UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
DC 20549
 
 **FORM
10-Q**
 
 **Quarterly
Report Pursuant to Section 13 or 15(d) of**
 **The
Securities Exchange Act of 1934**
 
 
 For the quarterly period ended April
      30, 2005
    
    Commission File No.
0-21084
 
 
 
 **Champion
Industries, Inc.**
 (Exact
name of Registrant as specified in its charter)
 
 
 West
      Virginia
    
    55-0717455(State
      or other jurisdiction of
      incorporation
      or organization)
    
    (I.R.S.
      Employer Identification No.)
 
 
 2450-90
1 st Avenue
 P.O. Box
2968
 Huntington,
WV 25728
 (Address
of principal executive offices)
 (Zip
Code)
 
 
 (304)
528-2700
 (Registrant’s
telephone number,
 including
area code)
 
 
  Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes  ü  No  .
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes _____No  ü  ..
 
 9,733,913 shares
of common stock of the Registrant were outstanding at April 30,
2005.
 
   
   **Champion
Industries, Inc.**
 
 **INDEX**
 **Page
      No.**Part
      I.   Financial InformationItem
      1.    Financial StatementsConsolidated
      Balance Sheets (Unaudited)
    3Consolidated
      Statements of Operations (Unaudited)
    5Consolidated
      Statements of Cash Flows (Unaudited)
    6Notes
      to Consolidated Financial Statements
    7Item
      2.  Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
    13Item 3a.  Quantitative and Qualitative Disclosure About Market
      Risk
    17Item 4. Controls and Procedures
    18Part
      II. Other InformationItem 1. Legal Proceedings
    18Item 4. Submission of Matters to a Vote of Security Holders
    19Item 6. Exhibits
    19Signatures
    20
 
  2
  **PART
I - FINANCIAL INFORMATION**
 
 **Item
1. Financial Statements**
 
 **Champion
Industries, Inc. and Subsidiaries**
 **Consolidated
Balance Sheets**
 
 
 
 **ASSETS**
    
    **April
      30,**
    
    **October
      31,****2005**
      **(Unaudited)**
    
    **2004**
      **(Audited)**Current
      assets:Cash
      and cash equivalents
    
    **$**
    **2,722,829**
    
    $
    1,745,457Accounts
      receivable, net of allowance of$1,453,000
      and $1,422,000
    
    
    **18,604,035**
    
    
    21,318,016Inventories
    
    
    **10,859,367**
    
    
    11,269,514Other
      current assets
    
    
    **1,184,752**
    
    
    973,832Deferred income tax assets
    
    
    **1,175,756**
    
    
    1,144,943Total
      current assets
    
    
    **34,546,739**
    
    
    36,451,762Property
      and equipment, at cost:Land
    
    
    **2,006,375**
    
    
    2,006,375Buildings
      and improvements
    
    
    **8,415,312**
    
    
    8,253,573Machinery
      and equipment
    
    
    **44,218,545**
    
    
    43,228,587Equipment
      under capital leases
    
    
    **983,407**
    
    
    983,407Furniture
      and fixtures
    
    
    **3,461,473**
    
    
    3,361,100Vehicles
    
    
    **3,667,649**
    
    
    3,523,467**62,752,761**
    
    
    61,356,509Less
      accumulated depreciation
    
    
    **(43,031,528**
    **)**
    
    (41,020,327
    )**19,721,233**
    
    
    20,336,182Cash
      surrender value of officers’ life insurance
    
    
    **1,039,514**
    
    
    1,039,514Goodwill
    
    
    **2,060,786**
    
    
    2,060,786Other
      intangibles, net of accumulated amortization
    
    
    **3,641,093**
    
    
    3,812,051Other
      assets
    
    
    **339,991**
    
    
    449,589**7,081,384**
    
    
    7,361,940Total
      assets
    
    **$**
    **61,349,356**
    
    $
    64,149,884
 
 
 
 
 
 See notes
to consolidated financial statements.
  3
  **Champion
Industries, Inc. and Subsidiaries**
 **Consolidated
Balance Sheets (continued)**
  
 **LIABILITIES
      AND SHAREHOLDERS’ EQUITY**
    
    **April
      30,**
    
    **October
      31,****2005**
      **(Unaudited)**
    
    **2004**
      **(Audited)**Current
      liabilities:Accounts
      payable
    
    **$**
    **2,762,524**
    
    $
    3,618,051Accrued
      payroll
    
    
    **1,321,850**
    
    
    1,778,736Taxes
      accrued and withheld
    
    
    **1,463,243**
    
    
    1,289,524Accrued
      income taxes
    
    
    **72,716**
    
    
    135,556Accrued
      expenses
    
    
    **1,694,611**
    
    
    1,028,246Current
      portion of long-term debt:Notes
      payable
    
    
    **1,586,951**
    
    
    1,555,911Capital
      lease obligations
    
    
    **48,805**
    
    
    132,518Total
      current liabilities
    
    
    **8,950,700**
    
    
    9,538,542Long-term
      debt, net of current portion:Notes
      payable, line of credit
    
    
    **1,800,000**
    
    
    2,300,000Notes
      payable, term
    
    
    **5,154,080**
    
    
    5,940,323Capital
      lease obligations
    
    
    **-**
    
    
    16,484Other
      liabilities
    
    
    **415,831**
    
    
    428,366Deferred
      income tax liability
    
    
    **4,285,496**
    
    
    4,375,357Total
      liabilities
    
    
    **20,606,107**
    
    
    22,599,072Shareholders’
      equity:Common
      stock, $1 par value, 20,000,000 shares authorized;
      9,733,913
      shares issued and outstanding
    
    
    **9,733,913**
    
    
    9,733,913Additional
      paid-in capital
    
    
    **22,278,110**
    
    
    22,278,110Retained
      earnings
    
    
    **8,731,226**
    
    
    9,538,789Total
      shareholders’ equity
    
    
    **40,743,249**
    
    
    41,550,812Total
      liabilities and shareholders’ equity
    
    **$**
    **61,349,356**
    
    $
    64,149,884
 
 
 
 
 
 See notes
to consolidated financial statements.
  4
  **Champion
Industries, Inc. and Subsidiaries**
 **Consolidated
Statements of Operations**
 (Unaudited)
   **Three
      Months Ended**
      **April
      30,**
    
    **Six
      Months Ended**
      **April
      30,****2005**
    
    
    **2004**
    
    
    **2005**
    
    
    **2004**Revenues:Printing
    
    **$**
    **24,384,970**
    
    $
    24,137,454
    
    **$**
    **48,821,591**
    
    $
    47,135,346Office
      products and office furniture
    
    
    **9,167,312**
    
    
    6,363,445
    
    
    **19,170,682**
    
    
    12,679,026Total
      revenues
    
    
    **33,552,282**
    
    
    30,500,899
    
    
    **67,992,273**
    
    
    59,814,372Cost
      of sales:Printing
    
    
    **17,972,110**
    
    
    17,483,303
    
    
    **35,849,374**
    
    
    34,506,803Office
      products and office furniture
    
    
    **6,269,754**
    
    
    4,129,793
    
    
    **13,274,017**
    
    
    8,453,894Total
      cost of sales
    
    
    **24,241,864**
    
    
    21,613,096
    
    
    **49,123,391**
    
    
    42,960,697Gross
      profit
    
    
    **9,310,418**
    
    
    8,887,803
    
    
    **18,868,882**
    
    
    16,853,675Selling,
      general and administrative expenses
    
    
    **9,362,857**
    
    
    8,611,461
    
    
    **18,388,229**
    
    
    16,532,515Income
      (loss) from operations
    
    
    **(52,439**
    **)**
    
    276,342
    
    
    **480,653**
    
    
    321,160Other
      income (expense):Interest
      income
    
    
    **4,574**
    
    
    1,180
    
    
    **9,640**
    
    
    2,798Interest
      expense
    
    
    **(133,938**
    **)**
    
    (56,590
    )
    
    **(271,303**
    **)**
    
    (103,269
    )Other
    
    
    **13,011**
    
    
    50,045
    
    
    **75,685**
    
    
    73,079**(116,353**
    **)**
    
    (5,365
    )
    
    **(185,978**
    **)**
    
    (27,392
    )Income
      (loss) before income taxes
    
    
    **(168,792**
    **)**
    
    270,977
    
    
    **294,675**
    
    
    293,768Income
      tax (expense) benefit
    
    
    **71,493**
    
    
    (109,822
    )
    
    **(128,848**
    **)**
    
    (119,000
    )Net
      income (loss)
    
    **$**
    **(97,299**
    **)**
    $
    161,155
    
    **$**
    **165,827**
    
    $
    174,768Earnings
      (loss) per shareBasic
    
    **$**
    **(0.01**
    **)**
    $
    0.02
    
    **$**
    **0.02**
    
    $
    0.02Diluted
    
    **$**
    **(0.01**
    **)**
    $
    0.02
    
    **$**
    **0.02**
    
    $
    0.02Weighted
      average shares outstanding:Basic
    
    
    **9,734,000**
    
    
    9,731,000
    
    
    **9,734,000**
    
    
    9,724,000Diluted
    
    
    **9,734,000**
    
    
    9,864,000
    
    
    **9,803,000**
    
    
    9,845,000Dividends
      per share
    
    **$**
    **0.05**
    
    $
    0.05
    
    **$**
    **0.10**
    
    $
    0.10
 
 
 
 See notes
to consolidated financial statements.
  5
  **Champion
Industries, Inc. and Subsidiaries**
 **Consolidated
Statements of Cash Flows**
 (Unaudited)
 
 **Six
      Months Ended**
      **April
      30,****2005**
    
    **2004****Cash
      flows from operating activities:**Net
      income
    
    **$**
    **165,827**
    
    $
    174,768Adjustments
      to reconcile net income to cash
      provided
      by operating activities:Depreciation
      and amortization
    
    
    **2,359,886**
    
    
    2,123,338Gain
      on sale of assets
    
    
    **(3,997**
    **)**
    
    (5,133
    )Deferred
      income taxes
    
    
    **(120,674**
    **)**
    
    **-**Increase
      in deferred compensation
    
    
    **3,575**
    
    
    5,362Bad
      debt expense
    
    
    **296,381**
    
    
    216,181Changes
      in assets and liabilities:Accounts
      receivable
    
    
    **2,417,600**
    
    
    2,279,278Inventories
    
    
    **410,147**
    
    
    639,593Other
      current assets
    
    
    **(210,920**
    **)**
    
    (715,348
    )Accounts
      payable
    
    
    **(855,526**
    **)**
    
    (829,645
    )Accrued
      payroll
    
    
    **(456,886**
    **)**
    
    **(**407,059
    )Taxes
      accrued and withheld
    
    
    **173,719**
    
    
    40,625Accrued
      income taxes
    
    
    **(62,840**
    **)**
    
    (700,970
    )Accrued
      expenses
    
    
    **666,365**
    
    
    (49,691
    )Other
      liabilities
    
    
    **(16,110**
    **)**
    
    (4,686
    )Net
      cash provided by operating activities
    
    
    **4,766,547**
    
    
    2,766,613**Cash
      flows from investing activities:**Purchases
      of property and equipment
    
    
    **(1,588,388**
    **)**
    
    (3,708,225
    )Proceeds
      from sales of property and equipment
    
    
    **51,174**
    
    
    83,614Decrease
      (increase) in other assets
    
    
    **76,830**
    
    
    (154,742
    )Decrease
      in cash surrender value life insurance
    
    
    **-**
    
    
    32,661Net
      cash used in investing activities
    
    
    **(1,460,384**
    **)**
    
    (3,746,692
    )**Cash
      flows from financing activities:**Borrowings
      on line of credit
    
    
    **2,217,000**
    
    
    2,745,000Payments
      on line of credit
    
    
    **(2,717,000**
    **)**
    
    (1,436,688
    )Proceeds
      from term debt and leases
    
    
    **-**
    
    
    1,000,000Principal
      payments on long-term debt
    
    
    **(855,400**
    **)**
    
    (542,857
    )Proceeds
      from exercise of stock options
    
    
    **-**
    
    
    56,063Dividends
      paid
    
    
    **(973,391**
    **)**
    
    (972,389
    )Net
      cash provided by (used in) financing activities
    
    
    **(2,328,791**
    **)**
    
    849,129Net
      increase (decrease) in cash and cash equivalents
    
    
    **977,372**
    
    
    (130,950
    )Cash
      and cash equivalents, beginning of period
    
    
    **1,745,457**
    
    
    2,171,713Cash
      and cash equivalents, end of period
    
    **$**
    **2,722,829**
    
    **$**
    2,040,763
 
 
 See notes
to consolidated financial statements.
 6
   **Champion
Industries, Inc. and Subsidiaries**
 
 **Notes
to Consolidated Financial Statements (Unaudited)**
 
 **April
30, 2005**
   **1.
Basis of Presentation and Business Operations**
 
 The
foregoing financial information has been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) and rules
and regulations of the Securities and Exchange Commission for interim financial
reporting. The preparation of the financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates. In the opinion of management, the financial
information reflects all adjustments (consisting of items of a normal recurring
nature) necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with GAAP. These interim financial
statements should be read in conjunction with the consolidated financial
statements for the year ended October 31, 2004, and related notes thereto
contained in Champion Industries, Inc.’s Form 10-K dated January 17, 2005. The
accompanying interim financial information is unaudited. The balance sheet
information as of October 31, 2004 was derived from our audited financial
statements.
 
 **2.
Earnings (Loss) per Share**
 
 Basic
earnings (loss) 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 0 and 69,000
shares for the three and six months ended April 30, 2005 and 133,000 and 121,000
shares for the three and six months ended April 30, 2004.  Due to
the net loss incurred in the secondquarter
of 2005, no outstanding options were included in the earnings per
share computation because they would automatically result in
anti-dilution.
 
 **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:
 
 **April
      30,**
    
    **October
      31,****2005**
    
    **2004**Printing:Raw
      materials
    
    **$**
    **2,365,368**
    
    $
    2,326,821Work
      in process
    
    
    **2,031,937**
    
    
    1,998,824Finished
      goods
    
    
    **3,518,168**
    
    
    3,460,834Office
      products and office furniture
    
    
    **2,943,894**
    
    
    3,483,035**$**
    **10,859,367**
    
    $
    11,269,514
  7
 
 **Champion
Industries, Inc. and Subsidiaries**
 
 **Notes
to Consolidated Financial Statements (Unaudited)
(continued)**
 **4.
Long-Term Debt**
 Long-term
debt consisted of the following:
 
 **April
      30,**
    
    **October
      31,****2005**
    
    **2004**Secured
      term note payable
    
    **$**
    **3,474,651**
    
    $
    3,920,000Installment
      notes payable to banks
    
    
    **3,266,380**
    
    
    3,576,234Capital
      lease obligations
    
    
    **48,805**
    
    
    149,002**6,789,836**
    
    
    7,645,236Less
      current portion
    
    
    **1,635,756**
    
    
    1,688,429Long-term
      debt, net of current portion
    
    **$**
    **5,154,080**
    
    $
    5,956,807
 
 The
Company has an unsecured revolving line of credit with a bank for borrowings to
a maximum of $10,000,000 with interest payable monthly at the prime rate of
interest. This line of credit expires in July 2006 and contains certain
restrictive financial covenants. There was $1,800,000 and $2,300,000 outstanding
under this facility at April 30,
2005 and October 31, 2004.
 
 The
Company has an unsecured revolving line of credit with a bank for borrowings to
a maximum of $1,000,000 with interest payable monthly at the Wall Street Journal
prime rate. The line of credit expires in October 2005 and contains certain
financial covenants. There were no borrowings outstanding under this facility at
April 30, 2005.
 
 There
were no non-cash financing activities for the three and six months ended April
30, 2005 and 2004.
 
 **5.
Shareholders’ Equity**
 
 The
Company paid a dividend of five cents per share on
March 28, 2005 to
stockholders of record on March
11, 2005 . Also,
the Company declared a dividend of five cents per share to be paid on June 24,
2005 to stockholders of record on June 3, 2005.
 
 **6.
Commitments and Contingencies**
 
 As
reported in Form 8-K filed May 11, 2005, on May 6, 2005, the Company entered
into an agreement to settle all claims in a Mississippi lawsuit asserting that
the Company and its Dallas Printing Company, Inc. subsidiary had engaged in
unfair competition and other wrongful acts in hiring certain employees of
National Forms & Systems Group, Inc.
 
 Following
trial of this matter, titled National Forms & Systems Group, Inc. v. Timothy
V. Ross; Todd Ross and Champion Industries, Inc.; and Timothy V. Ross v.
National Forms & Systems Group, Inc. and Mickey McCardle; in the Circuit
Court of the First Judicial District of Hinds County, Mississippi; Case No.
251-00-942-CIV, on February 16, 2002, a jury had awarded plaintiff $1,745,000 in
actual damages and $750,000 in punitive damages. Additionally, the trial court
had granted plaintiff $645,119 in attorney
 
 8
 **Champion
Industries, Inc. and Subsidiaries**

**Notes
to Consolidated Financial Statements (Unaudited)
(continued)**
  fees and
expenses, and ordered that interest on the amount of the jury award accrue from
February 22, 2002.
 
 The
Company successfully appealed the jury award and attorney fee and expense award
in both the Court of Appeals of the State of Mississippi and the Supreme Court
of Mississippi, with the appellate courts’ rulings having the effect of
reversing the jury’s award of damages and the trial court’s award of attorney
fees and expenses, and granting a new trial on plaintiff’s claims.
 
 Terms of
the settlement call for all parties’ claims to be dismissed with prejudice, as
fully compromised and released. The Company has paid plaintiff $440,000 cash and
will forego collection of and release its $60,276 cost judgment awarded as a
result of the reversal on appeal.
 
 As of
April 30, 2005 the Company had contractual obligations in the form of leases and
debt as follows:
 
 **Payments
      Due by Fiscal Year****Contractual
      Obligations**
    
    **2005**
    
    **2006**
    
    **2007**
    
    **2008**
    
    **2009**
    
    **Residual**
    
    **Total**Non-cancelable
      operating leases
    
    $
    705,247
    
    $
    1,231,948
    
    $
    945,183
    
    $
    701,474
    
    $
    253,340
    
    $
    -
    
    $
    3,837,192Revolving
      line of credit
    
    
    -
    
    
    1,800,000
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,800,000Term
      debt
    
    
    1,586,951
    
    
    1,543,150
    
    
    1,615,269
    
    
    966,250
    
    
    1,029,411
    
    
    -
    
    
    6,741,031Obligations
      under capital leases
    
    
    48,805
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    48,805$
    2,341,003
    
    $
    4,575,098
    
    $
    2,560,452
    
    $
    1,667,724
    
    $
    1,282,751
    
    $
    -
    
    $
    12,427,028
 
 **7.
Accounting for Stock-Based Compensation**
 
 In
December 2004, the SFAS 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 for the Company
is November 1, 2005.
 
 The
Company has elected to follow the intrinsic value method in accounting for its
employee stock options. Accordingly, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
 
 The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 2004,
risk-free interest rates of 4.03%; dividend yields of 4.21%; volatility factors
of the expected market price of the Company's common stock of 54.0%; and a
weighted-average expected life of the option of 4 years.
 
 The
following pro forma information has been determined as if the Company had
accounted for its employee stock options under the fair value method. For
purposes of pro forma disclosures, the estimated fair value of the options is
expensed in the year granted since the options vest immediately. The Company's
pro forma information for the quarters and six months ended April 30 are as
follows:
 
 9
 
 **Champion
Industries, Inc. and Subsidiaries**
 
 **Notes
to Consolidated Financial Statements (Unaudited)
(continued)**
 **Three
      Months Ended**
      **April
      30,**
    
    **Six
      Months Ended**
      **April
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004**Net
      income (loss), as reported
    
    **$**
    **(97,299**
    **)**
    $
    161,155
    
    **$**
    **165,827**
    
    $
    174,768Deduct:
      Total stock-based employee compensation expense determined under fair
      value method for all awards, net of related tax effects
    
    
    **—**
    
    
    **—**
    
    
    **—**
    
    
    109,962Pro
      forma net income (loss)
    
    **$**
    **(97,299**
    **)**
    $
    161,155
    
    **$**
    **165,827**
    
    $
    64,806Earnings
      (loss) per share:Basic,
      as reported
    
    **$**
    **(0.01**
    **)**
    $
    0.02
    
    **$**
    **0.02**
    
    $
    0.02Basic,
      pro forma
    
    
    **(0.01**
    **)**
    
    0.02
    
    
    **0.02**
    
    
    0.01Diluted,
      as reported
    
    **$**
    **(0.01**
    **)**
    $
    0.02
    
    **$**
    **0.02**
    
    $
    0.02Diluted,
      pro forma
    
    
    **(0.01**
    **)**
    
    0.02
    
    
    **0.02**
    
    
    0.01
 
 **8.
Acquisitions**
 
 On
September 7, 2004 the Company acquired all the issued and outstanding capital
stock of Syscan Corporation (“Syscan”), a West Virginia corporation, for a cash
price of $3,500,000 and a contingent purchase price, dependent upon satisfaction
of certain conditions, not to exceed the amount of $1,500,000.
 
 The
Williams Land Corporation has the option to put the 3000 Washington Street
building, occupied by Syscan, to the Company for a price of $1.5 million and the
Company has the option to purchase the building for $1.5 million at the
conclusion of the five year lease term commencing September 1, 2009. This option
may be exercised no later than 60 days prior to the end of the lease and closing
of said purchase cannot exceed 45 days from the end of the lease.
  **9.
Industry Segment Information**
 
 The
Company operates principally in two industry segments organized on the basis of
product lines: the production, printing and sale, principally to commercial
customers, of printed materials (including brochures, pamphlets, reports, tags,
continuous and other forms) and the sale of office products and office furniture
including interior design services.
 
 10
 
 **Champion
Industries, Inc. and Subsidiaries**
 
 **Notes
to Consolidated Financial Statements (Unaudited)
(continued)**
 The table
below presents information about reported segments for the three and six months
ended April 30:
 
 **Office
      Products****2005
      Quarter 2**
    
    **Printing**
    
    **&
      Furniture**
    
    **Total**Revenues
    
    $
    27,812,058
    
    $
    11,276,457
    
    $
    39,088,515Elimination
      of intersegment revenue
    
    
    (3,427,088
    )
    
    (2,109,145
    )
    
    (5,536,233
    )Consolidated
      revenues
    
    $
    24,384,970
    
    $
    9,167,312
    
    $
    33,552,282Operating
      income (loss)
    
    
    (241,860
    )
    
    189,421
    
    
    (52,439
    )Depreciation
      & amortization
    
    
    1,132,788
    
    
    74,987
    
    
    1,207,775Capital
      expenditures
    
    
    684,085
    
    
    48,768
    
    
    732,853Identifiable
      assets
    
    
    51,415,546
    
    
    9,933,810
    
    
    61,349,356Goodwill
    
    
    1,774,344
    
    
    286,442
    
    
    2,060,786****
    
    
    
    
    
    Office
      Products**2004
      Quarter 2**
    
    
    **Printing**
    
    
    **&
      Furniture**
    
    
    **Total**Revenues
    
    $
    27,068,780
    
    $
    7,908,579
    
    $
    34,977,359Elimination
      of intersegment revenue
    
    
    (2,931,326
    )
    
    (1,545,134
    )
    
    (4,476,460
    )Consolidated
      revenues
    
    $
    24,137,454
    
    $
    6,363,445
    
    $
    30,500,899Operating
      income (loss)
    
    
    297,582
    
    
    (21,240
    )
    
    276,342Depreciation
      & amortization
    
    
    1,089,450
    
    
    58,762
    
    
    1,148,212Capital
      expenditures
    
    
    2,689,128
    
    
    9,839
    
    
    2,698,967Identifiable
      assets
    
    
    48,131,179
    
    
    9,415,490
    
    
    57,546,669Goodwill
    
    
    1,774,344
    
    
    286,442
    
    
    2,060,786
 **Office
      Products****2005
      Year to date**
    
    **Printing**
    
    **&
      Furniture**
    
    **Total**Revenues
    
    $
    55,898,035
    
    $
    22,807,226
    
    $
    78,705,261Elimination
      of intersegment revenue
    
    
    (7,076,444
    )
    
    (3,636,544
    )
    
    (10,712,988
    )Consolidated
      revenues
    
    $
    48,821,591
    
    $
    19,170,682
    
    $
    67,992,273Operating
      income
    
    
    29,868
    
    
    450,785
    
    
    480,653Depreciation
      & amortization
    
    
    2,205,242
    
    
    154,644
    
    
    2,359,886Capital
      expenditures
    
    
    1,466,833
    
    
    121,555
    
    
    1,588,388Identifiable
      assets
    
    
    51,415,546
    
    
    9,933,810
    
    
    61,349,356Goodwill
    
    
    1,774,344
    
    
    286,442
    
    
    2,060,786
  11
 
 **Champion
Industries, Inc. and Subsidiaries**
 
 **Notes
to Consolidated Financial Statements (Unaudited)
(continued)**
 ****
    
    
    
    Office
      Products**2004
      Year to date**
    
    **Printing**
    
    **&
      Furniture**
    
    **Total**Revenues
    
    $
    52,598,800
    
    $
    15,598,533
    
    $
    68,197,333Elimination
      of intersegment revenue
    
    
    (5,463,454
    )
    
    (2,919,507
    )
    
    (8,382,961
    )Consolidated
      revenues
    
    $
    47,135,346
    
    $
    12,679,026
    
    $
    59,814,372Operating
      income (loss)
    
    
    474,966
    
    
    (153,806
    )
    
    321,160Depreciation
      & amortization
    
    
    2,051,147
    
    
    72,191
    
    
    2,123,338Capital
      expenditures
    
    
    3,682,677
    
    
    25,548
    
    
    3,708,225Identifiable
      assets
    
    
    48,131,179
    
    
    9,415,490
    
    
    57,546,669Goodwill
    
    
    1,774,344
    
    
    286,442
    
    
    2,060,786
 
 A
reconciliation of total segment revenues and of total segment operating income
to income before income taxes, for the three and six months ended April 30, 2005
and 2004, is as follows:
 
 
 **Three
      months**
    
    **Six
      months****2005**
    
    **2004**
    
    **2005**
    
    **2004**Revenues:Total
      segment revenues
    
    **$**
    **39,088,515**
    
    **$**
    **34,977,359**
    
    **$**
    **78,705,261**
    
    **$**
    **68,197,333**Elimination
      of intersegment revenue
    
    
    **(5,536,233**
    **)**
    
    **(4,476,460**
    **)**
    
    **(10,712,988**
    **)**
    
    **(8,382,961**
    **)**Consolidated
      revenue
    
    **$**
    **33,552,282**
    
    **$**
    **30,500,899**
    
    **$**
    **67,992,273**
    
    **$**
    **59,814,372**Operating
      income (loss):Total
      segment operating income (loss)
    
    **$**
    **(52,439**
    **)**
    **$**
    **276,342**
    
    **$**
    **480,653**
    
    **$**
    **321,160**Interest
      income
    
    
    **4,574**
    
    
    **1,180**
    
    
    **9,640**
    
    
    **2,798**Interest
      expense
    
    
    **(133,938**
    **)**
    
    **(56,590**
    **)**
    
    **(271,303**
    **)**
    
    **(103,269**
    **)**Other
      income
    
    
    **13,011**
    
    
    **50,045**
    
    
    **75,685**
    
    
    **73,079**Consolidated
      income (loss) before income taxes
    
    **$**
    **(168,792**
    **)**
    ****
      **$**
    ****
      **270,977**
    
    **$**
    **294,675**
    
    **$**
    **293,768**Identifiable
      assets:Total
      segment identifiable assets
    
    **$**
    **61,349,356**
    
    **$**
    **57,546,669**
    
    **$**
    **61,349,356**
    
    **$**
    **57,546,669**Elimination
      of intersegment assets
    
    
    —
    
    
    —
    
    
    —
    
    
    —Total
      consolidated assets
    
    **$**
    **61,349,356**
    
    **$**
    **57,546,669**
    
    **$**
    **61,349,356**
    
    **$**
    **57,546,669**
 
  12


**Champion
Industries, Inc. and Subsidiaries**
 ****
 **Item
2.** **Management’s
Discussion and Analysis of Financial Condition and Results of
Operations**
 **Results
of Operations**
 
 The
following table sets forth, for the periods indicated, information derived from
the Consolidated Statements of Operations as a percentage of total
revenues.
 
 **Percentage
      of Total Revenues****Three
      Months Ended**
      **April
      30,**
    
    **Six
      Months Ended**
      **April
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004**Revenues:Printing
    
    
    **72.7**
    **%**
    
    **79.1**
    **%**
    
    **71.8**
    **%**
    
    **78.8**
    **%**Office
      products and office furniture
    
    
    **27.3**
    
    
    **20.9**
    
    
    **28.2**
    
    
    **21.2**Total
      revenues
    
    
    **100.0**
    
    
    **100.0**
    
    
    **100.0**
    
    
    **100.0**Cost
      of sales:Printing
    
    
    **53.6**
    
    
    **57.3**
    
    
    **52.7**
    
    
    **57.7**Office
      products and office furniture
    
    
    **18.7**
    
    
    **13.6**
    
    
    **19.5**
    
    
    **14.1**Total
      cost of sales
    
    
    **72.****3**
    
    
    **70.9**
    
    
    **72.2**
    
    
    **71.8**Gross
      profit
    
    
    **27.7**
    
    
    **29.1**
    
    
    **27.8**
    
    
    **28.2**Selling,
      general and administrative
      expenses
    
    
    **27.9**
    
    
    **28.2**
    
    
    **27.1**
    
    
    **27.6**Income
      (loss) from operations
    
    
    **(0.2**
    **)**
    
    **0.9**
    
    
    **0.7**
    
    
    **0.6**Interest
      income
    
    
    **0.0**
    
    
    **0.0**
    
    
    **0.0**
    
    
    **0.0**Interest
      (expense)
    
    
    **(0.4**
    **)**
    
    **(0.2**
    **)**
    
    **(0.4**
    **)**
    
    **(0.2**
    **)**Other
      income
    
    
    **0.1**
    
    
    **0.2**
    
    
    **0.1**
    
    
    **0.1**Income
      (loss) before taxes
    
    
    **(0.5**
    **)**
    
    **0.9**
    
    
    **0.4**
    
    
    **0.5**Income
      tax (expense) benefit
    
    
    **0.2**
    
    
    **(0.4**
    **)**
    
    **(0.2**
    **)**
    
    **(0.2**
    **)**Net
      income (loss)
    
    
    **(0.3**
    **)%**
    
    **0.5**
    **%**
    
    **0.2**
    **%**
    
    **0.3**
    **%**
 
  
 **Three
Months Ended April 30, 2005 Compared to Three Months Ended April 30,
2004**
 
 *Revenues*
 
 Total
revenues increased 10.0% in the second quarter of 2005 compared to the same
period in 2004 to $33.6 million from $30.5 million. Printing revenue increased
1.0% in the second quarter of 2005 to $24.4 million from $24.1 million in the
second quarter of 2004. Office products and office furniture revenue increased
44.1% in the second quarter of 2005 to $9.2 million from $6.4 million in the
second quarter of 2004. The increase in printing revenue was primarily due to
additional sales derived from the Syscan acquisition offset by quarterly print
sales reductions across several divisions. The revenue increase in the office
products and office furniture division was primarily related to the Syscan
acquisition coupled with increased furniture sales.
 
 *Cost
of Sales*
 
 Total
cost of sales increased 12.2% in the second quarter of 2005 to $24.2 million
from $21.6 million in the second quarter of 2004. Printing cost of sales in the
second quarter of 2005
 
 13
 increased
$489,000 and increased as a percentage of printing sales from 72.4% in 2004 to
73.7% in 2005. The increase in printing costs as a percent of printing sales was
primarily attributable to higher material and outside purchase costs as a
percent of printing sales. Office products and office furniture cost of sales
increased 51.8% or approximately $2.1 million in 2005 to $6.3 million from $4.1
million in 2004 and as a percent of sales increased to 68.4% in 2005 from 64.9%
in 2004. The increase in office products and office furniture cost of sales is
attributable to the higher sales discussed above. The increase in office
products and office furniture cost of sales as a percent of sales is reflective
of higher furniture costs as a percent of furniture sales and wholesale pricing
factors at Syscan for office supplies.
 
 *Operating
Expenses*
 
 In the
second quarter of 2005, selling, general, and administrative expenses increased
on a gross dollar basis to $9.4 million from $8.6 million in 2004, an increase
of $751,000 or 8.7%.  Selling, general and administrative expenses as a
percentage of sales decreased to 27.9% in 2005 from 28.2% in 2004 as a result of
higher sales in 2005 over 2004.
 
 The
increase in selling, general and administrative expenses is primarily due to
$777,000 of legal settlements, accruals and expenses including $440,000 to
settle a lawsuit in Mississippi and additional costs incurred as a result of the
acquisition of Syscan in September 2004.  In the second quarter of 2004 the
Company incurred additional costs related to the consolidation of facilities,
higher payroll costs to support sales initiatives, and increased professional
fees for accounting and legal costs.
 
 *Income
(loss) from Operations and Other Income and Expenses*
 
 Income
(loss) from operations decreased 119.0% in the second quarter of 2005 to a loss
of ($52,000) from income of $276,000 in the second quarter of 2004. This
decrease is the result of increased selling, general and administrative expenses
partially offset by increased gross profit contributions resulting from the
sales increases discussed above.
 
 Other
expense increased $111,000 due primarily to a $77,000 increase in interest
expense resulting from higher borrowings primarily related to the acquisition of
Syscan in September 2004 coupled with an increase in interest
rates.
 
 *Income
Taxes*
 
 The
Company’s effective income tax rate was 42.4% for the second  quarter
of 2005 and 40.5% for the second quarter of 2004. The increase in income taxes
as a percentage of income before taxes is primarily related to the
nondeductibility of certain selling related expenses. The effective income tax
rate approximates the combined federal and state, net of federal benefit,
statutory income tax rate and is partially impacted by the geographic
profitability mix of our operations.
 
 *Net
Income (loss)*
 
 Net
income (loss) for the second  quarter
of 2005 was a loss of ($97,000) compared to net income of $161,000 in the
second  quarter
of 2004. Basic and diluted earnings (loss) per share for the three months ended
April 30, 2005 and 2004 were $(0.01) and $0.02.
 
 14
 ****
 **Six
Months Ended April 30, 2005 Compared to Six Months Ended April 30,
2004**
 
 *Revenues*
 
 Total
revenues increased 13.7% in the first six months of 2005 compared to the same
period in 2004 to $68.0 million from $59.8 million. Printing revenue increased
3.6% in the six month period ended April 30, 2005 to $48.8 million from $47.1
million in the same period in 2004. Office products and office furniture revenue
increased 51.2% in the six month period ended April 30, 2005 to $19.2 million
from $12.7 million in the same period in 2004. The revenue increase for the
office products and office furniture segment was attributable to an increase in
furniture sales in 2005 due in part to the additional sales derived from the
purchase of Syscan coupled with organic growth and additional office product
sales resulting from the Syscan acquisition. The increase in printing sales was
primarily due to additional sales derived from the Syscan acquisition offset by
print sales reductions across several divisions.
 
 *Cost
of Sales*
 
 Total
cost of sales increased 14.3% in the six months ended April 30, 2005 to $49.1
million from $43.0 million in the six months ended April 30, 2004. Printing cost
of sales increased 3.9% in the six months ended April 30, 2005 to $35.8 million
from $34.5 million in the six months ended April 30, 2004. The increase in
printing cost of sales was primarily due to the increase in printing sales noted
above and gross margin compression resulting from increased labor costs related
in part to the Syscan acquisition. Office products and office furniture cost of
sales increased 57.0% in the six months ended April 30, 2005 to $13.3 million
from $8.5 million in the six months ended April 30, 2004 and increased as a
percent of sales from 66.7% in 2004 to 69.2% in 2005. The increase in office
products and office furniture cost of sales is attributable to an increase in
office products and office furniture sales. The increase in office products and
office furniture cost of sales as a percent of sales is reflective of higher
furniture costs as a percent of furniture sales and wholesale pricing factors at
Syscan for office supplies.
 
 *Operating
Expenses*
 
 During
the six months ended April 30, 2005 compared to the same period in 2004,
selling, general and administrative expenses decreased as a percentage of sales
to 27.1% from 27.6%. Total selling, general and administrative expenses
increased $1.9 million. The
increase in selling, general and administrative expenses is primarily due to
additional costs associated with the acquisition of Syscan in September 2004 and
approximately $800,000 in legal related costs associated with various legal
settlements, accruals, and expenses including a $440,000 settlement related to a
Mississippi lawsuit.
 
 *Income
from Operations and Other Income and Expenses*
 
 Income
from operations increased 49.7% in the six month period ended April 30, 2005 to
$481,000 from $321,000 in the same period of 2004. This
increase is the result of increased gross profit contribution due to increased
sales discussed above partially offset by increased selling, general and
administrative expenses to support such sales growth coupled with approximately
$800,000 in legal related costs on a year to date basis. Other expense increased
$159,000 to $186,000 in 2005 from $27,000 in 2004, this increase is primarily
due to a $168,000
 
 15
 increase
in interest expense resulting from higher borrowings primarily related to the
acquisition of Syscan in September 2004 coupled with an increase in interest
rates.
 
 *Income
Taxes*
 
 The
Company’s effective income tax rate was 43.7% for the six months ended April 30,
2005, up from 40.5% in the same period of 2004. The
increase in income taxes as a percentage of income before taxes is primarily
related to the nondeductibility of certain selling related expenses. The
effective income tax rate approximates the combined federal and state, net of
federal benefit, statutory income tax rate and is partially impacted by the
geographic profitability mix of our operations.
 
 *Net
Income*
 
 Net
income for the first six months of 2005 decreased 5.1% to $166,000 from $175,000
in the same period of 2004 due to the reasons discussed above. Basic and diluted
earnings per share for the six months ended April 30, 2005 and 2004, were
$0.02.
 
 **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.
 
 **Liquidity
and Capital Resources**
 
 Net cash
provided by operations for the six months ended April 30, 2005, was $4.8 million
compared to net cash provided by operations of $2.8 million during the same
period in 2004. This change in net cash from operations is due primarily to
timing changes in assets and liabilities including an increase in accrued
expenses resulting from various legal related settlements, accruals and
expenses. In addition, accrued income taxes reflected a reduction in the
utilization of cash due to higher earnings for the fiscal year ended October 31,
2003 compared to 2004.
 
 Net cash
used in investing activities for the six months ended April 30, 2005 was $1.5
million compared to $3.7 million during the same period in 2004. The net cash
used in investing activities during the first six months of 2005 primarily
related to vehicle and equipment additions including pre-press expenditures at
two of the Company’s sheetfed plants and print on demand expenditures. The 2004
expenditures primarily related to equipment purchases and expenditures for
buildings and improvements including the purchase of new sheetfed
presses.
  16
 
 Net cash
used in financing activities for the six months ended April 30, 2005 was $2.3
million compared to net cash provided by financing activities of $849,000 during
the same period in 2004. This change is primarily due to $1.8 million in net
changes on the Company’s line of credit, and net payments on term debt of
$855,000 in 2005 compared to net borrowings on term debt of $457,000 in
2004.
 
 Working
capital on April 30, 2005 was $25.6 million, a decrease of $1.3 million from
October 31, 2004. Management believes that working capital and operating ratios
remain at acceptable levels.
 
 The
Company expects that the combination of funds available from working capital,
borrowings available under the Company’s credit facilities and anticipated cash
flows from operations will provide sufficient capital resources for the
foreseeable future. In the event the Company seeks to accelerate internal growth
or make acquisitions beyond these sources, additional financing would be
necessary.
 
 **Environmental
Regulation**
 
 The
Company is subject to the environmental laws and regulations of the United
States, and the states in which it operates, concerning emissions into the air,
discharges into the waterways and the generation, handling and disposal of waste
materials. The Company’s past expenditures relating to environmental compliance
have not had a material effect on the Company. These laws and regulations are
constantly evolving, and it is impossible to predict accurately the effect they
may have upon the capital expenditures, earnings, and competitive position of
the Company in the future. Based upon information currently available,
management believes that expenditures relating to environmental compliance will
not have a material impact on the financial position of the
Company.
 
 **Special
Note Regarding Forward-Looking Statements**
 
 Certain
statements contained in this Form 10-Q, including without limitation statements
including the word “believes,” “anticipates,” “intends,” “expects” or words of
similar import, constitute “forward-looking statements” within the meaning of
section 27A of the Securities Act of 1933, as amended (the “Securities Act”),
and section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements of the Company expressed or implied
by such forward-looking statements. Such factors include, among others, general
economic conditions, changes in business strategy or development plans, and
other factors referenced in this Form 10-Q. Given these uncertainties, readers
are cautioned not to place undue reliance on such forward-looking statements.
The Company disclaims any obligation to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
 
 **ITEM
3a. Quantitative and Qualitative Disclosure About Market
Risk**
 
 The
Company does not have any significant exposure relating to market
risk.
  17
 ****
 **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.
 
  
 **PART
II - OTHER INFORMATION**
 
 **ITEM
1. Legal Proceedings**
 
 As
reported in Form 8-K filed May 11, 2005, on May 6, 2005, the Company entered
into an agreement to settle all claims in a Mississippi lawsuit asserting that
the Company and its Dallas Printing Company, Inc. subsidiary had engaged in
unfair competition and other wrongful acts in hiring certain employees of
National Forms & Systems Group, Inc.
 
 Following
trial of this matter, titled National Forms & Systems Group, Inc. v. Timothy
V. Ross; Todd Ross and Champion Industries, Inc.; and Timothy V. Ross v.
National Forms & Systems Group, Inc. and Mickey McCardle; in the Circuit
Court of the First Judicial District of Hinds County, Mississippi; Case No.
251-00-942-CIV, on February 16, 2002, a jury had awarded plaintiff $1,745,000 in
actual damages and $750,000 in punitive damages. Additionally, the trial court
had granted plaintiff $645,119 in attorney fees and expenses, and ordered that
interest on the amount of the jury award accrue from February 22,
2002.
 
 The
Company successfully appealed the jury award and attorney fee and expense award
in both the Court of Appeals of the State of Mississippi and the Supreme Court
of Mississippi, with the appellate courts’ rulings having the effect of
reversing the jury’s award of damages and the trial court’s award of attorney
fees and expenses, and granting a new trial on plaintiff’s claims.
 
 Terms of
the settlement call for all parties’ claims to be dismissed with prejudice, as
fully compromised and released. The Company has paid plaintiff $440,000 cash and
will forego collection of and release its $60,276 cost judgment awarded as a
result of the reversal on appeal.
  18
 
 **ITEM
4. Submission of Matters to a Vote of Security Holders**
 
 At the
annual meeting of shareholders held March 21, 2005, the following matters were
voted upon:
 
 a)
    Fixing
      the number of directors at seven (7) and election of the following
      nominees as directors, with votes “for” and “withheld,” as well as broker
      non-votes, as follows:
 **Director**
    **Votes
      “For”**
    **Votes
      “Withheld”**
    **Broker
      Non-votes**Louis
      J. Akers
    9,147,245
    49,677
    -0-Philip
      E. Cline
    9,137,272
    59,650
    -0-Harley
      F. Mooney, Jr.
    9,157,919
    39,003
    -0-A.
      Michael Perry
    9,158,094
    38,828
    -0-Marshall
      T. Reynolds
    9,154,994
    41,928
    -0-Neal
      W. Scaggs
    9,158,094
    38,828
    -0-Glenn
      W. Wilcox, Sr.
    9,158,094
    38,828
    -0-
 
 ****
 ****
 **Item
6. Exhibits**
 ****
 a)
      Exhibits:(10.1)
    Release
      of Claims and Settlement Agreement among the Company and National Forms
      and Systems Group, Inc. and others filed as Exhibit 10.1 to Form 8-K filed
      May 11, 2005 is incorporated herein by reference.
 (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
  19
    **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:
      June10,
      2005
    /s/
      Marshall T. ReynoldsMarshall
      T. ReynoldsChief
      Executive OfficerDate:
      June10,
      2005
    /s/
      Toney K. AdkinsToney
      K. AdkinsPresident
      and Chief Operating OfficerDate:
      June10,
      2005
    /s/
      Todd R. FryTodd
      R. FrySenior
      Vice President and Chief Financial Officer
 
 
 20