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 July 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, 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 issuers classes of common stock, as of the latest practicable date.
 
 Class
 
 Outstanding at July 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 (Unaudited)
 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 3.  Quantitative and Qualitative Disclosure About Market Risk
 19
  Item 4T.  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
 
July 31,
 
 
 
October 31,
  
 
 
2008
(Unaudited)
 
 
 
2007
(Audited)
 
Current assets:
 
 
 
 
 
 
  
     Cash and cash equivalents
$
329,841
 
 
$ 
5,793,120
 
    Accounts receivable, net of allowance of $1,457,000 and $1,511,000
 
21,864,628
 
 
 
23,239,103
  
     Inventories
 
11,590,551
 
 
 
11,504,847
  
 Income tax refund
  
266,595
       632,439  
     Other current assets
 
1,089,112
 
 
 
882,535
  
     Deferred income tax assets
 
1,066,611
 
 
 
969,664
  
      Total current assets
 
36,207,338
 
 
 
43,021,708
  
 
 
 
 
 
 
 
  
     Property and equipment, at cost:
 
 
 
 
 
 
  
      Land
 
2,120,689
 
 
 
2,120,689
  
      Buildings and improvements
 
12,397,296
 
 
 
12,262,229
  
      Machinery and equipment
 
55,002,603
 
 
 
55,763,920
  
      Furniture and fixtures
 
4,079,690
 
 
 
4,088,761
  
      Vehicles
 
3,229,184
 
 
 
3,185,555
 
 
 
76,829,462
 
 
 
77,421,154
  
      Less accumulated depreciation
 
(48,847,502
)
 
 
(48,164,640
)
 
 
27,981,960
 
 
 
29,256,514
  
 
 
 
 
 
 
 
 
    Cash surrender value of officers’ life insurance
 
834,106
 
 
 
834,106
  
    Goodwill
 
38,854,364
 
 
 
38,853,657
 
Deferred financing costs
   1,586,037       1,818,140  
    Other intangibles, net of accumulated amortization
 
15,991,016
 
 
 
16,779,241
 
  Trademark & masthead   18,515,316       18,515,316  
     Other assets
 
73,198
 
 
 
132,909
 
 
 
75,854,037
 
 
 
76,933,369
 
    Total assets
$
140,043,335
 
 
$
149,211,591
 
 
See notes to consolidated financial statements.
 
 
3
Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
July 31,
 
October 31,
 
 
2008
(Unaudited)
 
2007
(Audited)
 
Current liabilities:
 
 
 
 
 
 
  Accounts payable
$
4,517,322
 
$
5,491,189
 
  Accrued payroll
 
2,629,595
 
 
2,460,287
 
  Taxes accrued and withheld
 
989,380
 
 
1,294,125
 
  Accrued expenses
 
1,837,011
 
 
3,433,971
 
  Current portion of long-term debt:
 
 
 
 
 
 
     Notes payable
   5,102,173      5,033,637   
      Total current liabilities
 
15,075,481
 
 
17,713,209
 
 
 
 
 
 
 
 
Long-term debt, net of current portion:
 
 
 
 
 
 
Line of credit
 
10,125,496
 
 
15,540,496
 
Notes payable, term
 
60,506,964
 
 
63,837,402
 
Other liabilities
 
750,470
 
 
10,950
 
Deferred income tax liabilities
 
3,294,209
 
 
3,382,447
 
      Total liabilities
 
89,752,620
 
 
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
 
17,978,714
 
 
16,036,224
 
  Other comprehensive loss   (444,522 )   (11,350 )
Total shareholders’ equity
 
50,290,715
 
 
48,727,087
 
 Total liabilities and shareholders’ equity
$
140,043,335
 
$
149,211,591
 
 
See notes to consolidated financial statements.
4
Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 
 
Three Months Ended
July 31,
Nine Months Ended
July 31,
  
 
 
 
2008
 
 
2007
 
 
2008
 
 
2007
  
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
  
  Printing
 
$
25,310,637
 
$
24,667,108
 
$
76,773,926
 
$
75,824,770
  
  Office products and office furniture
 
 
9,796,451
 
 
10,924,751
 
 
28,314,705
 
 
28,520,299
  
  Newspaper     4,609,131     -      14,192,580     -   
    Total revenues
 
 
39,716,219
 
 
35,591,859
 
 
119,281,211
 
 
104,345,069
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Cost of sales and newspaper operating costs:
 
 
 
 
 
 
 
 
 
 
 
 
  
  Printing
 
 
18,211,453
 
 
17,998,427
 
 
54,480,388
 
 
53,989,332
  
  Office products and office furniture
 
 
6,804,811
 
 
7,841,171
 
 
19,824,259
 
 
20,061,128
  
  Newspaper cost of sales and operating costs     2,428,051      -     7,037,662     -  
    Total cost of sales and newspaper operating costs
 
 
27,444,315
 
 
25,839,598
 
 
81,342,309
 
 
74,050,460
  
Gross profit
 
 
12,271,904
 
 
9,752,261
 
 
37,938,902
 
 
30,294,609
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
    Selling, general and administrative expenses
 
 
9,846,190
 
 
7,930,683
 
 
29,235,077
 
 
23,830,326
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Income from operations
 
 
2,425,714
 
 
1,821,578
  
 
8,703,825
 
 
6,464,283
  
                           
Other income (expenses):
 
 
 
 
 
 
 
 
 
 
 
 
  
     Interest income
 
 
9,880
 
 
13,751
 
 
61,115
 
 
31,825
  
     Interest expense
 
 
(1,270,690
)
 
(137,232
)
 
(4,385,648
)
 
(423,298
) 
     Other
 
 
16,820
 
 
12,745
 
 
49,734
 
 
31,625
  
 
 
 
(1,243,990
)
 
(110,736
)
 
(4,274,799
)
 
(359,848
) 
                           
Income before income taxes
 
 
1,181,724
 
 
1,710,842
  
 
4,429,026
 
 
6,104,435
  
     Income tax (expense)
 
 
(114,809
) 
 
(679,350
) 
 
(688,947
)
 
(2,415,041
)
Net income
 
$
1,066,915
 
$
1,031,492
  
$
3,740,079
 
$
3,689,394
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Earnings per share
 
 
 
 
 
 
 
 
 
 
 
 
  
     Basic
 
$
0.11
 
$
0.10
  
$
0.37
 
$
0.37
  
     Diluted
 
$
0.11
 
$
0.10
 
$
0.37
 
$
0.36
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
  
     Basic
 
 
9,988,000
 
 
9,963,000
 
 
9,986,000
 
 
9,954,000
  
     Diluted
 
 
10,023,000
 
 
10,106,000
 
 
10,036,000
 
 
10,116,000
  
Dividends per share
 
$
0.06 
 
$
0.06
 
$
0.18
 
$
0.18
  
 
See notes to consolidated financial statements.
5
Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(Unaudited)
         
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  
                                     
Comprehensive income:                                    
  Net income for 2008
  
-
    
-
    
-
    
3,740,079
    
 -
    
3,740,079
  
Other comprehensive loss (net of tax)
   -     -     -     -     (433,172 )  
(433,172
 )
    Total comprehesive income   -     -     -     3,740,079     (433,172 )   3,306,907  
                                     
  Dividends ($0.18 per share)
  
-
    
-
    
-
    
(1,797,589
) 
  
 -
    
(1,797,589
) 
  Stock options exercised
  
19,000
    
19,000
    
35,310
    
- 
    
 -
    
54,310
  
                                     
Balance, July 31, 2008
  
9,987,913
  
$
9,987,913
  
$
22,768,610
  
$
17,978,714
  
$
 (444,522
) 
$
50,290,715
  
 
See notes to consolidated financial statements.
6
Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
 
 
Nine Months Ended July 31,
 
 
 
2008
 
2007
 
Cash flows from operating activities:
 
 
 
 
 
Net income
 
$
3,740,079
 
$
3,689,394
 
Adjustments to reconcile net income to cash
provided by operating activities:
 
 
 
 
 
 
 
  Depreciation and amortization
 
 
4,033,131
 
 
2,803,589
 
Gain on sale of assets
 
 
(2,254
) 
 
(11,303
 )
Deferred income taxes
 
 
111,163
 
 
(195,440
) 
Deferred financing costs
     232,103     -   
    Increase in deferred compensation
 
 
- 
 
 
1,340
 
Bad debt expense
 
 
358,244
 
 
437,645
 
     Changes in assets and liabilities:
 
 
  
 
 
  
 
    Accounts receivable
 
 
1,016,231
  
 
(325,648
)
    Inventories
 
 
(85,704
)
 
399,211
 
    Other current assets
 
 
(206,577
)
 
(354,031
)
    Accounts payable
 
 
(962,517
) 
 
(298,841
)
    Accrued payroll
 
 
169,308
 
 
23,993
 
    Taxes accrued and withheld
 
 
(304,745
) 
 
12,351
 
    Income taxes
 
 
365,844
 
 
(980,714
 ) 
    Accrued expenses
 
 
19,156
 
 
47,375
 
    Other liabilities
 
 
(1,350
)
 
(1,680
)
     Net cash provided by operating activities
 
 
8,482,112
 
 
5,247,241
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Purchases of property and equipment
 
 
(2,107,847
)
 
(2,578,221
)
Proceeds from sales of property
 
 
148,749
 
 
126,659
 
Businesses acquired
    
(1,616,823
)
  
(1,481,556
)
Change in other assets
 
 
50,711
 
 
(4,168
) 
     Net cash used in investing activities
 
 
(3,525,210
)
 
(3,937,286
)
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Borrowings on line of credit
 
 
-
 
 
9,311,000
 
Payments on line of credit
 
 
(5,415,000
)
 
(9,311,000
)
Proceeds from term debt and leases
 
 
767,852
 
 
2,654,254
 
Principal payments on long-term debt
 
 
(4,029,754
)
 
(2,856,061
)
Proceeds from exercise of stock options
    
54,310
     126,060  
Dividends paid
 
 
(1,797,589
)
 
(1,791,645
)
     Net cash used in financing activities
 
 
(10,420,181
 )
 
(1,867,392
)
Net decrease in cash and cash equivalents
 
 
(5,463,279
) 
 
(557,437
) 
Cash and cash equivalents, beginning of period
 
 
5,793,120
 
 
5,486,577
 
Cash and cash equivalents, end of period
 
$
329,841
 
$
4,929,140
 
See notes to consolidated financial statements.
7
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
July 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 35,000 and 51,000 shares for the three and nine months ended July 31, 2008 and 143,000 and 162,000 shares for the three and nine months ended July 31, 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:
 
 
July 31,
 
October 31,
 
 
 
2008
 
2007
 
Printing and newspaper:
 
 
 
 
 
    Raw materials
 
$
3,083,689
 
$
2,401,340
 
    Work in process
 
 
1,724,908
 
 
1,906,301
 
    Finished goods
 
 
4,049,610
 
 
4,003,318
 
Office products and office furniture
 
 
2,732,344
 
 
3,193,888
 
 
 
$
11,590,551
 
$
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:
 
July 31.
 
October 31,
 
 
 
2008
 
2007
 
Installment notes payable to banks
 
 $
      809,137
 
 $
171,039
 
Term loan facility with a bank
 
 
64,800,000
 
 
68,700,000
 
 
 
 
65,609,137
 
 
68,871,039
 
Less current portion
 
 
5,102,173
 
 
5,033,637
 
Long-term debt, net of current portion
 
$
60,506,964
 
$
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 July 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 $10,125,496 and $15,540,496 under this facility at July 31, 2008 and October 31, 2007. Pursuant to its borrowing base calculation, the Company had approximately $6.8 million and $8.8 million in additional availability under its $30.0 million revolving credit line at July 31, 2008 and October 31, 2007.  The Company’s credit availability is calculated pursuant to a minimum excess availability plus cash and cash equivalents calculation subject to a $3.0 million threshold. 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.
 
In April 2008, the Company entered into a $767,852 five-year term debt agreement with a bank with interest at the prime rate.
 
There were no non-cash financing and investing activities for the three and nine months ended July 31, 2008.  Non-cash financing and investing activities for the three and nine months ended July 31, 2007 were $1.6 and $1.7 million.  These activities primarily related to equipment purchases.
 
5. Shareholders’ Equity
 
The Company paid a dividend of six cents per share on June 23, 2008 to stockholders of record on June 6, 2008. Also, the Company declared a dividend of six cents per share to be paid on September 19, 2008 to stockholders of record on September 2, 2008.
 
The Company issued 19,000 and 40,000 shares of stock during the nine months ended July 31, 2008 and 2007, for total proceeds from stock options exercised of approximately $54,000 and $126,000.

9
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
6. Commitments and Contingencies
 
As of July 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
 
$
342,381
 
$
1,234,474
 
$
889,160
 
 $
735,145
 
 $
576,703
    $
490,244
  
 $
4,268,107
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        
 
 
 
Revolving line of credit
 
 
-
 
 
-
 
 
-
 
 
-
 
 
10,125,496
    
-
  
 
10,125,496
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        
 
 
 
Term debt
 
 
1,209,285
 
 
5,078,981
 
 
5,049,194
 
 
5,057,218
 
 
5,065,674
    
 44,148,785
  
 
65,609,137
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        
 
 
 
 
 
$
1,551,666
 
$
6,313,455
 
$
5,938,354
 
$
5,792,363
 
 $
15,767,873
    $
 44,639,029
  
 $
80,002,740
  
 
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. Since the Company’s outstanding employee stock options vested 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 and nine months ended July 31, 2008 and 2007.
10
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
8. Acquisitions
 
On September 14, 2007, the Company completed, pursuant to an asset purchase agreement, the acquisition of The Herald-Dispatch daily newspaper in Huntington, WV.  The purchase price was $77.0 million and subject to a working capital payment of $837,554 plus or minus any change in working capital from the index working capital base of $1,675,107 at the closing date of September 14, 2007.  The working capital payment totaled approximately $1.6 million 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 ending September 1, 2009. This option may be exercised no later than 60 days prior to the end of the lease and closing of said purchase cannot exceed 45 days from the end of the lease.
 
9.  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 has approximately $150,000 of unrecognized tax benefits, all of which would impact the effective tax rate if recognized.  The Company was notified in April 2008 and an examination began in May 2008 by the IRS covering our fiscal year-end 2005 federal tax return.  This audit was completed and settled during the third quarter of 2008. As of July 31, 2008, the Company is subject to U.S. Federal income tax examinations for the fiscal tax years ended October 31, 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 years ended 2004 and 2005 currently under examination.  Tax interest and penalties are classified as income taxes in the accompanying statements of income and were insignificant for all periods presented.  The Company is currently unable to assess whether any significant increase or decrease to the unrecognized tax benefit will be recorded during the next 12 months. 
 
11

Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
 
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 publication of The Herald-Dispatch daily newspaper in Huntington, WV 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 and nine months ended July 31:
 
2008 Quarter 3
Printing
  
Office Products & Furniture
Newspaper
  
Total
  
                         
Revenues
   $ 28,577,242     $ 11,803,597     $ 4,609,131     $ 44,989,970  
Elimination of intersegment revenue
     (3,266,605 )     (2,007,146 )     -        (5,273,751 )
Consolidated revenues
   $ 25,310,637       9,796,451     $ 4,609,131     $ 39,716,219  
                                 
Operating income
     990,242       722,955       712,517       2,425,714  
Depreciation & amortization
     887,680       51,952       413,961       1,353,593  
Capital expenditures
     910,128       20,667       141,935       1,072,730  
Identifiable assets
     55,413,704       3,492,425       81,137,206       140,043,335  
Goodwill
     2,226,837       1,230,485       35,397,042       38,854,364  
                                 
     
2007 Quarter 3
Printing
    
Office Products & Furniture
    
Newspaper
  
Total
  
                                 
Revenues
   $ 27,833,445     $ 12,896,219      $ -     $ 40,729,664  
Elimination of intersegment revenue
     (3,166,337 )     (1,971,468 )     -       (5,137,805 )
Consolidated revenues
   $ 24,667,108     $ 10,924,751      $ -     $ 35,591,859  
                                 
Operating income
     951,913       869,665       -       1,821,578  
Depreciation & amortization
     896,511       53,096       -       949,607  
Capital expenditures
     2,199,598       50,454       -       2,250,052  
Identifiable assets
     55,578,236       11,263,577       -       66,841,813  
Goodwill
     2,302,668       1,184,674       -       3,487,342  
 
 
       
       
2008 Year to Date
  
Printing
    
Office Products & Furniture
    
Newspaper
    
Total
  
                         
Revenues
   $ 86,709,185     $ 34,374,794      $ 14,192,580     $ 135,276,559  
Elimination of intersegment revenue
     (9,935,259 )     (6,060,089 )     -        (15,995,348 )
Consolidated revenues
   $ 76,773,926     $ 28,314,705      $ 14,192,580     $ 119,281,211  
                                 
Operating income
     4,179,219       1,694,730       2,829,876       8,703,825  
Depreciation & amortization
     2,647,183       163,244       1,222,704       4,033,131  
Capital expenditures
     1,837,203       73,697       196,947       2,107,847  
Identifiable assets
     55,413,704       3,492,425       81,137,206       140,043,335  
Goodwill
     2,226,837       1,230,485       35,397,042       38,854,364  
 
12
Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)
       
2007 Year to Date
  
Printing
    
Office Products & Furniture
    
Newspaper
    
Total
  
                         
Revenues
   $ 85,358,358     $ 34,720,171      $ -     $ 120,078,529  
Elimination of intersegment revenue
     (9,533,588 )     (6,199,872 )     -       (15,733,460 )
Consolidated revenues
   $ 75,824,770     $ 28,520,299      $ -     $ 104,345,069  
                                 
Operating income
     4,684,803       1,779,480       -       6,464,283  
Depreciation & amortization
     2,646,115       157,474       -       2,803,589  
Capital expenditures
     4,221,201       94,884       -       4,316,085  
Identifiable assets
     55,578,236       11,263,577       -       66,841,813  
Goodwill
     2,302,668       1,184,674       -       3,487,342  
 
 
A reconciliation of total segment revenues and of total segment operating income to consolidated income before income taxes, for the three and nine months ended July 31, 2008 and 2007, is as follows:
 
 
   
Three months
Nine months
     
2008
    
2007
    
2008
    
2007
  
Revenues:
                          
Total segment revenues
  
$
44,989,970
  
$
40,729,664
  
$
135,276,559
  
$
120,078,529
  
Elimination of intersegment revenue
    
(5,273,751
 )  
(5,137,805
 )  
(15,995,348
 )  
(15,733,460
 )
Consolidated revenue
  
$
39,716,219
  
$
35,591,859
  
$
119,281,211
  
$
104,345,069
  
                           
Operating income:
                          
    Total segment operating income
  
$
2,425,714
  
$
1,821,578
  
$
8,703,825
  
$
6,464,283
  
 Interest income
    
9,880
    
13,751
    
61,115
    
31,825
  
Interest expense
    
(1,270,690
 )   
(137,232
 )  
(4,385,648
 )  
(423,298
 )
Other income
    
16,820
    
12,745
    
49,734
    
31,625
  
Consolidated income before income taxes
  
$
1,181,724
  
$
1,710,842
  
$
4,429,026
  
$
6,104,435
  
                           
Identifiable assets:
    
 
          
 
        
Total segment identifiable assets
  
$
  140,043,335
  
$
66,841,813
  
$
  140,043,335
  
$
66,841,813
  
Elimination of intersegment assets
    
—
    
—
    
—
    
—
  
Total consolidated assets
  
$
140,043,335
  
$
66,841,813
  
$
140,043,335
  
 $
  66,841,813
  
 
 
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 2.46% at July 31, 2008).  The remaining term of this swap agreement is approximately 27 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 $433,000, net of income tax as other comprehensive loss. The cumulative other comprehensive loss, net of income tax, recorded by the Company was $445,000 at July 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 Statements of Operations as a percentage of total revenues.
 
 
   
 
Percentage of Total Revenues
   
Three Months Ended
July 31,
Nine Months Ended
July 31,
     
2008
  
2007
  
2008
  
2007
  
Revenues:
 
                       
    Printing
    
63.7
%
69.3
%
64.4
%
72.7
%
    Office products and office furniture
    
24.7
  
30.7
  
23.7
  
27.3
  
Newspaper
    
11.6
  
 -
  
11.9
  
  -
  
Total revenues
    
100.00
  
100.00
  
100.00
  
100.00
  
Cost of sales and newspaper operating costs:
                    
    Printing
    
45.9
  
50.6
  
45.7
  
51.8
  
    Office products and office furniture
    
17.1
  
22.0
  
16.6
  
19.2
  
Newspaper cost of sales and operating costs
    
6.1
  
-
  
5.9
  
-
  
        Total cost of sales and newspaper operating costs
    
69.1
  
72.6
  
68.2
  
71.0
  
    Gross profit
    
30.9
  
27.4
  
31.8
  
29.0
  
Selling, general and administrative expenses
    
24.8
  
22.3
  
24.5
  
22.8
  
Income from operations
    
6.1
  
5.1
  
7.3
  
6.2
  
Interest income
    
0.0
  
0.0
  
0.1
  
0.0
  
Interest expense
    
(3.2
 ) 
(0.4
 )
(3.7
 )
(0.4
 )
Other income
    
0.1
  
0.1
  
0.0
  
0.0
  
Income before taxes
    
3.0
  
4.8
  
3.7
  
5.8
  
Income tax expense
    
(0.3
 )
(1.9
 )
(0.6
 )
(2.3
 )
Net income
    
2.7
%
2.9
%
3.1
%
3.5
%
 
 
14
 
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
 
 
Three Months Ended July 31, 2008 Compared to Three Months Ended July 31, 2007
 
 
Revenues
 
Total revenues increased 11.6% in the third quarter of 2008 compared to the same period in 2007 from $35.6 million to $39.7 million. Printing revenue increased 2.6% in the third quarter of 2008 to $25.3 million from $24.7 million in the third quarter of 2007. Office products and office furniture revenue decreased 10.3% in the third quarter of 2008 to $9.8 million from $10.9 million in the third quarter of 2007. The increase in printing sales was related to incremental commercial printing sales associated with the acquisition of The Herald-Dispatch.  The decrease in office products and office furniture sales was primarily due to lower overall furniture sales in 2008. The Company recorded newspaper revenues associated with the acquisition of The Herald-Dispatch of approximately $4.6 million consisting of advertising revenue of approximately $3.6 million and $1.0 million in circulation revenues.  The on-line revenues for the three months ended July 31, 2008 approximated $444,000 and are recorded as a component of advertising revenue.
 
Cost of Sales
 
Total cost of sales increased 6.2% in the third quarter of 2008 to $27.4 million from $25.8 million in the third quarter of 2007. Printing cost of sales in the third quarter of 2008 increased $213,000 over the prior year and decreased as a percentage of printing sales from 73.0% in 2007 to 72.0% in 2008. The printing gross margin dollar increase resulted from higher sales volume coupled with lower cost of goods sold as percentage of sales primarily resulting from improved absorption of fixed costs associated with overhead. Office products and office furniture cost of sales decreased in 2008 from 2007 levels due to decreased sales and decreased as a percent of sales from 71.8% in 2007 to 69.5% in 2008, primarily due to a decrease in furniture cost of sales as a percent of furniture sales. Newspaper cost of sales and operating costs as a percent of newspaper sales were 52.7% for the three months ended July 31, 2008.
 
Operating Expenses
 
In the third quarter of 2008, selling, general and administrative expenses (S,G&A) increased on a gross dollar basis to $9.8 million from $7.9 million in 2007, an increase of $1.9 million or 24.2%. As a percentage of total sales, the expenses increased on a quarter to quarter basis in 2008 to 24.8% from 22.3% in 2007. 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 third quarter of 2008 to $2.4 million from $1.8 million in the third quarter of 2007.  This increase is the result of the acquisition of The Herald-Dispatch.  Other expenses (net), increased approximately $1.1 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. 
 
The Company is subject to various claims and legal actions as well as various governmental audits and examinations.  The Company settled the audit of its 2005 Federal Tax return in July 2008.  The Company currently has one state tax return covering fiscal years ended 2004 and 2005 under examination. 
 
Income Taxes
 
The Company’s effective income tax rate was 9.7% for the third quarter of 2008 and 39.7% for the third 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 third quarter of 2008 was $1.1 million compared to $1.0 million in the third quarter of 2007. Basic and diluted earnings per share for the three months ended July 31, 2008 and 2007 were $0.11 and $0.10.
 
Nine Months Ended July 31, 2008 Compared to Nine Months Ended July 31, 2007
 
Revenues
 
Total revenues increased 14.3% in the first nine months of 2008 compared to the same period in 2007 to $119.3 million from $104.3 million. Printing revenue increased 1.3% in the nine month period ended July 31, 2008 to $76.8 million from $75.8 million in the same period in 2007. Office products and office furniture revenue decreased 0.7% in the nine month period ended July 31, 2008 to $28.3 million from $28.5 million in the same period in 2007. The increase in printing sales was primarily due to incremental printing sales associated with the acquisition of The Herald-Dispatch. The decrease in the office products and office furniture segment was reflective of  a reduction in office supply sales partially offset by higher furniture sales associated with contract furniture projects.  The Company recorded newspaper revenues associated with the acquisition of The Herald-Dispatch of approximately $14.2 million consisting of advertising revenues of approximately $11.0 million and circulation revenues of approximately $3.2 million.  The on-line revenues for the nine months ended July 31, 2008 approximated $1.2 million and are recorded a as component of advertising revenue.
 
Cost of Sales
 
Total cost of sales increased 9.8% in the nine months ended July 31, 2008 to $81.3 million from $74.1 million in the nine months ended July 31, 2007. Printing cost of sales increased 0.9% in the nine months ended July 31, 2008 to $54.5 million from $54.0 million in the nine months ended July 31, 2007. The increase in printing cost of sales was primarily due to the increase in printing sales noted above partially offset by a slight gross margin improvement resulting from improved overhead absorption. Office products and office furniture cost of sales decreased 1.2% in the nine months ended July 31, 2008 to $19.8 million from $20.1 million in the nine months ended July 31, 2007 and decreased as a percent of sales from 70.3% in 2007 to 70.0% in 2008. The decrease in office products and office furniture cost of sales is attributable to a decrease in office products and office furniture sales coupled with a decrease in office products and office furniture cost of sales as a percent of office products and office furniture sales.
 
Operating Expenses
 
During the nine months ended July 31, 2008 compared to the same period in 2007, selling, general and administrative expenses increased as a percentage of sales to 24.5% from 22.8% in 2007. Total S,G&A increased $5.4 million. The increase in selling, general and administrative expenses is primarily the result of the acquisition of The Herald-Dispatch. 
16
 
 
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 34.6% in the nine month period ended July 31, 2008 to $8.7 million from $6.5 million in the same period of 2007. This increase is the result of the acquisition of The Herald-Dispatch.  Other expense (net) increased $3.9 million to $4.3 million in 2008 from $360,000 in 2007. This increase is primarily due to a $4.0 million increase in interest expense resulting from higher average borrowings associated with the financing to purchase The Herald-Dispatch. 
 
The Company is subject to various claims and legal actions as well as various governmental audits and examinations.  The second and third quarters of 2008 were favorably impacted by certain non-tax related multi-state claims primarily related to various liabilities, specifically related to the Company’s historical accounting treatment.  The after tax impact of such items approximated $265,000.  The Company settled the audit of its 2005 Federal Tax return in July 2008.  The Company currently has one state tax return covering fiscal years ended 2004 and 2005 under examination. 
 
Income Taxes
 
The Company’s effective income tax rate was 15.6% for the nine months ended July 31, 2008, down from 39.6% in the same period 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 nine months of 2008 increased 1.4% to $3,740,000 from $3,689,000 in the same period of 2007 due to the reasons discussed above. Basic and diluted earnings per share for the nine months ended July 31, 2008 were $0.37 and $0.37 and for the nine months ended July 31, 2007 were $0.37 and $0.36.
 
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.
 
 
17
 
 
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
 
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 as it 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 included 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.

Liquidity and Capital Resources
 
Net cash provided by operations for the nine months ended July 31, 2008, was $8.5 million compared to net cash provided by operations of $5.2 million during the same period in 2007. This change in net cash from operations is due primarily to timing changes in assets and liabilities and higher depreciation and amortization expense resulting from the acquisition of The Herald-Dispatch.
 
Net cash used in investing activities for the nine months ended July 31, 2008 was $3.5 million compared to $3.9 million during the same period in 2007.  The net cash used in investing activities during the first nine months of 2008 primarily related 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 nine months of 2007 primarily related to the payment of the contingent purchase price for the Syscan acquisition, capital expenditures in 2007 for the build out of the facility occupied by Champion Output Solutions and other equipment and vehicle purchases.
 
Net cash used in financing activities for the nine months ended July 31, 2008 was $10.4 million compared to $1.9 million 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 July 31, 2008 relate to the Syscan acquisition and are associated with 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 July 31, 2008 was $21.1 million and at October 31, 2007 was $25.3 million. 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.
 
 
18
 
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
 
 
 
Environmental Regulation
 
The Company is subject to the environmental laws and regulations of the United States, and the states in which it operates, concerning emissions into the air, discharges into the waterways and the generation, handling and disposal of waste materials. The Company’s past expenditures relating to environmental compliance have not had a material effect on the Company. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they may have upon the capital expenditures, earnings, and competitive position of the Company in the future. Based upon information currently available, management believes that expenditures relating to environmental compliance will not have a material impact on the financial position of the Company.
 
Special Note Regarding Forward-Looking Statements
 
Certain statements contained in this Form 10-Q, including without limitation statements including the word “believes,” “anticipates,” “intends,” “expects” or words of similar import, constitute “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, 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 3. Quantitative and Qualitative Disclosure About Market Risk
 
The Company does not have any significant exposure relating to market risk.
 
ITEM 4T. 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: September 5, 2008
 
/s/ Marshall T. Reynolds
 
 
Marshall T. Reynolds
 
 
Chief Executive Officer
 
   
   
Date: September 5, 2008
 
/s/ Toney K. Adkins
 
 
Toney K. Adkins
 
 
President and Chief Operating Officer
 
   
   
Date: September 5, 2008
 
/s/ Todd R. Fry
 
 
Todd R. Fry
 
 
Senior Vice President and Chief Financial Officer
 
 
 
 
 
21