non-GAAP assets reported on the Company's internal balance sheets and are typically adjusted for negative book cash balances, taxes and other items excluded for segment reporting including cash which has not been allocated to segments. The assets are classified based on the primary functional segment category as reported on the internal balance sheets. Therefore the actual segment assets may not directly correspond with the segment operating (loss) income reported herein. The Company has certain assets classified as held for sale/discontinued operations representing $571,391 at April 30, 2013 and has adjusted April 30, 2012 identifiable assets to reflect certain assets subsequently determined to be assets held for sale /discontinued operations of $7,012,047 at April 30, 2012. These assets were part of the printing segment prior to the reclassification as assets held for sale/discontinued operations. The total assets reported on the Company's balance sheets as of April 30, 2013 and 2012 are $41,960,272 and $58,285,193. The identifiable assets reported below represent $38,843,132 and $50,576,028 at April 30, 2013 and 2012.
 
The table below presents information about reported segments for the three and six months ended April 30:
 
2013 Quarter 2
 
Printing
 
Office Products & Furniture
 
Newspaper
 
Total
 
                   
Revenues from continuing operations
 
$
12,637,333  
$
8,493,759
 
$
3,037,690
 
$
24,168,782
 
Elimination of intersegment revenue
    (915,893
)
 
(1,469,187
)
 
-
   
(2,385,080
)
Consolidated revenues from continuing operations
 
$
11,721,440  
$
 7,024,572  
$
3,037,690
 
$
21,783,702
 
                           
Operating income from continuing operations
   
237,823
    333,807      212,974     784,604  
Depreciation & amortization
    503,760    
35,652
   
254,356
   
793,768
 
Capital expenditures
    216,465    
-
   
8,465
     224,930  
Identifiable assets
    22,400,226    
6,262,201
   
10,180,705
   
38,843,132
 
Goodwill
    -    
1,230,485
   
-
   
1,230,485
 
                           

2012 Quarter 2
 
Printing
 
Office Products & Furniture
 
Newspaper
 
Total
 
                   
Revenues from continuing operations
 
$
15,963,719
 
$
10,502,075
 
$
3,412,941
 
$
29,878,735
 
Elimination of intersegment revenue
   
(1,209,747
)
 
(1,375,456
)
 
-
   
(2,585,203
)
Consolidated revenues from continuing operations
 
$
14,753,972
 
$
9,126,619
 
$
3,412,941
 
$
27,293,532
 
                           
Operating (loss) income from continuing operations
   
(89,210
)  
778,268
   
(9,127,513
)
 
(8,438,455
)
Depreciation & amortization
   
626,631
   
20,814
   
287,524
   
934,969
 
Capital expenditures
   
134,393
   
15,773
   
38,361
   
188,527
 
Identifiable assets
   
30,050,566
   
7,445,216
   
13,080,246
   
50,576,028
 
Goodwill
   
2,226,837
   
1,230,485
   
-
   
3,457,322
 
                           
 
 
22

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

 
2013 Year to Date
 
Printing
 
Office Products
& Furniture
 
Newspaper
 
Total
 
                           
Revenues from continuing operations
 
$
25,374,404
 
$
16,942,016
 
$
6,589,932
 
$
48,906,352
 
Elimination of intersegment revenue
   
(1,803,925
)
 
(2,708,425
)
 
-
   
(4,512,350
)
Consolidated revenues from continuing operations
 
$
23,570,479
 
$
14,233,591
 
$
6,589,932
 
$
44,394,002
 
                           
Operating (loss) income from continuing operations
   
(2,207,436
)  
544,727
   
747,373
   
(915,336
)
Depreciation & amortization
   
1,010,045
   
69,503
   
508,746
   
1,588,294
 
Capital expenditures
   
288,582
   
1,483
   
8,465
   
298,530
 
Identifiable assets
   
22,400,226
   
6,262,201
   
10,180,705
   
38,843,132
 
Goodwill
   
-
   
1,230,485
   
-
   
1,230,485
 
 
2012 Year to Date
 
Printing
 
Office
Products
& Furniture
 
Newspaper
 
Total
 
                           
Revenues from continuing operations
 
$
31,613,763
 
$
20,294,023
 
$
7,285,988
 
$
59,193,774
 
Elimination of intersegment revenue
   
(2,397,788
)
 
(2,976,803
)
 
-
   
(5,374,591
)
Consolidated revenues from continuing operations
 
$
29,215,975
 
$
17,317,220
 
$
7,285,988
 
$
53,819,183
 
                            
Operating (loss) income from continuing operations
   
(699,920
)
 
1,330,834
   
(8,424,623
)
 
(7,793,709
)
Depreciation & amortization
   
1,252,264
   
54,665
   
573,746
   
1,880,675
 
Capital expenditures
   
320,994
   
33,831
   
50,994
   
405,819
 
Identifiable assets
   
30,050,566
   
7,445,216
   
13,080,246
   
50,576,028
 
Goodwill
   
2,226,837
   
1,230,485
   
-
   
3,457,322
 
 
A reconciliation of total segment revenues and of total segment operating (loss) income to consolidated (loss) income before income taxes, for the three and six months ended April 30, 2013 and 2012, is as follows:
 
   
Three months
Six months
     
2013
   
2012
   
2013
   
2012
 
Revenues:
                         
Total segment revenues from continuing operations
 
$
24,168,782
 
$
29,878,735
 
$
48,906,352  
$
59,193,774
 
Elimination of intersegment revenue
   
(2,385,080)
 
 
(2,585,203)
 
 
(4,512,350)
 
 
(5,374,591)
 
Consolidated revenue from continuing operations
 
 
21,783,702
 
$
27,293,532
 
$
44,394,002
 
$
53,819,183
 
                           
Operating (loss) income from continuing operations:
                         
Total segment operating (loss) income from continuing operations
 
$
784,604
 
$
(8,438,455)
 
$
(915,336)
 
$
(7,793,709)
 
Interest expense - related party
   
(20,087)
 
 
(16,250)
 
 
(40,851)
 
 
(22,389)
 
Interest expense
   
(1,499,076)
 
 
(822,306)
 
 
(3,033,520)
 
 
(1,614,702)
 
Other income
   
11,370
   
4,629
   
20,993
   
8,760
 
Consolidated (loss) income from continuing operations before income taxes
 
$
(723,189)
 
$
(9,272,382)
 
$
(3,968,714)
 
$
(9,422,040)
 
                           
Identifiable assets:
                         
Total segment identifiable assets
 
$
38,843,132
 
$
50,576,028
 
$
38,843,132
 
$
50,576,028
 
Assets not allocated to a segment
    3,117,140    
7,709,165
   
3,117,140
   
7,709,165
 
Total consolidated assets
 
$
41,960,272
 
$
58,285,193
 
$
41,960,272
 
$
58,285,193
 
 
 
23

 
  Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
 
9. Fair Value Measurements
 
 
There is 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 Company does not believe it is practicable to estimate the fair value of its variable interest-bearing debt and revolving credit facilities related to its primary credit facilities with a syndicate of banks and its subordinated debt to a related party due primarily to the fact that an active market for the Company’s debt does not exist.
 
The term debt not related to the Restated Credit Agreement had a carrying value of approximately $0.3 million and the Company believes carrying value approximates fair value for this debt based on recent market conditions, collateral support, recent borrowings and other factors.
 
Cash consists principally of cash on deposit with banks. The Company's cash deposits in excess of federally insured amounts are primarily maintained at a large well-known financial institution.
 
The carrying amounts of the Company's accounts receivable, accounts payable, accrued payrolls and commissions, taxes accrued and withheld and accrued expenses approximates fair value due to their short-term nature.
 
Goodwill and other intangible assets are measured on a non-recurring basis using Level 3 inputs. Goodwill and non-amortizing intangible assets are also subject to an annual impairment test. (see Note 11)
 
 
 
24

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
10. Restructuring of Operations
 
In fiscal 2010 and 2011, the Company recorded charges related to a restructuring and profitability enhancement plan. This plan was implemented to effectuate certain key initiatives and was an integral component of the Second Amendment and Waiver to the Credit Agreement among the Company, Fifth Third Bank, as Lender, L/C Issuer and Administrative Agent for Lenders and other Lenders dated March 31, 2010 (the "Second Amendment"). These actions were taken to comply with the provisions and targeted covenants of the Second Amendment and to address the impact of the global economic crisis on the Company. The Company may incur additional costs in future periods to address the ongoing and fluid nature of the economic crisis, and may incur costs pursuant to certain initiatives being reviewed in accordance with the provisions of the Restated Credit Agreement and May 2013 Forbearance Agreement. The Company incurred costs in 2012 related to the consolidation of the Company's commercial printing production operation in Cincinnati, Ohio into existing Company facilities in other locations. In 2013, the Company also incurred costs associated with personnel of approximately $55,000 and inventory costs of approximately $153,000, associated primarily with the sale of substantially all of the property, plant and equipment of the Donihe Graphics subsidiary in Kingsport, Tennessee. These costs associated with Donihe are reflected as a component of discontinued operations. The amount of future charges not discussed herein is currently not estimable by the Company.
 
The Company's restructuring plans were implemented to address several key initiatives, including streamlining production and administrative operations and headcount reductions. The aggregate pre-tax charge resulting from these actions was $2.4 million. The charges were comprised of $1.6 million associated with excess facility and maintenance costs, primarily related to operating leases, inventory related costs of $200,000 and costs associated with streamlining production and personnel related separation costs of $613,000. The costs associated with the restructuring and profitability enhancement plan are primarily recorded in the restructuring charges line item as part of operating income. Inventory is recorded as a component of cost of sales.
 
The following information summarizes the costs incurred with respect to restructuring, integration and asset impairment charges during the three and six months ended April 30, 2013 and 2012, as well as the cumulative total of such costs representing fiscal 2011, fiscal 2012, and the first two quarters of fiscal 2013 to the extent applicable, such costs are included as a component of the printing segment:

                     
   
Three Months Ended
April 30, 2013
 
Three Months Ended
April 30, 2012
 
Six Months Ended
April 30, 2013
 
Six Months Ended
April 30, 2012
 
Cumulative Total
Occupancy and equipment related costs
$
-
$
-
$
-
$
-
$
1,618,965
Costs incurred to streamline production, personnel and other
 
-
 
-
 
-
 
-
 
612,764
Inventory
 
-
 
-
 
-
 
-
 
200,380
Total
$
-
$
-
$
-
$
-
$
2,432,109
 
The activity pertaining to the Company’s accruals related to restructuring and other charges since October 31, 2012, including additions and payments made are summarized below:
 
 
 
 
Occupancy and equipment related costs
 
Costs incurred to streamline production,
personnel and other
 
Total
             
Balance at October 31, 2012
$
241,821
$
-
$
241,821
2013 expenses
   -    -    -
Paid in 2013
  (241,821)     -   (241,821) 
             
Balance at April 30, 2013
$
$
$
 -
 
 
The restructuring payments in 2013 were primarily related to a contractual settlement in the form of a promissory note with the Lessor at the Company’s former location in Bridgeville, Pennsylvania. (see Note 5)
 
 
25

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

11. Acquired Intangible Assets and Goodwill
 
   
April 30, 2013
   
October 31, 2012
 
   
Gross
         
Gross
       
   
Carrying
   
Accumulated
   
Carrying
   
Accumulated
 
   
Amount
   
Amortization
   
Amount
   
Amortization
 
Amortizable intangible assets:
                       
Non-compete agreement
 
$
1,000,000
   
$
1,000,000
   
$
1,000,000
   
$
1,000,000
 
Customer relationships
   
2,451,073
     
1,087,984
     
2,451,073
     
1,026,935
 
Advertising and subscriber base
   
4,989,768
     
2,026,154
     
4,989,768
     
1,952,322
 
Other
   
564,946
     
549,988
     
564,946
     
541,236
 
     
9,005,787
     
4,664,126
     
9,005,787
     
4,520,493
 
                                 
Unamortizable intangible assets:
                               
Goodwill
   
1,307,267
     
76,782
     
3,964,600
     
507,278
 
Trademark and masthead
   
2,091,022
     
-
     
2,091,022
     
-
 
     
3,398,289
      76,782       6,055,622        507,278   
                                 
Total goodwill and other intangibles
 
$
12,404,076
   
$
4,740,908
   
$
15,061,409
   
$
5,027,771
 
                                 
 
During the first quarter of 2013 as part of a process of addressing the Company’s debt status with its 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.
 
 
26

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
Amortization expense for the three and six months ended April 30, 2013 was $71,817 and $143,633, and for the three and six months ended April 30, 2012 was $74,565 and $149,129, respectively. Customer relationships are being amortized over a period of 20 years, 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 16 years.
 
Estimated amortization expense for each of the following years is:
 
2013
  $
143,628
 
2014
   
275,970
 
2015
   
269,761
 
2016     269,761  
2017     269,761  
Thereafter     3,112,780  
   
$
4,341,661
 
 
The changes in the carrying amount of goodwill, trademark and masthead and other amortizing intangibles for the six months ended April 30, 2013 were:
 
Goodwill:
 
   
Printing
   
Office Products and Furniture
   
Newspaper
   
Total
 
                                 
Balance at October 31, 2012                                
   Goodwill   $ 2,226,837       1,230,485       35,437,456       38,894,778  
   Accumulated impairment losses     -       -       (35,437,456 )     (35,437,456 )
      2,226,837     $ 1,230,485     $ -     $ 3,457,322  
                                 
Goodwill acquired six months ended April 30, 2013     -       -       -       -  
Impairment losses six months ended April 30, 2013     (2,226,837     -        -       (2,226,837 
                                 
Balance at April 30, 2013                                
   Goodwill      2,226,837       1,230,485       35,437,456       38,894,778  
   Accumulated impairment losses     (2,226,837     -       (35,437,456     (37,664,293
    $ -     $ 1,230,485     $  -     $ 1,230,485  
 
 
 
 
27

Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
Trademark and Masthead:
 
    Printing     Office Products and Furniture     Newspaper     Total  
                                 
Balance at October 31, 2012
                               
Trademark and masthead   -     -     18,515,316     $ 18,515,316  
Accumulated impairment losses     -       -       (16,424,294 )     (16,424,294 )
      -       -       2,091,022       2,091,022  
                                 
Trademark & masthead acquired six months ended April 30, 2013     -       -       -       -  
Impairment losses six months ended April 30, 2013     -        -        -       -  
                                 
Balance at April 30, 2013                                
Trademark & masthead     -        -        18,515,316       18,515,316  
 Accumulated impairment losses     -        -        (16,424,294 )     (16,424,294
    $ -     $ -     2,091,022     $  2,091,022  
 
Amortizing Intangible Assets (net of amortization expense):
 
 
  Printing     Office Products and Furniture     Newspaper     Total  
                                 
Balance at October 31, 2012
                               
Amortizing intangible     500,721       947,127       12,088,930       13,536,778  
Accumulated impairment losses     -       -       (9,051,484 )     (9,051,484 )
    $ 500,721     $ 947,127     $ 3,037,446     $ 4,485,294  
                                 
Amortizing intangible acquired six months ended April 30, 2013     -       -       -       -  
Impairment losses six months ended April 30, 2013     -        -        -        -  
Amortization expense     29,202       40,598       73,833       143,633  
                                 
Balance at April 30, 2013                                
 Amortizing intangible
    471,519       906,529       12,015,097       13,393,145  
 Accumulated impairment losses     -        -        (9,051,484 )       (9,051,484
    471,519     906,529     $   2,963,613     $   4,341,661  
 
 
A summary of impairment charges is included in the table below:
 
    Six Months Ended April 30,  
    2013   2012  
           
Goodwill $ 2,226,837 $ 9,510,933  
Other intangibles   -   -  
Trademark & masthead   -   -  
  $ 2,226,837 $ 9,510,933  
 
 
 
28

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
12. Discontinued Operations and Assets Held for Sale
 
On July 2, 2012, the Company’s wholly owned subsidiary Interform Corporation sold substantially all of the assets of its Consolidated Graphic Communications ("CGC") business headquartered in Bridgeville, Pennsylvania to Safeguard Acquisition, Inc. ("Safeguard") pursuant to an asset purchase agreement ("APA"). The Company received $3,100,000 in cash at closing and an additional $650,000 in the fourth quarter of 2012 comprising a settlement of both the working capital calculations and contractual hold back pursuant to the terms of the APA. The Company had recorded a gain on the sale of such assets in the amount of $1.6 million reflecting the $3,750,000 in cash proceeds for 2012 as a component of discontinued operations.
 
The Interform subsidiary and the CGC operating division have historically been accounted for in the Company’s printing segment. In accordance with the applicable accounting guidance for the disposal of long-lived assets, the results of CGC are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented.
 
As part of the Company’s revised restructuring plan submitted to the Company’s secured lenders in July 2012 the Company determined that another division within the printing segment met the criteria of an asset held for sale at July 31, 2012 (Donihe). Therefore, in accordance with applicable accounting guidance the Company has determined the associated assets and liabilities of this division should be classified as assets and liabilities held for sale/discontinued operations at October 31, 2012 and April 30, 2013. The Company recorded an impairment charge in fiscal 2012 of approximately $337,000 as a result of the measurement requirements associated with this division. This division's results have historically been accounted for in the Company’s printing segment. In accordance with the applicable accounting guidance for the disposal of long-lived assets, these results are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented.
 
The Company has also identified certain long-lived assets that are being included as a component of assets held for sale for the Merten division ("Merten") which is currently expected to retain a sales presence in Cincinnati, Ohio. As part of the Company’s revised restructuring plan submitted to the Company’s secured lenders in July 2012 the Company determined that certain printing segment assets met the criteria of an asset held for sale of Merten.
 
Therefore, in accordance with applicable accounting guidance the Company has determined certain long-lived assets of this division should be classified as assets held for sale at October 31, 2012 (These assets were sold in December 2012).
 
The Company recorded an impairment charge of approximately $309,000 in fiscal 2012 as a result of the measurement requirements associated with assets classified as held for sale of the Merten division. The Merten results have historically been accounted for in the Company’s printing segment. In accordance with the applicable accounting guidance, since the Company currently intends to retain a sales presence in Cincinnati and is attempting to retain customers through Chapman Printing-Huntington location, the operations of Merten would continue to be classified as continuing operations.
 
In December 2012, the Company completed the sale of substantially all of the property and equipment at Donihe and Merten for $1,050,000, net of commissions, and in December 2012, the Company completed the sale of Donihe real estate for $175,000.
 
The Company identified two Company owned facilities within the printing segment that the Company intends to sell as a result of the Company’s Revised Restructuring Plan. These facilities are being carried at their carrying amount which the Company believes to currently be lower than the estimated fair value less cost to sell.
 
 
29

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
 
The following is selected financial information included in net (loss) earnings from discontinued operations for two divisions classified within the printing segment and reflects interest on estimated debt required to be repaid as a result of these disposal transactions and excludes any general corporate overhead allocations. The interest expense allocated to discontinued operations for the three months ended April 30, 2013 and 2012, was $4,000 and $68,000 and for the six months ended April 30, 2013 and 2012 was $12,000 and $136,000.
 
 
Three Months Ended April 30,
 
   
2013
 
2012
 
   
CGC
 
Donihe
 
Total
   
CGC
 
Donihe
   
Total
 
Net sales
$
-
$
(5,032
)   $
(5,032
$
4,139,848
$
1,955,120
 
$
6,094,968
 
(Loss) earnings from discontinued operations
 
-
 
(101,427
)
(101,427
)
 
75,932
 
(29,552
)  
46,380
 
Income tax benefit (expense)
 
-
 
-
 
-
   
(31,011
)
9,859
 
 
(21,152
)
Gain on sale of discontinued
operations
 
-
 
-
 
-
   
-
 
-
   
-
 
Income tax (expense) on sale
 
-
 
-
 
-
 
 
-
 
-
   
-
 
Net (loss) earnings from
discontinued operations
 $
-
 $
(101,427
)   $
 (101,427  $
44,921
 $
(19,693
)         $
25,228
 
 
 
Six Months Ended April 30,
   
2013
 
2012
   
CGC
 
Donihe
 
Total
   
CGC
 
Donihe
   
Total
Net sales
$
-
$
637,176
$
637,176
 
$
7,911,661
$
3,259,007
 
$
11,170,668
(Loss) earnings from discontinued operations
 
-
 
(397,780)
 
(397,780)
 
 
119,101
 
(72,410)
 
 
46,691
Income tax benefit (expense)
 
-
 
-
 
-
   
(48,641)
 
24,156
   
(24,485)
Gain on sale of discontinued
operations
 
-
 
-
 
-
   
-
 
-
   
-
Income tax (expense) on sale
 
-
 
-
 
-
   
-
 
-
   
-
Net (loss) earnings from
discontinued operations
$
-
$
(397,780)
  $
(397,780)
 
$
70,460
$
(48,254)
 
$
22,206
 
The major classes of assets and liabilities held for sale and of discontinued operations included in the Consolidated Balance Sheets are as follows (see Note 5 for discussion of debt allocated to liabilities held for sale/discontinued operations):
 
   
Held for sale
 
Discontinued Operations
 
Total
   
Held for sale
 
Discontinued Operations
 
Total
   
April 30, 2013
   
October 31, 2012
Assets:
                         
Accounts Receivable
$
-
$
188,001
$
188,001
 
$
-
$
777,740
$
777,740
Inventories
 
-
 
-
 
-
   
-
 
283,467
 
283,467
Other current assets
 
-
 
14,317
 
14,317
   
-
 
-
 
-
Property and equipment, net
 
369,073
 
-
 
369,073
   
1,219,073
 
425,000
 
1,644,073
Total current assets
 
369,073
  202,318  
571,391
   
1,219,073
 
1,486,207
 
2,705,280
Property and equipment, net
 
-
 
-
 
-
   
-
 
-
 
-
Other assets
 
-
 
-
 
-
   
-
 
-
 
-
Total noncurrent assets
 
-
 
-
 
-
   
-
 
-
 
-
Total assets held for
sale/discontinued operations
$
369,073
$
202,318
$
571,391
 
$
1,219,073
$
1,486,207
$
2,705,280
                           
Liabilities:
                         
Accounts payable
$
-
$
35,864
$
35,864
 
$
-
$
278,266
$
278,266
Deferred revenue
 
-
 
-
 
-
   
-
 
4,726
 
4,726
Accrued payroll and commissions
 
-
 
-
 
-
   
-
 
55,310
 
55,310
Taxes accrued and withheld
 
-
 
40,988
 
40,988
   
-
 
138,148
 
138,148
Accrued expenses
 
-
 
-
 
-
   
-
 
43,103
 
43,103
Debt (see Note 5)
 
369,073
  125,466  
494,539
   
1,219,073
 
966,654
 
2,185,727
Total current liabilities
 
369,073
 
202,318
 
571,391
   
1,219,073
 
1,486,207
 
2,705,280
Total noncurrent liabilities
 
-
 
-
 
-
   
-
 
-
 
-
Total liabilities held for
sale/discontinued operations
$
369,073
$
202,318
$
571,391
 
$
1,219,073
$
1,486,207
$
2,705,280

 
30

 
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
The Company is currently evaluating the sale or potential sale of either segments or divisions or operations within segments for each of the Company’s three operating segments. Except as disclosed herein these evaluations have not met the applicable GAAP requirements for classification as assets held for sale at the balance sheet date of April 30, 2013, however as further discussed below there is a higher probability that these divisions/segments may meet the criteria as held for sale after the balance sheet date of April 30, 2013 and the Company has provided the applicable disclosure.
 
As a result of the provisions of the May 2013 Forbearance Agreement the Company has agreed to pursue the sale of certain assets. In addition, the Company notified the secured lenders of an additional division it is pursuing a sale of that is not required pursuant to the terms of the May 2013 Forbearance Agreement. As a result of this process the Company has identified two operating divisions and one segment which it is actively working to sell as defined below. The Company began actively soliciting letters of interest for one of the transactions prior to quarter end and has received letters of interest subsequent to April 30, 2013 for all three assets sales identified below. The Company has received a letter of interest for the newspaper segment but as of the date of filing this quarterly report has not executed this letter. The Company has agreed in principle to a letter of interest regarding the printing division and is actively engaged in discussions regarding an asset purchase agreement for the printing division. The letter of interest for the office furniture division did not meet the Company or May 2013 Forbearance Agreement requirements. If the Company is able to successfully negotiate applicable asset purchase agreements and attain lender approval, it is possible some of these transactions may close in the third or fourth quarter of 2013. The following is a summary of the assets which are currently being classified as held and used but which subsequent to quarter end have been determined to have a higher degree of probability of meeting the classification of held for sale:

   
April 30, 2013
   
Printing Division
 
Office Furniture Division
 
Newspaper Segment
 
Total
Assets (excludes certain divisional assets):
               
Accounts receivable, net
$
211,958
$   1,783,010  $   1,170,011  $   3,164,979
Inventory
 
106,526
    186,877     321,501     614,904
Prepaid expenses and other current assets
 
29,550
    56,548     172,514     258,612
Total current assets
 
348,034
    2,026,435     1,664,026     4,038,495
Long-term assets :
               
Property, plant and equipment, net
 
977,243
    83,064     3,462,044     4,522,351
Intangible assets
 
-
    -     5,054,635     5,054,635
Total long-term assets
 
977,243
    83,064     8,516,679     9,576,986
Total assets $ 1,325,277 $ 2,109,499 $ 10,180,705 $ 13,615,481
                 
Liabilities (excludes debt allocation):                
Accounts payable
$
180,314
 $ 565,930  $ 178,421  $ 924,665
Deferred revenue
  -   -   765,548   765,548
Accrued payroll and commissions
   15,564    210,906    318,773   545,243
Taxes accrued and withheld
   49,625   92,805   145,466   287,896
Accrued expenses   39,594   14,256   -   53,850
Total liabilities $  285,097  $ 883,897 $  1,408,208 $ 2,577,202
 
The Company has assessed if there is an impairment charge that may be warranted for these assets which were deemed to be held and used at April 30, 2013 and subsequent to April 30, 2013 may have a higher probability of meeting the held for sale classification. The Company believes based on the targeted purchase price and adjusted for selling costs the Company anticipates recording a gain on the applicable asset sales as a whole but may have an impairment for the transactions contemplated for the newspaper segment and printing segment. The Company anticipates a gain on the sale of the office furniture division based on targeted purchase price thresholds acceptable to the Company and secured lenders. The preliminary assessment excludes goodwill which may require allocation to the office furniture division and the amount, if any, is currently being evaluated by the Company. The Company currently is unable to determine the impairment, if any, due to various uncertainties still pending within the provisions of any transactions being contemplated and the applicable terms which may be negotiated in any asset purchase agreements which may ultimately be negotiated for the transactions being contemplated. Moreover, the impairment criteria would not exist under the applicable standards for an asset held and used as of April 30, 2013, but may exist in subsequent reporting periods if the asset held for sale criteria are met.
 
31

 
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
 
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.
 
    Percentage of Total Revenues
     
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
                           
       2013      2012      2013      2012  
Revenues: