FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

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


 For the quarterly period ended January 31, 2005 
  
 Commission File No. 0-21084
                                                 
 
  
 


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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes        No  ü .
 
9,733,913 shares of common stock of the Registrant were outstanding at January 31, 2005.
 
 
Champion Industries, Inc.

INDEX
 

 
 
 Page No.
 Part I.   Financial Information  
      Item 1.    Financial Statements  
         Consolidated Balance Sheets (Unaudited)
 3
         Consolidated Statements of Income (Unaudited)
 5
         Consolidated Statements of Cash Flows (Unaudited)
 6
         Notes to Consolidated Financial Statements
 7
     Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
     Item 3a.  Quantitative and Qualitative Disclosure About Market Risk
 16
     Item 4. Controls and Procedures
16
 Part II. Other Information  
     Item 6. Exhibits
17
 Signatures
18
 
2
 
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets

 
             
 
             
 
ASSETS
  
January 31,
      
October 31,
   
2005
(Unaudited)
      
2004
(Audited)
  
Current assets:
            
Cash and cash equivalents
 
$ 4,340,042
    
 
$ 1,745,457
Accounts receivable, net of allowance of $1,437,000 and $1,422,000
  
17,965,402
      
21,318,016
Inventories
  
11,098,798
      
11,269,514
Other current assets
  
1,432,573
      
973,832
Deferred income tax assets
  
1,144,943
      
1,144,943
Total current assets
  
35,981,758
      
36,451,762
             
             
Property and equipment, at cost:
            
Land
  
2,006,375
      
2,006,375
Buildings and improvements
  
8,319,543
      
8,253,573
Machinery and equipment
  
43,770,959
      
43,228,587
Equipment under capital leases
  
983,407
      
983,407
Furniture and fixtures
  
3,431,688
      
3,361,100
Vehicles
 
3,581,435
      
3,523,467
  
   
62,093,407
      
61,356,509
Less accumulated depreciation
  
(41,978,613
)
    
(41,020,327
)
   
20,114,794
      
20,336,182
               
Cash surrender value of officers’ life insurance
  
1,039,514
      
1,039,514
Goodwill
  
2,060,786
      
2,060,786
  
Other intangibles, net of accumulated amortization
 
3,726,571
      
3,812,051
  
Other assets
  
333,064
      
449,589
  
   
7,159,935
      
7,361,940
  
Total assets
 
$ 63,256,487
    
 
$ 64,149,884
  
See notes to consolidated financial statements.
 
3
 
Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)




LIABILITIES AND SHAREHOLDERS’ EQUITY
January 31,
  
October 31,
  
 
2005
(Unaudited)
  
2004
(Audited)
  
Current liabilities:
            
Accounts payable
 
$ 3,926,215
  
 
$ 3,618,051
  
Accrued payroll
  
1,374,739
    
1,778,736
  
Taxes accrued and withheld
  
1,408,691
    
1,289,524
  
Accrued income taxes
  
310,897
    
135,556
  
Accrued expenses
  
1,097,807
    
1,028,246
  
Current portion of long-term debt:
            
Notes payable
  
1,567,630
    
1,555,911
  
Capital lease obligations
  
94,020
    
132,518
  
Total current liabilities
  
9,779,999
    
9,538,542
  
             
Long-term debt, net of current portion:
            
Notes payable, line of credit
  
1,800,000
    
2,300,000
  
Notes payable, term
  
5,544,696
    
5,940,323
  
Capital lease obligations
  
-
    
16,484
  
Other liabilities
  
429,192
    
428,366
  
Deferred income tax liabilities
  
4,375,357
    
4,375,357
  
Total liabilities
  
21,929,244
    
22,599,072
  
 
Commitments and contingencies
 
            
Shareholders’ equity:
            
Common stock, $1 par value, 20,000,000 shares authorized;
9,733,913 shares issued and outstanding
  
9,733,913
    
9,733,913
  
Additional paid-in capital
  
22,278,110
    
22,278,110
  
Retained earnings
  
9,315,220
    
9,538,789
  
Total shareholders’ equity
  
41,327,243
    
41,550,812
  
Total liabilities and shareholders’ equity
 
$ 63,256,487
  
 
$ 64,149,884
  

 


See notes to consolidated financial statements.
 
4
 
Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)

 
   
Three Months Ended January 31,
  
   
2005
 
 
2004
  
Revenues:
            
Printing
 
$ 24,436,621
  
 
$ 22,997,892
  
Office products and office furniture
  
10,003,370
    
6,315,581
  
Total revenues
  
34,439,991
    
29,313,473
  
             
Cost of sales:
            
Printing
  
17,877,263
    
17,023,500
  
Office products and office furniture
  
7,004,263
    
4,324,101
  
Total cost of sales
  
24,881,526
    
21,347,601
  
             
Gross profit
  
9,558,465
    
7,965,872
  
             
Selling, general and administrative expenses
  
9,025,372
    
7,921,054
  
             
Income from operations
  
533,093
    
44,818
  
Other income (expense):
            
Interest income
  
5,066
    
1,618
  
Interest expense
  
(137,365
)
  
(46,679
)
Other
  
62,673
    
23,034
  
   
(69,626
)
  
(22,027
)
Income before income taxes
 
463,467
    
22,791
  
Income tax expense
  
(200,341
)
  
(9,178
)
Net income
 
$ 263,126
  
 
$ 13,613
  
             
Earnings per share:
            
Basic
 
$ 0.03
  
 
$ 0.00
  
Diluted
 
$ 0.03
  
 
$ 0.00
  
             
Weighted average shares outstanding: 
            
Basic
  
9,734,000
    
9,717,000
  
Diluted
  
9,802,000
    
9,826,000
  
             
Dividends per share
 
$ 0.05
  
 
$ 0.05
  



See notes to consolidated financial statements.
 
5
 
Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

   
Three Months Ended January 31,
  
   
2005
  
2004
  
Cash flows from operating activities:
          
Net income
 
$
263,126
  
$
13,613
  
Adjustments to reconcile net income to cash
provided by operating activities:
              
Depreciation and amortization
   
1,152,111
    
975,126
  
Gain on sale of assets
    
(4,099
)
  
(1,107
)
Increase in deferred compensation
    
1,787
    
2,681
  
Bad debt expense
    
114,224
    
124,209
  
Changes in assets and liabilities:
              
Accounts receivable
    
3,238,390
    
3,192,173
  
Inventories
    
170,716
    
397,129
  
Other current assets
    
(458,741
)
  
(488,819
)
Accounts payable
    
308,164
    
(845,735
)
Accrued payroll
    
(403,997
)
  
(536,191
)
Taxes accrued and withheld
    
119,167
    
(125,986
)
Income taxes
    
175,341
    
(612,180
)
Accrued expenses
    
69,561
    
(137,423
)
Other liabilities
    
(961
)
  
(3,735
)
Net cash provided by operating activities
    
4,744,789
    
1,953,755
  
               
Cash flows from investing activities:
              
Purchases of property and equipment
    
(855,535
)
  
(1,009,258
)
Proceeds from sales of property
    
24,223
    
58,064
  
Goodwill additions
    
—
    
(130,814
)
Decrease in cash surrender value life insurance
    
—
    
32,661
  
Other assets
    
106,693
    
25,594
  
Net cash used in investing activities
    
(724,619
)
  
(1,023,753
)
               
Cash flows from financing activities:
              
Borrowings on line of credit
    
993,000
    
1,000,000
  
Payments on line of credit
    
(1,493,000
)
  
(705,668
)
Principal payments on long-term debt
    
(438,890
)
  
(266,985
)
Proceeds from exercise of stock options
    
—
    
10,520
  
Dividends paid
    
(486,695
)
  
(485,897
)
Net cash used in financing activities
    
(1,425,585
)
  
(448,030
)
Net increase in cash and cash equivalents
    
2,594,585
    
481,972
  
Cash and cash equivalents, beginning of period
    
1,745,457
    
2,171,713
  
Cash and cash equivalents, end of period
  
$
4,340,042
  
$
2,653,685
  


See notes to consolidated financial statements.
 
6

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

January 31, 2005
 
1. Basis of Presentation and Business Operations
The foregoing financial information has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and rules and regulations of the Securities and Exchange Commission for interim financial reporting. The preparation of the financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. In the opinion of management, the financial information reflects all adjustments (consisting of items of a normal recurring nature) necessary for a fair presentation of financial position, results of operations and cash flows in conformity with GAAP. These interim financial statements should be read in conjunction with the consolidated financial statements for the year ended October 31, 2004, and related notes thereto contained in Champion Industries, Inc.’s Form 10-K dated January 17, 2005. The accompanying interim financial information is unaudited. The balance sheet information as of October 31, 2004 was derived from our audited financial statements.

2. Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted average shares of common stock outstanding for the period and excludes any dilutive effects of stock options. Diluted earnings per share is computed by dividing net income by the weighted average shares of common stock outstanding for the period plus the shares that would be outstanding assuming the exercise of dilutive stock options. The dilutive effect of stock options was 68,000 and 109,000 shares for the three months ended January 31, 2005 and 2004.

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

Inventories consisted of the following:
 
   
January 31,
  
October 31,
  
   
2005
  
2004
  
Printing:
          
Raw materials
  
$
2,395,965
  
$
2,326,821
  
Work in process
    
2,058,221
    
1,998,824
  
Finished goods
    
3,563,676
    
3,460,834
  
Office products and office furniture
    
3,080,936
    
3,483,035
  
   
$
11,098,798
  
$
11,269,514
  
 
7

Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
4. Long-Term Debt
 
Long-term debt consisted of the following:
 
   
January 31,
  
October 31,
  
   
2005
  
2004
  
               
Secured term note payable
Installment notes payable to banks
  
$
3,698,242
3,414,084
  
$
3,920,000
3,576,234
  
Capital lease obligations
   
94,020
    
149,002
  
     
7,206,346
    
7,645,236
  
Less current portion
    
1,661,650
    
1,688,429
  
Long-term debt, net of current portion
  
$
5,544,696
  
$
5,956,807
  

The Company has an unsecured revolving line of credit with a bank for borrowings to a maximum of $10,000,000 with interest payable monthly at the prime rate of interest. The line of credit expires in July 2006 and contains certain restrictive financial covenants. The Company had outstanding borrowings under this facility of $1.8 million and $2.3 million at January 31, 2005 and October 31, 2004.

The Company has an unsecured revolving line of credit with a bank for borrowings to a maximum of $1,000,000 with interest payable monthly at the Wall Street Journal prime rate. The line of credit expires in October 2005 and contains certain financial covenants. There were no borrowings outstanding under this facility at January 31, 2005 and October 31, 2004.

There were no non-cash financing activities for the three months ended January 31, 2005 and 2004.

5. Shareholders’ Equity
 
The Company paid a dividend of five cents per share on December 31, 2004 to stockholders of record on December 3, 2004. Also, the Company declared a dividend of five cents per share to be paid on March 28, 2005 to stockholders of record on March 11, 2005.

6. Commitments and Contingencies
 
On February 16, 2002, a jury verdict was rendered against the Company in a civil action brought against the Company in state court in Jackson, Mississippi. The plaintiff in this civil action asserted that the Company and its Dallas Printing Company, Inc. subsidiary had engaged in unfair competition and other wrongful acts in hiring certain of its employees. The jury awarded the plaintiff $1,745,000 in actual damages and $750,000 in punitive damages.

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

The Company appealed both the jury award and the attorney fee and expense award.
 
8

Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
The Company was advised on February 3, 2004 that the Court of Appeals of the State of Mississippi had reversed the aforementioned judgment and jury verdict rendered against the Company and had remanded the case for new trial. The plaintiff petitioned the appeals court for rehearing of its ruling on February 17, 2004. The Company’s response was filed on February 24, 2004.

On June 22, 2004 the Company was advised that the Court of Appeals of the State of Mississippi had upheld its February 3, 2004 reversal of the judgment and jury verdict and its remand of the case for new trial and had denied plaintiff’s petition for rehearing of that decision. Plaintiff filed a petition for writ of certiorari with the Mississippi Supreme Court to contest the ruling of the Court of Appeals on July 6, 2004. The Company filed a response to such petition on July 27, 2004.

The Company was advised on September 16, 2004 that the Supreme Court of Mississippi had upheld the Court of Appeals of the State of Mississippi’s February 3, 2004 reversal of the judgment and jury verdict rendered February 16, 2002 against the Company and had upheld the reversal and remand of the case for new trial.

The effect of the appeals courts orders of February 3, 2004 and June 22, 2004 and the Mississippi Supreme Court’s denial of plaintiff’s petition for certiorari is to negate the trial court’s award of damages and attorneys fees previously granted against the Company, and grant a new trial on plaintiff’s claims.

As of January 31, 2005 the Company had contractual obligations in the form of leases and debt as follows:
 
   
Payments Due by Fiscal Year
  
Contractual Obligations
  
2005
  
2006
  
2007
  
2008
  
2009
  
Residual
  
Total
  
                               
Non-cancelable operating leases
  
$
1,047,867
  
$
1,220,998
  
$
945,183
  
$
701,474
  
$
253,340
  
$
-
  
$
4,168,862
  
                                             
Revolving line of credit
    
-
   
1,800,000
    
-
   
-
   
-
   
-
   
1,800,000
 
                                             
Term debt
    
1,172,003
    
1,561,364
    
1,580,206
    
1,583,979
    
300,328
   
914,446
   
7,112,326
 
                                             
Obligations under capital leases
    
77,536
   
16,484
   
-
   
-
   
-
   
-
   
94,020
 
   
$
2,297,406
  
$
4,598,846
  
$
2,525,389
  
$
2,285,453
  
$
553,668
  
$
914,446
  
$
13,175,208
  


7. Accounting for Stock-Based Compensation

In December 2004, the FASB issued SFAS No. 123R (revised 2004), Share-Based Payment. This statement revises SFAS No. 123, Accounting for Stock-Based Compensation, and requires companies to expense the value of employee stock options and similar awards. The effective date of this standard is interim and annual periods beginning after June 15, 2005.
 
The Company has elected to follow the intrinsic value method in accounting for its employee stock options. Accordingly, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
 
9

Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2004, risk-free interest rates of 4.03%, dividend yields of 4.21%, volatility factors of the expected market price of the Company's common stock of 54.0% and a weighted-average expected life of the option of 4 years.

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


   
Quarter Ended January 31,
  
   
2005
  
2004
  
           
Net income, as reported
  
$
263,126
  
$
13,613
  
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects
    
-
    
109,962
  
               
Pro forma net income (loss)
  
$
263,126
  
$
(96,349
)
Earnings (loss) per share:
              
Basic, as reported
  
$
0.03
  
$
0.00
  
Basic, pro forma
    
0.03
    
(0.01
)
               
Diluted, as reported
  
$
0.03
  
$
0.00
  
Diluted, pro forma
    
0.03
    
(0.01
)

Since the Company had a pro-forma net loss as shown above for the three months ended January 31, 2004 the dilutive effect of 109,000 stock options were anti-dilutive on a pro-forma basis for the three months ended January 31, 2004.
 
8. Acquisitions
 
On September 7, 2004 the Company acquired all the issued and outstanding capital stock of Syscan Corporation (“Syscan”), a West Virginia corporation, for a cash price of $3,500,000 and a contingent purchase price, dependent upon satisfaction of certain conditions, not to exceed the amount of $1,500,000.

The Williams Land Corporation has the option to put the 3000 Washington Street building occupied by Syscan to the Company for a price of $1.5 million and the Company has the option to purchase the building for $1.5 million at the conclusion of the five year lease term commencing September 1, 2009. This option may be exercised no later than 60 days prior to the end of the lease and closing of said purchase cannot exceed 45 days for the end of the lease.
 
10

Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
9. Industry Segment Information
 
The Company operates principally in two industry segments organized on the basis of product lines: the production, printing and sale, principally to commercial customers, of printed materials (including brochures, pamphlets, reports, tags, continuous and other forms), and the sale of office products and office furniture including interior design services.
The table below presents information about reported segments for the three months ended January 31:
 
       
Office Products
      
2005 Quarter 1
  
Printing
 
& Furniture
 
Total
  
               
Revenues
  
$
28,085,977
  
$
11,528,769
  
$
39,614,746
  
                     
Elimination of intersegment revenue
    
(3,649,356
)
  
(1,525,399
)
  
(5,174,755
)
                     
Consolidated revenues
  
$
24,436,621
  
$
10,003,370
  
$
34,439,991
  
                     
Operating income
    
271,729
    
261,364
    
533,093
  
                     
Depreciation & amortization
    
1,072,454
    
79,657
    
1,152,111
  
                     
Capital expenditures
    
782,748
    
72,787
    
855,535
  
                     
Identifiable assets
    
53,108,233
    
10,148,254
    
63,256,487
  
                     
Goodwill
    
1,774,344
    
286,442
    
2,060,786
  
                     
 
    
Office Products
  
2004 Quarter 1
    
Printing
 
 
& Furniture
 
 
Total
  
                     
Revenues
  
$
25,530,021
  
$
7,689,954
  
$
33,219,975
  
                     
Elimination of intersegment revenue
    
(2,532,129
)
  
(1,374,373
)
  
(3,906,502
)
                     
Consolidated revenues
  
$
22,997,892
  
$
6,315,581
  
$
29,313,473
  
                     
Operating income (loss)
    
177,384
    
(132,566
)
  
44,818
  
                     
Depreciation & amortization
    
961,696
    
13,430
    
975,126
  
                     
Capital expenditures
    
993,549
    
15,709
    
1,009,258
  
                     
Identifiable assets
    
45,995,910
    
9,779,939
    
55,775,849
  
                     
Goodwill
    
1,774,344
    
286,442
    
2,060,786
  
 
 
11

Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
A reconciliation of total segment revenues and of total segment operating income to income before income taxes, for the three months ended January 31, 2005 and 2004, is as follows:
 
   
Three Months Ended January 31,
  
   
2005
  
2004
  
Revenues:
          
Total segment revenues
  
$
39,614,746
  
$
33,219,975
  
Elimination of intersegment revenue
    
(5,174,755
)
  
(3,906,502
)
               
Consolidated revenue
  
$
34,439,991
  
$
29,313,473
  
               
Operating income:
              
Total segment operating income
 
$
533,093
  
$
44,818
  
               
 Interest income
    
5,066
    
1,618
  
               
Interest expense
    
(137,365
)
  
(46,679
)
               
Other income
    
62,673
    
23,034
  
               
Consolidated income before income taxes
  
$
463,467
  
$
22,791
  
               
Identifiable assets:
              
Total segment identifiable assets
  
$
63,256,487
  
$
55,775,849
  
Elimination of intersegment assets
    
—
    
—
  
               
Total consolidated assets
  
$
63,256,487
  
$
55,775,849
  
 
12

Champion Industries, Inc. and Subsidiaries
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Results of Operations
The following table sets forth, for the periods indicated, information derived from the Consolidated Income Statements as a percentage of total revenues.
 
         Three Months Ended January 31,  
        2005  2004  
          ($ in thousands)  
Revenues:
    
Printing
        
$
24,437
    
71.0
%
  
$
22,998
    
78.5
%
Office products and office furniture
          
10,003
    
29.0
      
6,316
    
21.5
  
Total revenues
          
34,440
    
100.0
      
29,314
    
100.0
  
                                   
Cost of sales:
                                  
Printing
          
17,878
    
51.9
      
17,024
    
58.1
  
Office products and office furniture
          
7,004
    
20.3
      
4,324
    
14.7
  
Total cost of sales
          
24,882
    
72.2
      
21,348
    
72.8
  
Gross profit
          
9,558
    
27.8
      
7,966
    
27.2
  
Selling, general and administrative expenses
          
9,025
    
26.2
      
7,921
    
27.0
  
Income from operations
          
533
    
1.6
      
45
    
0.2
  
Interest income
          
5
    
0.0
      
2
    
0.0
  
Interest expense
          
(137
)
  
(0.4
)
    
(47
)
  
(0.1
)
Other income
          
62
    
0.2
      
23
    
0.0
  
Income before taxes
          
463
    
1.4
      
23
    
0.1
  
Income taxes
          
(200
)
  
(0.6
)
    
(9
)
  
(0.0
)
Net income
       
$
263
    
0.8
%
  
$
14
    
0.1
%
 
Three Months Ended January 31, 2005 Compared to Three Months Ended January 31, 2004
 
Revenues
 
Total revenues increased 17.5% in the first quarter of 2005 compared to the same period in 2004 from $29.3 million to $34.4 million. Printing revenue increased 6.3% in the first quarter of 2005 to $24.4 million from $23.0 million in the first quarter of 2004. Office products and office furniture revenue increased 58.4% in the first quarter of 2005 to $10.0 million from $6.3 million in the first quarter of 2004. The revenue increase for the office products and office furniture segment was attributable to an increase in furniture sales in 2005 due in part to the additional sales derived from the purchase of Syscan coupled with organic growth and additional office product sales resulting from the Syscan acquisition. The increase in printing sales was primarily due to additional sales derived from the Syscan acquisition.
 
13

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
 
Cost of Sales
 
Total cost of sales increased 16.6% in the first quarter of 2005 to $24.9 million from $21.3 million in the first quarter of 2004. Printing cost of sales in the first quarter of 2005 increased $854,000 over the prior year and decreased as a percentage of printing sales from 74.0% in 2004 to 73.2% in 2005 primarily due to improved market pricing integrity. The printing gross margin dollar increase resulted from both increased sales volume and improved market pricing integrity. Office products and office furniture cost of sales increased 62.0% or approximately $2.7 million in 2005 to $7.0 million from $4.3 million in 2004 and increased as a percent of sales from 68.5% in 2004 to 70.0% in 2005. The increase in office products and office furniture cost of sales is attributable to the increase in sales. The increase in office products and office furniture cost of sales as a percent of sales is reflective of decreased margins due in part to wholesale pricing factors at Syscan for office supplies.
 
Operating Expenses
 
In the first quarter of 2005, selling, general and administrative expenses increased on a gross dollar basis to $9.0 million from $7.9 million in 2004, an increase of $1.1 million or 13.9%. As a percentage of sales the expenses decreased on a quarter to quarter basis in 2005 to 26.2% from 27.0% in 2004 of total sales.
 
The increase in selling, general and administrative expenses is primarily the result of additional costs incurred as a result of the acquisition of Syscan in September 2004.
 
Income from Operations and Other Income and Expenses
 
Income from operations increased in the first quarter of 2005 to $533,000 from $45,000 in the first quarter of 2004. This increase is the result of increased sales and gross profit, coupled with a decrease in selling, general and administrative expenses as a percent of sales. Other expense (net), increased approximately $48,000 from 2004 to 2005 primarily due to increases in interest expense resulting from higher outstanding borrowings and increased interest rates.
 
Income Taxes
 
The Company’s effective income tax rate was 43.2% for the first quarter of 2005 and 40.3% for the first quarter of 2004. The increase in income taxes as a percentage of income before taxes is primarily related to the nondeductibility of certain selling related expenses. The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate.
 
Net Income
 
Net income for the first quarter of 2005 was $263,000 compared to net income of $14,000 in the first quarter of 2004. Basic and diluted earnings per share for the three months ended January 31, 2005 and 2004 were $0.03 and $0.00.
 
Inflation and Economic Conditions
 
Management believes that the effect of inflation on the Company’s operations has not been material and will continue to be immaterial for the foreseeable future. The Company does not have long-term sales
 
14

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
 
and purchase contracts; therefore, to the extent permitted by competition, it has the ability to pass through to the customer most cost increases resulting from inflation, if any.
 
Seasonality
 
Historically, the Company has experienced a greater portion of its profitability in the second and fourth quarters than in the first and third quarters. The second quarter generally reflects in-creased orders for printing of corporate annual reports and proxy statements. A post-Labor Day increase in demand for printing services and office products coincides with the Company’s fourth quarter.
 
Liquidity and Capital Resources
 
Net cash provided by operations for the three months ended January 31, 2005, was $4.7 million compared to net cash provided by operations of $2.0 million during the same period in 2004. This change in net cash from operations is due primarily to timing changes in assets and liabilities, including an increase in accounts payable in 2005 compared to a decrease in accounts payable in 2004 and additional tax payments during the first quarter of 2004 compared to the first quarter of 2005.
 
Net cash used in investing activities for the three months ended January 31, 2005 was $725,000 compared to $1.0 million during the same period in 2004. The net cash used in investing activities during the first three months of 2005 primarily relates to equipment and vehicle purchases and for the first three months of 2004 primarily relates to equipment, vehicle purchases and building improvements.
 
Net cash used in financing activities for the three months ended January 31, 2005 was $1.4 million compared to $448,000 during the same period in 2004. This change is primarily due to net payments on the Company’s line of credit of $500,000 compared with net borrowings of approximately $300,000 in 2004 and a $172,000 increase in principal payments in 2005 on term debt.
 
The Company’s off balance sheet arrangements at January 31, 2005 relate to the Syscan acquisition and are associated with potential contingent purchase price consideration of $1.5 million payable in October 2006 and a put option from Williams Land Corporation to sell a building to the Company for $1.5 million. This option may be exercised no later than 60 days prior to the end of the lease and closing of said purchase cannot exceed 45 days from the end of the lease. The lease term concludes effective September 1, 2009.

Working capital on January 31, 2005 was $26.2 million, a decrease of $700,000 from October 31, 2004. Management believes that working capital and operating ratios remain at acceptable levels.

The Company expects that the combination of funds available from working capital, borrowings available under the Company’s credit facilities and anticipated cash flows from operations will provide sufficient capital resources for the foreseeable future. In the event the Company seeks to accelerate internal growth or make acquisitions beyond these sources, additional financing would be necessary.
 
Environmental Regulation
 
The Company is subject to the environmental laws and regulations of the United States, and the states in which it operates, concerning emissions into the air, discharges into the waterways and the generation,
 
15

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
 
handling and disposal of waste materials. The Company’s past expenditures relating to environmental compliance have not had a material effect on the Company. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they may have upon the capital expenditures, earnings, and competitive position of the Company in the future. Based upon information currently available, management believes that expenditures relating to environmental compliance will not have a material impact on the financial position of the Company.
 
Special Note Regarding Forward-Looking Statements
 
Certain statements contained in this Form 10-Q, including without limitation statements including the word “believes,” “anticipates,” “intends,” “expects” or words of similar import, constitute “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, general economic conditions, changes in business strategy or development plans, and other factors referenced in this Form 10-Q. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
 
ITEM 3a. Quantitative and Qualitative Disclosure About Market Risk
 
The Company does not have any significant exposure relating to market risk.
 
ITEM 4. Controls and Procedures
 
Company management, including the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15c as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There were no changes in internal controls over financial reporting during the last fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.
 
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PART II - OTHER INFORMATION
Item 6. Exhibits
 
a)
Exhibits:
     
 (31.1)
 
Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Marshall T. Reynolds
 
 
Exhibit 31.1 Page Exhibit 31.1-p1
 (31.2)
Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Todd R. Fry
 
 
Exhibit 31.2 Page Exhibit 31.2-p1
 (31.3)
Principal Operating Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Toney K. Adkins
 
 
Exhibit 31.3 Page Exhibit 31.3-p1
 (32)
Marshall T. Reynolds, Todd R. Fry and Toney K. Adkins Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley act of 2002
 
 
Exhibit 32 Page Exhibit 32-p1
 
17
 
SIGNATURES

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

CHAMPION INDUSTRIES, INC.

Date: March 11, 2005
/s/ Marshall T. Reynolds
 
Marshall T. Reynolds
 
Chief Executive Officer
   
   
Date: March 11, 2005
/s/ Toney K. Adkins
 
Toney K. Adkins
 
President and Chief Operating Officer
   
   
Date: March 11, 2005
/s/ Todd R. Fry
 
Todd R. Fry
 
Senior Vice President and Chief Financial Officer


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