form10q.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 JANUARY 31, 2008 
 
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. 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer o
 Accelerated filer o  
 Non-accelerated filer x
 
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 issuers classes of common stock, as of the latest practicable date.
 
 Class
  
 Outstanding at January 31, 2008
 Common stock, $1.00 par value per share
  
 9,987,913 shares
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 Shareholders' Equity                                                                                  6
         Consolidated Statements of Cash Flows (Unaudited)
 7
         Notes to Consolidated Financial Statements
 8
     Item 2.  Management’s Discussion and Analysis of
 
                          Financial Condition and Results of Operations                                                                                14
     Item 3a.  Quantitative and Qualitative Disclosure About Market Risk
 18
     Item 4. Controls and Procedures
19
 Part II. Other Information  
             Item 1A. Risk Factors
20
             Item 6. Exhibits
20
 Signatures
21
2
 
PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
 
 
ASSETS
  
January 31,
    
October 31,
  
   
2008
(Unaudited)
    
2007
(Audited)
  
Current assets:
            
Cash and cash equivalents
   $
519,748
     $
5,793,120
  
Accounts receivable, net of allowance of $1,518,000 and $1,511,000
    
21,791,060
      
23,239,103
  
Inventories
    
10,882,377
      
11,504,847
  
        Income tax refund     378,820       632,439  
Other current assets
    
1,441,819
      
882,535
  
Deferred income tax assets
    
969,664
      
969,664
  
Total current assets
    
35,983,488
      
43,021,708
  
                 
                 
Property and equipment, at cost:
                
Land
    
2,120,689
      
2,120,689
  
Buildings and improvements
    
12,326,645
      
12,262,229
  
Machinery and equipment
    
55,936,149
      
55,763,920
  
Furniture and fixtures
    
4,103,272
      
4,088,761
  
Vehicles
   
3,209,573
      
3,185,555
  
     
77,696,328
      
77,421,154
  
 Less accumulated depreciation
     (49,172,822 )     (48,164,640 )
      28,523,506       29,256,514  
                 
Cash surrender value of officers’ life insurance
    
834,106
      
834,106
  
Goodwill
    
38,854,364
      
38,853,657
  
        Deferred financing costs     1,748,426       1,818,140  
Other intangibles, net of accumulated amortization
   
16,519,048
      
16,779,241
  
        Trademark & masthead     18,515,316       18,515,316  
Other assets
    
81,717
      
132,909
  
     
76,552,977
      
76,933,369
  
 Total assets
   $
141,059,971
     $
149,211,591
  
See notes to consolidated financial statements.
3
 
Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
  
January 31,
    
October 31,
  
   
2008     (Unaudited)
    
2007
(Audited)
  
             
Current liabilities:            
    Accounts payable   $ 3,789,015     $ 5,491,189  
    Accrued payroll     1,857,966       2,460,287  
    Taxes accrued and withheld     817,353       1,294,125  
    Accrued expenses     1,669,659       3,433,971  
    Current portion of long-term debt     5,019,641       5,033,637  
                Total current liabilities     13,153,634       17,713,209  
                 
Long-term debt, net of current portion:                
Notes payable, line of credit
     12,525,496       15,540,496  
Notes payable, term
     62,515,937       63,837,402  
Other liabilities     670,867       10,950  
Deferred income tax liabilities
     3,382,447       3,382,447  
                Total liabilities     92,248,381       100,484,504  
                 
Shareholders’ equity:                
Common stock, $1 par value, 20,000,000 shares authorized; 9,987,913 and 9,968,913
shares issued and outstanding
     9,987,913       9,968,913  
Additional paid-in capital
     22,768,610       22,733,300  
Retained earnings
     16,715,434       16,036,224  
Other comprehensive loss
     (660,367 )     (11,350 )
                Total shareholders’ equity     48,811,590       48,727,087  
                 
Total liabilities and shareholders’ equity   $ 141,059,971     $ 149,211,591  
 
See notes to consolidated financial statements.
 
4
 
Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 
 
   
Three Months Ended January 31,
  
   
2008
    
2007
  
 Revenues:
            
      Printing   $ 25,180,134     $ 25,862,367  
      Office products and office furniture     10,077,857       9,076,966  
      Newspaper     5,035,782       -  
     Total revenues      40,293,773       34,939,333  
                 
 Cost of sales & newspaper operating costs:                
      Printing     17,801,054       18,238,302  
      Office products and office furniture     7,325,443      
6,350,004
  
      Newspaper cost of sales & operating costs     2,270,730       -  
     Total cost of sales & newspaper operating costs     27,397,227       24,588,306  
                 
 Gross profit     12,896,546       10,351,027  
                 
 Selling, general and administrative expenses     9,692,709       8,130,331  
                 
 Income from operations     3,203,837       2,220,696  
 Other income (expense):                
      Interest income     25,237       5,230  
      Interest expense     (1,749,182 )      (133,903 )
      Other     13,214       4,023  
      (1,710,731 )      (124,650 )
 Income before income taxes     1,493,106       2,096,046  
 Income tax expense     (214,859 )      (827,885 )
 Net income   $ 1,278,247     $ 1,268,161  
                 
 Earnings per share:                
      Basic   $ 0.13     $ 0.13  
      Diluted   $ 0.13     $ 0.13  
                 
 Weighted average shares outstanding:                
      Basic     9,981,000       9,939,000  
      Diluted     10,045,000       10,110,000  
                 
 Dividends per share   $ 0.06     $ 0.06
 
 
 
See notes to consolidated financial statements.
5
Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
 
           
Additional
      
  Other
      
   
Common Stock
  
Paid-In
  
Retained
  
  Comprehensive
      
   
Shares
  
Amount
  
Capital
  
Earnings
  
  Loss
  
Total
  
 Balance, October 31, 2007     9,968,913    $ 9,968,913    $ 22,733,300    $ 16,036,224    $  (11,350 )   $ 48,727,087  
    Net income for 2008     -     -     -     1,278,247    
 -
     1,278,247  
    Dividends ($0.06 per share)     -     -     -     (599,037 )   
 -
     (599,037 ) 
    Stock options exercised     19,000     19,000     35,310     -     
 -
     54,310  
Other comprehensive loss
     -     -     -     -     
 (649,017
 )   (649,017 ) 
                                       
Balance, January 31, 2008
    
9,987,913
  
$
9,987,913
  
$
22,768,610
  
$
16,715,434
  
$
 (660,367
 ) 
$
48,811,590
 
 
See notes to consolidated financial statements.
6
Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
   
Three Months Ended January 31,
  
   
2008
  
2007
  
Cash flows from operating activities:
          
Net income
 
$
1,278,247
  
$
1,268,161
  
Adjustments to reconcile net income to cash provided by operating activities:
              
Depreciation and amortization
   
1,327,116
    
955,397
  
        Deferred financing costs     77,368     -  
Loss on sale of assets
    
2,523
 
  
1,209
 
Increase in deferred compensation
    
-
    
446
  
Bad debt expense
    
140,161
    
85,757
  
Changes in assets and liabilities:
              
Accounts receivable
    
1,307,882
    
75,236
  
Inventories
    
622,470
    
(209,335
 )
Other current assets
    
(559,284
)
  
(410,340
)
Accounts payable
    
(1,690,823
 )   
(579,801
)
Accrued payroll
    
(602,321
)
  
(276,262
)
Taxes accrued and withheld
    
(476,772
 )  
3,321
 
Income taxes
    
253,619
    
47,459
 
Accrued expenses
    
(148,196
 )  
72,329
 
Other liabilities
    
(450
)
  
(1,078
)
Net cash provided by operating activities
    
1,531,540
    
1,032,499
  
               
Cash flows from investing activities:
              
Purchases of property and equipment
    
(359,633
)
  
(1,161,218
)
Proceeds from sales of property
    
18,541
    
23,570
  
Businesses acquired
    
(1,616,823
)
  
(1,350,725
 )
Change in other assets
    
48,191
    
(3,506
 ) 
Net cash used in investing activities
    
(1,909,724
)
  
(2,491,879
)
               
Cash flows from financing activities:
              
Borrowings on line of credit
    
-
    
4,134,000
  
Payments on line of credit
    
(3,015,000
)
  
(4,134,000
)
Proceeds from term debt and leases     -     1,351,225  
Principal payments on long-term debt
    
(1,335,461
)
  
(909,158
)
Proceeds from exercise of stock options     54,310     109,440  
Dividends paid
    
(599,037
)
  
(596,094
)
Net cash used in financing activities
    
(4,895,188
)
  
(44,587
)
Net decrease in cash and cash equivalents
    
(5,273,372
 )   
(1,503,967
 ) 
Cash and cash equivalents, beginning of period
    
5,793,120
    
5,486,577
  
Cash and cash equivalents, end of period
  
$
519,748
  
$
3,982,610
  
See notes to consolidated financial statements.
7
Champion Industries, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements (Unaudited)
 
January 31, 2008
 
 
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, 2007, and related notes thereto contained in Champion Industries, Inc.’s Form 10-K dated January 21, 2008. 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, 2007 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 64,000 and 171,000 shares for the three months ended January 31, 2008 and 2007.
 
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,
  
   
2008
  
2007
  
Printing and newspaper:
          
Raw materials
  
$
2,454,048
  
$
2,401,340
  
Work in process
    
1,734,760
    
1,906,301
  
Finished goods
    
4,155,092
    
4,003,318
  
Office products and office furniture
    
2,538,477
    
3,193,888
  
   
$
10,882,377
  
$
11,504,847
  
 
8
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,
  
   
2008
  
2007
  
        Installment notes payable to banks   $
135,578
    $ 171,039  
        Term loan facility with a bank
  
 
67,400,000
  
 
68,700,000
  
     
67,535,578
    
68,871,039
  
Less current portion
    
5,019,641
    
5,033,637
  
Long-term debt, net of current portion
  
$
62,515,937
  
$
63,837,402
  
 
The secured and unsecured credit facilities contain restrictive financial covenants requiring the Company to maintain certain financial ratios. The Company was in compliance with these covenants at January 31, 2008. The Company is required to maintain a minimum of $750,000 of compensating balances with Fifth Third Bank under the terms of its credit agreement. The Company is permitted to pay dividends under its credit agreement as long as no default or event of default exists or shall exist after giving effect to the proposed dividend and the Company has delivered to the credit agreement's administrative agent prior to the proposed dividend a pro forma compliance certificate evidencing compliance with applicable covenants as defined in the credit agreement.
 
The Company is required to make certain mandatory payments on its credit facilities related to (1) net proceeds received from a loss subject to applicable thresholds, (2) equity proceeds and (3) effective January 31, 2009, the Company is required to prepay its credit facilities by 75% of excess cash flow for its most recently completed fiscal year. The excess cash flow for purposes of this calculation is defined as the difference (if any) between (a) EBITDA for such period and (b) federal, state and local income taxes paid in cash during such period plus capital expenditures during such period not financed with indebtedness plus interest expense paid in cash during such period plus the aggregate amount of scheduled payments made by the Borrower and its Subsidiaries during such period in respect of all principal on all indebtedness (whether at maturity, as a result of mandatory sinking fund redemption, or otherwise), plus restricted payments paid in cash by the Borrower during such period in compliance with the credit agreement.
 
The Company can borrow a maximum of $30,000,000 under its revolving line of credit subject to a borrowing base limitation with interest payable monthly at the prime rate of interest and/or LIBOR plus a margin. The Company had borrowed $12,525,496 and $15,540,496 under this facility at January 31, 2008 and October 31, 2007. Pursuant to its borrowing base calculation, the Company had approximately $5.5 million in additional availability under its $30.0 million revolving credit line at January 31, 2008. The line of credit expires in September 2012 and contains certain restrictive financial covenants, is subject to borrowing base limitations and is collateralized by substantially all of the assets of the Company.

The 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 2008 and contains certain financial covenants. There were no borrowings outstanding under this facility at January 31, 2008 and October 31, 2007.
 
There were no non-cash financing activities for the three months ended January 31, 2008 and 2007. 
 
5. Shareholders’ Equity
 
The Company paid a dividend of six cents per share on December 28, 2007 to stockholders of record on December 7, 2007. Also, the Company declared a dividend of six cents per share to be paid on March 24, 2008 to stockholders of record on March 7, 2008.
 
The Company issued 19,000 and 34,000 shares for the exercise of stock options during the first quarter of 2008 and 2007, for total proceeds from stock options exercised of approximately $54,000 and $109,000.
 
9

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

As of January 31, 2008 the Company had contractual obligations in the form of leases and debt as follows:
 
   
Payments Due by Fiscal Year
  
Contractual Obligations
  
2008
  
2009
  
2010
  
2011
  
2012
  
Residual
  
Total
  
                               
Non-cancelable operating leases
  
$
906,846
  
$
839,739
  
$
542,912
  
$
440,242
  
$
283,200
  
$
221,200
  
$
3,234,139
  
Line of credit      -     -       -      -      12,525,496     -      12,525,496  
Term debt
    
3,773,176
    
4,937,402
    
4,900,000
    
4,900,000
    
4,900,000
    
44,125,000
    
67,535,578
  
                                             
   
$
4,680,022
  
$
5,777,141
  
$
5,442,912
  
$
5,340,242
  
$
17,708,696
  
$
44,346,200
  
$
83,295,213
  
 
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 initially was for interim and annual periods beginning after June 15, 2005. On April 14, 2005, the United States Securities and Exchange Commission amended the effective date of this standard to the beginning of a company’s fiscal year that begins after June 15, 2005. Therefore, the effective date of this standard for the Company was November 1, 2005. Since the Company’s employee stock options vest immediately in the year granted, the initial adoption of this standard had no effect on the Company’s financial statements. However, the Company will be required to expense the fair value of the employee stock options when future options are granted or when existing options are modified or repurchased pursuant to the provisions of SFAS No. 123R.
 
The Company did not issue any employee stock options for the three months ended January 31, 2008 and 2007.
 
8. Income Taxes
 
The Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48) effective November 1, 2007 with no effect on the Company's consolidated financial statements. As of the date of adoption, the Company had approximately $150,000 of unrecognized tax benefits, all of which would impact the effective tax rate if recognized. The Company is not currently under examination by the IRS. As of November 1, 2007, the Company is subject to U.S. Federal income tax examinations for the fiscal tax years ended October 31, 2004, 2005, 2006 and 2007. State Income Tax returns are generally subject to a period of examination for a period of three to five years. We have one state income tax return covering our fiscal year end 2004 and 2005 currently under examination. Tax interest and penalties are classified as income taxes in the accompanying statements of income and were insignificant for all periods presented. The Company does not currently anticipate that any significant increase or decrease to the unrecognized tax benefit will be recorded during the next 12 months.
 
10
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
 
9. Acquisitions
 
On September 14, 2007, the Company completed, pursuant to an asset purchase agreement, the acquisition of The Herald-Dispatch daily newspaper in Huntington, WV. The purchase price was $77.0 million and subject to a working capital payment of $837,554 plus or minus any change in working capital from the index working capital base of $1,675,107 at the closing date of September 14, 2007.  The working capital payment totaled approximately $1.6 million and was paid in January 2008.
 
On September 7, 2004, the Company acquired all the issued and outstanding capital stock of Syscan Corporation (“Syscan”), a West Virginia corporation, for a cash price of $3,500,000 and a contingent purchase price, dependent upon satisfaction of certain conditions, not to exceed the amount of $1,500,000. On December 14, 2006, the Company paid the contingent purchase price in the amount of $1,350,725.
 
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 from the end of the lease.
11
 
10. 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 publishes The Herald-Dispatch daily newspaper in Huntington, West Virginia with a total daily and Sunday circulation of approximately 27,000 and 32,000, respectively.
 
The table below presents information about reported segments for the three months ended January 31:
 
2008 Quarter 1  
Printing
    
Office Products & Furniture
    
Newspaper
    
Total
  
                         
Revenues   $ 28,507,768     $ 12,058,132     $ 5,035,782     $ 45,601,682  
                                 
Elimination of intersegment revenue     (3,327,634 )     (1,980,275 )     -       (5,307,909 )
                                 
Consolidated revenues   $ 25,180,134     $ 10,077,857     $ 5,035,782     $ 40,293,773  
                                 
Operating income     1,344,079       499,699       1,360,059       3,203,837  
                                 
Depreciation & amortization     918,771       54,887       353,458       1,327,116  
                                 
Capital expenditures     282,641       43,002       33,990       359,633  
                                 
Identifiable assets     56,124,161       3,860,314       81,075,496       141,059,971  
                                 
Goodwill     2,226,837       1,230,485       35,397,042       38,854,364  
                                 
2007 Quarter 1  
Printing
    
Office Products & Furniture
    
Newspaper
    
Total
  
                                 
Revenues   $ 28,999,524     $ 11,229,940     $ -     $ 40,229,464  
                                 
Elimination of intersegment revenue     (3,137,157 )     (2,152,974 )     -       (5,290,131 )
                                 
Consolidated revenues   $ 25,862,367     $ 9,076,966     $ -     $ 34,939,333  
                                 
Operating income     1,739,649       481,047       -       2,220,696  
                                 
Depreciation & amortization     904,263       51,134       -       955,397  
                                 
Capital expenditures     1,131,915       29,303       -       1,161,218  
                                 
Identifiable assets     54,752,575       10,375,416       -       65,127,991  
                                 
Goodwill     2,226,837       1,184,674       -       3,411,511  
 
12
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, 2008 and 2007, is as follows:
 
   
Three Months Ended January 31,
  
   
2008
  
2007
  
Revenues:
          
Total segment revenues
  
$
45,601,682
  
$
40,229,464
  
Elimination of intersegment revenue
    
(5,307,909
)
  
(5,290,131
)
               
Consolidated revenue
  
$
40,293,773
  
$
34,939,333
  
               
Operating income:
              
Total segment operating income
 
$
3,203,837
  
$
2,220,696
  
               
 Interest income
    
25,237
    
5,230
  
               
Interest expense
    
(1,749,182
)
  
(133,903
)
               
Other (expense) income
    
13,214
    
4,023
  
               
Consolidated income before income taxes
  
$
1,493,106
  
$
2,096,046
  
               
Identifiable assets:
              
Total segment identifiable assets
  
$
141,059,971
  
$
65,127,991
  
Elimination of intersegment assets
    
-
    
-
  
               
Total consolidated assets
  
$
141,059,971
  
$
65,127,991
  
 
11. Derivative Instruments and Hedging Activities
 
    The Company manages exposure to changes in market interest rates. The Company's use of derivative instruments is limited to highly effective fixed and floating interest rate swap agreements used to manage well-defined interest rate risk exposures. The Company monitors its positions and the credit ratings of its counterparties and does not anticipate non-performance by the counterparties. Interest rate swap agreements are not entered into for trading purposes.
 
    At September 28, 2007, the Company was party to an interest rate swap agreement which terminates on October 29, 2010.  The swap agreement is with a major financial institution and aggregates $25 million in notional principal amount. This swap agreement effectively converted $25 million of variable interest rate debt to fixed rate debt. The swap agreement requires the Company to make fixed interest payments based on an average effective rate of 4.78% and receive variable interest payments from its counterparties based on one-month LIBOR (actual rate of 3.27% at January 31, 2008).  The remaining term of this swap agreement is approximately 33 months. In fiscal 2008, the Company recorded a net change in the fair value of the fixed interest rate swap agreement in the amount of $649,000, net of income tax as other comprehensive loss. The cumulative other comprehensive loss, net of income tax, recorded by the Company was $660,000 at January 31, 2008.  The net additional interest payments made or received under this swap agreement are recognized in interest expense.
13

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,
($ In thousands)
  
   
2008
    
2007
  
 Revenues:                    
 
          
    Printing   $
25,180
       62.5  %    $
25,862
       74.0 %
    Office products and office furniture     10,078       25.0       9,077       26.0  
    Newspaper     5,036       12.5       -       -  
       Total revenues     40,294       100.0       34,939       100.00  
                                 
 Cost of sales & newspaper operating costs:                                
    Printing     17,801       44.2      
18,238
       52.2  
    Office products and office furniture     7,325       18.2       6,350       18.2  
    Newspaper cost of sales and operating costs      2,271        5.6       -       -  
       Total cost of sales & newspaper operating costs     27,397       68.0       24,588       70.4  
 Gross profit     12,897        32.0       10,351       29.6  
 Selling, general and administrative expenses      9,693        24.0       8,130       23.2  
 Income from operations      3,204        8.0       2,221       6.4  
    Interest income      25        0.0       5       0.0  
    Interest expense      (1,749 )       (4.3 )      (134 )     (0.4 )
    Other income      13        0.0       4       0.0  
 Income before taxes     1,493        3.7       2,096       6.0  
    Income taxes      (215 )      (0.5 )      (828 )     (2.4 )
 Net income   $  1,278        3.2 %   $ 1,268       3.6 %
14
Champion Industries, Inc. and Subsidiaries
 
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
 
 
Three Months Ended January 31, 2008 Compared to Three Months Ended January 31, 2007
 
Revenues
 
Total revenues increased 15.3% in the first quarter of 2008 compared to the same period in 2007 from $34.9 million to $40.3 million. Printing revenue decreased 2.6% in the first quarter of 2008 to $25.2 million from $25.9 million in the first quarter of 2007. Office products and office furniture revenue increased 11.0% in the first quarter of 2008 to $10.1 million from $9.1 million in the first quarter of 2007. The decrease in printing sales was due to sluggish sales in several of our commercial plants that operate primarily in the sheetfed arena. The increase in office products and office furniture sales was primarily due to higher furniture sales associated with contract furniture projects. The Company recorded newspaper revenues associated with the acquisition of The Herald-Dispatch of approximately $5.0 million consisting of advertising revenue of approximately $3.9 million and $1.1 million in circulation revenues. The on-line revenues for the three months ended January 31, 2008 approximated $340,000 and are recorded as a component of advertising revenue.
 
Cost of Sales and Newspaper Operating Costs
 
Total cost of sales increased 11.4% in the first quarter of 2008 to $27.4 million from $24.6 million in the first quarter of 2007. Printing cost of sales in the first quarter of 2008 decreased $437,000 over the prior year primarily due to lower printing sales on relatively flat gross margin percent. Office products and office furniture cost of sales increased in 2008 from 2007 levels and increased as a percent of sales from 70.0% in 2007 to 72.7% in 2008. The increase in office products and office furniture cost of sales as a percent of sales is primarily reflective of an increase in furniture cost of sales as a percent of furniture sales. Newspaper cost of sales as a percent of newspaper sales were 45.1% for the three months ended January 31, 2008.
 
Operating Expenses
 
In the first quarter of 2008, selling, general and administrative expenses increased on a gross dollar basis to $9.7 million from $8.1 million in 2007, an increase of $1.6 million or 19.2%. As a percentage of sales, the expenses increased on a quarter to quarter basis in 2008 to 24.0% from 23.2% in 2007 of total sales. The increase in selling, general and administrative expenses is primarily the result of the acquisition of The Herald-Dispatch.
15

Champion Industries, Inc. and Subsidiaries
 
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
 
 
Income from Operations and Other Income and Expenses
 
Income from operations increased in the first quarter of 2008 to $3.2 million from $2.2 million in the first quarter of 2007. This increase is the result of the acquisition of The Herald-Dispatch. 
 
Other expense (net), increased approximately $1.6 million from 2007 to 2008 primarily due to increases in interest expense resulting from higher average borrowings associated with the financing to purchase The Herald-Dispatch.
 
Income Taxes
 
The Company’s effective income tax rate was 14.4% for the first quarter of 2008 and 39.5% for the first quarter of 2007. The decrease in income taxes as a percentage of income before taxes is primarily related to amortization expense deductions recorded as a permanent difference due to the acquisition of The Herald-Dispatch. 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 2008 was $1,278,000 compared to net income of $1,268,000 in the first quarter of 2007. Basic and diluted earnings per share for the three months ended January 31, 2008 and 2007 were $0.13 and $0.13.
 
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 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 increased orders for printing of corporate annual reports and proxy statements. A post-Labor Day increase in demand for printing services and office products coincides with the Company’s fourth quarter.
 
Our business is subject to seasonal fluctuations that we expect to continue to be reflected in our operating results in future periods. On a historical basis The Herald-Dispatch's first and third calendar quarters of the year tended to be the weakest because advertising volume is at its lowest levels following the holiday season and a seasonal slowdown in the summer months. Correspondingly, on a historical basis the fourth calendar quarter followed by the second calendar quarter tended to be the strongest quarters. The fourth calendar quarter includes heavy holiday season advertising. Other factors that affect our quarterly revenues and operating results may be beyond our control, including changes in the pricing policies of our competitors, the hiring and retention of key personnel, wage and cost pressures, distribution costs, changes in newsprint prices and general economic factors.
 
16
Liquidity and Capital Resources
 
Net cash provided by operations for the three months ended January 31, 2008, was $1.5 million compared to net cash provided by operations of $1.0 million during the same period in 2007. This change in net cash from operations is due primarily to higher depreciation and amortization expense primarily as a result of the acquisition of The Herald-Dispatch. 
 
Net cash used in investing activities for the three months ended January 31, 2008 was $1.9 million compared to $2.5 million during the same period in 2007. The net cash used in investing activities during the first three months of 2008 primarily relates to the payment of the working capital adjustment associated with the acquisition of The Herald-Dispatch and the purchase of equipment and vehicles. The net cash used in investing activities during the first three months of 2007 primarily relates to the payment of the contingent purchase price for the Syscan acquisition, capital expenditures for the build out of the facility occupied by Champion Output Solutions and the purchase of equipment and vehicles.
17
Champion Industries, Inc. and Subsidiaries
 
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
 
 
Net cash used in financing activities for the three months ended January 31, 2008 was $4.9 million compared to $45,000 during the same period in 2007. This increase is primarily due to payments on the line of credit and scheduled principal payments on indebtedness.
 
The Company’s off balance sheet arrangements at January 31, 2008 relate to the Syscan acquisition and are associated with a put option permitting 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, 2008 was $22.8 million, a decrease of $2.5 million from October 31, 2007. 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, 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 and business conditions, general economic and business conditions in the Company’s market areas affected by Hurricane Katrina, changes in business strategy or development plans and other factors referenced in this Form 10-Q , including without limitations under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”  The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
 
ITEM 3a. Quantitative and Qualitative Disclosure About Market Risk
 
The Company does not have any significant exposure relating to market risk.
18
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.
 
19
 
PART II - OTHER INFORMATION
 
 
Item 1A. Risk Factors
 
There were no material changes in risk factors from disclosures previously reported in our annual report on Form 10-K for the fiscal year ended October 31, 2007.
 
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
 
20
 
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 10, 2008
/s/ Marshall T. Reynolds
 
Marshall T. Reynolds
 
Chief Executive Officer
   
   
Date: March 10, 2008
/s/ Toney K. Adkins
 
Toney K. Adkins
 
President and Chief Operating Officer
   
   
Date: March 10, 2008
/s/ Todd R. Fry
 
Todd R. Fry
 
Senior Vice President and Chief Financial Officer
 
 
21