##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934  For the quarterly period ended July 31, 2004
    
    Commission File No. 0-21084
   Champion Industries, Inc.  West Virginia
    
    55-0717455(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    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,    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 [X] No [   ]. Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes
[   ] No [X]. 9,733,913 shares of common stock of the Registrant were outstanding at
July 31, 2004.




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##### 



Champion Industries, Inc. INDEX Page No.Part I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets (Unaudited)
    
    
    3Consolidated Statements of Income (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
    
    
    14Item 3a. Quantitative and Qualitative Disclosure About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18Part II. Other InformationItem 6. Exhibits and Reports on Form 8-K
    
    
    19Signatures
    
    
    20
 2




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##### 



PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements Champion Industries, Inc. and Subsidiaries 
 Consolidated Balance Sheets
  July 31,
    
    October 31,ASSETS
    
    2004
    
    2003Current assets:Cash and cash equivalents
    
    $
    2,645,245
    
    
    $
    2,171,713Accounts receivable, net of allowance of $1,226,000 and $1,191,000
    
    
    18,971,833
    
    
    
    20,142,812Inventories
    
    
    10,860,838
    
    
    
    11,349,929Income tax refund
    
    
    
    
    
    
    Other current assets
    
    
    1,251,320
    
    
    
    739,560Deferred income tax assets
    
    
    1,059,520
    
    
    
    1,059,520Total current assets
    
    
    34,788,756
    
    
    
    35,463,534Property and equipment, at cost:Land
    
    
    1,973,042
    
    
    
    2,063,373Buildings and improvements
    
    
    7,864,802
    
    
    
    7,445,219Machinery and equipment
    
    
    40,044,715
    
    
    
    37,682,530Equipment under capital leases
    
    
    983,407
    
    
    
    983,407Furniture and fixtures
    
    
    3,110,204
    
    
    
    2,965,389Vehicles
    
    
    3,301,756
    
    
    
    3,262,86157,277,926
    
    
    
    54,402,779Less accumulated depreciation
    
    
    (37,553,043
    )
    
    
    (34,964,006
    )19,724,883
    
    
    
    19,438,773Cash surrender value of officers life insurance
    
    
    988,134
    
    
    
    1,020,795Goodwill and other intangible assets
    
    
    2,478,587
    
    
    
    2,114,390Other assets
    
    
    308,881
    
    
    
    431,3433,775,602
    
    
    
    3,566,528Total assets
    
    $
    58,289,241
    
    
    $
    58,468,835
 See notes to consolidated financial statements. 3




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##### 



Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
(Unaudited) July 31,
    
    October 31,LIABILITIES AND SHAREHOLDERS EQUITY
    
    2004
    
    2003Current liabilities:Accounts payable
    
    $
    3,369,298
    
    
    $
    3,283,222Accrued payroll
    
    
    1,450,250
    
    
    
    1,500,165Taxes accrued and withheld
    
    
    1,385,247
    
    
    
    1,259,853Accrued income taxes
    
    
    5,506
    
    
    
    707,119Accrued expenses
    
    
    868,984
    
    
    
    789,676Current portion of long-term debt:Notes payable
    
    
    593,107
    
    
    
    744,662Capital lease obligations
    
    
    178,423
    
    
    
    202,309Total current liabilities
    
    
    7,850,815
    
    
    
    8,487,006Long-term debt, net of current portion:Notes payable, line of credit
    
    
    2,974,000
    
    
    
    1,705,668Notes payable, term
    
    
    2,572,509
    
    
    
    2,103,569Capital lease obligations
    
    
    24,552
    
    
    
    156,718Other liabilities
    
    
    426,637
    
    
    
    424,233Deferred income tax liability
    
    
    2,900,807
    
    
    
    2,900,807Total liabilities
    
    
    16,749,320
    
    
    
    15,778,001Shareholders equity:Common stock, $1 par value, 20,000,000 shares authorized;
9,733,913 and 9,713,913 shares issued and outstanding
    
    
    9,733,913
    
    
    
    9,713,913Additional paid-in capital
    
    
    22,278,110
    
    
    
    22,242,047Retained earnings
    
    
    9,527,898
    
    
    
    10,734,874Total shareholders equity
    
    
    41,539,921
    
    
    
    42,690,834Total liabilities and shareholders equity
    
    $
    58,289,241
    
    
    $
    58,468,835
 See notes to consolidated financial statements. 4




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##### 



Champion Industries, Inc. and Subsidiaries 
 Consolidated Statements of Income
  Three Months Ended
    
    Nine Months EndedJuly 31,
    
    July 31,2004
    
    2003
    
    2004
    
    2003Revenues:Printing
    
    $
    23,011,690
    
    
    $
    23,258,426
    
    
    $
    70,147,035
    
    
    $
    69,769,120Office products and office
furniture
    
    
    7,086,529
    
    
    
    7,340,074
    
    
    
    19,765,555
    
    
    
    18,777,508Total revenues
    
    
    30,098,219
    
    
    
    30,598,500
    
    
    
    89,912,590
    
    
    
    88,546,628Cost of sales:Printing
    
    
    16,913,725
    
    
    
    17,149,495
    
    
    
    51,420,528
    
    
    
    50,960,092Office products and office
furniture
    
    
    4,850,670
    
    
    
    5,231,810
    
    
    
    13,304,564
    
    
    
    12,959,752Total cost of sales
    
    
    21,764,395
    
    
    
    22,381,305
    
    
    
    64,725,092
    
    
    
    63,919,844Gross profit
    
    
    8,333,824
    
    
    
    8,217,195
    
    
    
    25,187,498
    
    
    
    24,626,784Selling, general and
administrative expenses
    
    
    8,247,988
    
    
    
    7,785,835
    
    
    
    24,780,503
    
    
    
    22,814,119Income from operations
    
    
    85,836
    
    
    
    431,360
    
    
    
    406,995
    
    
    
    1,812,665Other income (expense):Interest income
    
    
    1,079
    
    
    
    1,154
    
    
    
    3,877
    
    
    
    3,201Interest expense
    
    
    (78,462
    )
    
    
    (8,208
    )
    
    
    (181,729
    )
    
    
    (113,648
    )Other
    
    
    121,577
    
    
    
    8,143
    
    
    
    194,656
    
    
    
    54,93044,194
    
    
    
    1,089
    
    
    
    16,804
    
    
    
    (55,517
    )Income before income taxes
    
    
    130,030
    
    
    
    432,449
    
    
    
    423,799
    
    
    
    1,757,148Income taxes
    
    
    (52,689
    )
    
    
    (179,466
    )
    
    
    (171,689
    )
    
    
    (732,935
    )Net income
    
    $
    77,341
    
    
    $
    252,983
    
    
    $
    252,110
    
    
    $
    1,024,213Earnings per shareBasic
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.03
    
    
    $
    0.11Diluted
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.03
    
    
    $
    0.11Weighted average shares
outstanding:Basic
    
    
    9,734,000
    
    
    
    9,714,000
    
    
    
    9,727,000
    
    
    
    9,714,000Diluted
    
    
    9,832,000
    
    
    
    9,756,000
    
    
    
    9,841,000
    
    
    
    9,745,000Dividends per share
    
    $
    0.05
    
    
    $
    0.05
    
    
    $
    0.15
    
    
    $
    0.15
 See notes to consolidated financial statements. 5




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##### 



Champion Industries, Inc. and Subsidiaries 
 Consolidated Statements of Cash Flows
  Nine Months EndedJuly 31,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    252,110
    
    
    $
    1,024,213Adjustments to reconcile net income to cash
provided by operating activities:Depreciation and amortization
    
    
    3,223,193
    
    
    
    3,035,879(Gain) loss on sale of assets
    
    
    (102,925
    )
    
    
    699Increase in deferred compensation
    
    
    8,042
    
    
    
    10,723Bad debt expense
    
    
    317,539
    
    
    
    123,741Changes in assets and liabilities:Accounts receivable
    
    
    934,996
    
    
    
    575,645Inventories
    
    
    489,091
    
    
    
    697,228Other current assets
    
    
    (421,760
    )
    
    
    596,711Accounts payable
    
    
    86,076
    
    
    
    (629,895
    )Accrued payroll
    
    
    (49,915
    )
    
    
    (502,900
    )Taxes accrued and withheld
    
    
    125,394
    
    
    
    (118,996
    )Accrued income taxes
    
    
    (701,613
    )
    
    
    (998,425
    )Accrued expenses
    
    
    79,308
    
    
    
    (70,613
    )Other liabilities
    
    
    (5,638
    )
    
    
    (14,929
    )Net cash provided by operating activities
    
    
    4,233,898
    
    
    
    3,729,081Cash flows from investing activities:Purchases of property and equipment
    
    
    (3,987,220
    )
    
    
    (2,417,433
    )Proceeds from sales of property
    
    
    789,702
    
    
    
    149,048Businesses acquired, net of cash received
    
    
    (346,556
    )
    
    
    (415,598
    )Goodwill additions
    
    
    (227,161
    )
    
    
    (7,809
    )Increase (decrease) in other assets
    
    
    (48,434
    )
    
    
    242,818Decrease (increase) in cash surrender value life insurance
    
    
    32,661
    
    
    
    (9,240
    )Net cash used in investing activities
    
    
    (3,787,008
    )
    
    
    (2,458,214
    )Cash flows from financing activities:Borrowings on line of credit
    
    
    4,205,000
    
    
    
    1,700,000Payments on line of credit
    
    
    (2,936,668
    )
    
    
    (1,000,000
    )Proceeds from term debt and leases
    
    
    1,000,000
    
    
    
    572,550Principal payments on long-term debt
    
    
    (838,667
    )
    
    
    (2,236,312
    )Proceeds from exercise of stock options
    
    
    56,063
    
    
    
    Dividends paid
    
    
    (1,459,086
    )
    
    
    (1,457,086
    )Net cash provided by (used in) financing activities
    
    
    26,642
    
    
    
    (2,420,848
    )Net increase (decrease) in cash and cash equivalents
    
    
    473,532
    
    
    
    (1,149,981
    )Cash and cash equivalents, beginning of period
    
    
    2,171,713
    
    
    
    4,507,139Cash and cash equivalents, end of period
    
    $
    2,645,245
    
    
    $
    3,357,158
 See notes to consolidated financial statements. 6




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Champion Industries, Inc. and Subsidiaries 
 Notes to Consolidated Financial Statements (Unaudited) July 31, 2004 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, 2003, and
related notes thereto contained in Champion Industries, Inc.s Form 10-K dated
January 26, 2004. The accompanying interim financial information is unaudited.
The balance sheet information as of October 31, 2003 was derived from our
audited financial statements. Certain prior-year amounts have been reclassified to conform to the current
year Financial Statement presentation. 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 98,000 and
113,000 shares for the three and nine months ended July 31, 2004 and 42,000 and
31,000 shares for the three and nine months ended July 31, 2003. 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 31,2004
    
    2003Printing:Raw materials
    
    $
    2,185,335
    
    
    $
    2,203,228Work in process
    
    
    2,005,995
    
    
    
    2,022,420Finished goods
    
    
    3,650,295
    
    
    
    3,680,184Office products and office furniture
    
    
    3,019,213
    
    
    
    3,444,097$
    10,860,838
    
    
    $
    11,349,929
 7




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Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (continued) 4. Goodwill Goodwill increased by $227,161 and $7,809 during the nine
months ended July 31, 2004 and 2003 primarily as a result of the Company
settling contingent consideration payments of a prior acquisition. 5. Long-Term Debt Long-term debt consisted of the following: July 31,
    
    October 31,2004
    
    2003Installment notes payable to banks
    
    $
    3,165,616
    
    
    $
    2,848,231Capital lease obligations
    
    
    202,975
    
    
    
    359,0273,368,591
    
    
    
    3,207,258Less current portion
    
    
    771,530
    
    
    
    946,971Long-term debt, net of current portion
    
    $
    2,597,061
    
    
    $
    2,260,287
 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 $2,374,000 and $1,705,688
outstanding under this facility at July 31, 2004 and October 31, 2003. 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 was $600,000 outstanding under
this facility at July 31, 2004. During the second quarter of 2004 the Company financed a previously funded
press with a term note for $1.0 million at the Wall Street Journal prime rate. The Companys non-cash activities for the nine months ended July 31, 2004 and
2003 included vehicle purchases of approximately $0 and $96,000, which were
financed by a bank and for the nine months ended July 31, 2003 the purchase of
a building in Baton Rouge, Louisiana of which $1,440,000 of the purchase price
was financed by a bank. 6. Shareholders Equity The Company paid a dividend of five cents per share on June 21, 2004 to
stockholders of record on June 4, 2004. Also, the Company declared a dividend
of five cents per share to be paid on September 20, 2004 to stockholders of
record on September 3, 2004. 8




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Champion Industries, Inc. and Subsidiaries Notes to Consolidated
Financial Statements (Unaudited) (continued) 7. Commitments and Contingencies On February 16, 2002, a jury verdict was rendered against the Company in a
civil action brought against the Company in state court in Jackson,
Mississippi. The plaintiffs in this civil action asserted that the Company and its Dallas
Printing Company, Inc. subsidiary had engaged in unfair competition and other
wrongful acts in hiring certain of its employees. The jury awarded the
plaintiffs $1,745,000 in actual damages and $750,000 in punitive damages. On March 1, 2002, the plaintiffs in the civil action filed a motion for
attorneys fees and costs in the amount of $889,401. On July 16, 2002, the
court entered an order granting plaintiff $645,119 in attorney fees and
expenses, and ordered that interest on the amount of the jury award accrue from
February 22, 2002. On July 17, 2002, the Company filed a notice of appeal from the jury verdict.
The appeal involves both the jury award and the attorneys fee and expense
award. If the Company is not successful on appeal, Mississippi law provides
that it is liable for an additional 15% of the total award. The Company was advised on February 3, 2004 that the Court of Appeals of the
State of Mississippi had reversed the aforementioned judgment and jury verdict
rendered against the Company and had remanded the case for new trial. The
plaintiffs petitioned the appeals court for rehearing of its ruling on February
17, 2004. The Companys response was filed on February 24, 2004. On June 22, 2004 the Company was advised that the Court of Appeals of the State
of Mississippi had upheld its February 3, 2004 reversal of the judgment and
jury verdict and its remand of the case for new trial. Plaintiffs filed a
petition for writ of certiorari with the Mississippi Supreme Court to contest
the ruling of the Court of Appeals on July 6, 2004. The Company filed a
response to such petition on July 27, 2004. The Company has been advised that it has no insurance coverage for this award.
If upon final resolution of the appeals process, the verdict is not overturned,
the impact on the operating results of the Company could be material. 9




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Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (continued) As of July 31, 2004 the Company had contractual obligations in the form of
leases and debt as follows: Payments Due by Fiscal YearContractual Obligations
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Residual
    
    TotalNon-cancelable operating leases
    
    $
    266,963
    
    
    $
    847,963
    
    
    $
    751,053
    
    
    $
    555,103
    
    
    $
    399,594
    
    
    $
    6,000
    
    
    $
    2,826,676Revolving line of credit
    
    
    
    
    
    
    600,000
    
    
    
    2,374,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,974,000Term debt
    
    
    593,107
    
    
    
    501,696
    
    
    
    451,344
    
    
    
    443,998
    
    
    
    185,333
    
    
    
    990,138
    
    
    
    3,165,616Obligations under capital leases
    
    
    178,423
    
    
    
    24,552
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    202,975$
    1,038,493
    
    
    $
    1,974,211
    
    
    $
    3,576,397
    
    
    $
    999,101
    
    
    $
    584,927
    
    
    $
    996,138
    
    
    $
    9,169,267
 8. Accounting of Stock-Based Compensation In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
CompensationTransition and Disclosure. Statement 148 amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition to Statement 123s fair value method of accounting for
stock-based employee compensation. 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 and 2003, respectively: risk-free interest rates of 4.03%
and 3.97%; dividend yields of 4.21% and 7.22%; volatility factors of the
expected market price of the Companys common stock of 54.0% and 46.4%; 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 nine months ended July 31 are as
follows: 10




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##### 



Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (continued) Three Months Ended
    
    Nine Months EndedJuly 31
    
    July 312004
    
    2003
    
    2004
    
    2003Net Income, as reported
    
    $
    77,341
    
    
    $
    252,983
    
    
    $
    252,110
    
    
    $
    1,024,213Deduct: Total
stock-based employee
compensation expense
determined under fair
value method for all
awards, net of related
tax effects
    
    
    
    
    
    
    
    
    
    
    109,962
    
    
    
    47,200Pro Forma net income
    
    $
    77,341
    
    
    $
    252,983
    
    
    $
    142,148
    
    
    $
    977,013Earnings per share:Basic, as reported
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.03
    
    
    $
    0.11Basic, pro forma
    
    
    0.01
    
    
    
    0.03
    
    
    
    0.01
    
    
    
    0.10Diluted, as reported
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.03
    
    
    $
    0.11Diluted, pro forma
    
    
    0.01
    
    
    
    0.03
    
    
    
    0.01
    
    
    
    0.10
 9. Industry Segment Information The Company operates principally in two industry segments organized on the
basis of product lines: the production, printing and sale, principally to
commercial customers, of printed materials (including brochures, pamphlets,
reports, tags, continuous and other forms) and the sale of office products and
office furniture including interior design services. The table below presents information about reported segments for the three and
nine months ended July 31: Office Products2004 Quarter 3
    
    Printing
    
    & Furniture
    
    TotalRevenues
    
    $
    26,155,556
    
    
    $
    8,540,074
    
    
    $
    34,695,630Elimination of intersegment revenue
    
    
    (3,143,866
    )
    
    
    (1,453,545
    )
    
    
    (4,597,411
    )Consolidated revenues
    
    $
    23,011,690
    
    
    $
    7,086,529
    
    
    $
    30,098,219Operating income (loss)
    
    
    (47,535
    )
    
    
    133,371
    
    
    
    85,836Depreciation & amortization
    
    
    1,065,400
    
    
    
    34,455
    
    
    
    1,099,855Capital expenditures
    
    
    261,226
    
    
    
    17,769
    
    
    
    278,995Identifiable assets
    
    
    48,691,447
    
    
    
    9,597,794
    
    
    
    58,289,241Goodwill
    
    
    1,774,344
    
    
    
    286,442
    
    
    
    2,060,786
 11




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##### 



Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (continued) Office Products2003 Quarter 3
    
    Printing
    
    & Furniture
    
    TotalRevenues
    
    $
    25,737,829
    
    
    $
    8,598,413
    
    
    $
    34,336,242Elimination of intersegment revenue
    
    
    (2,479,403
    )
    
    
    (1,258,339
    )
    
    
    (3,737,742
    )Consolidated revenues
    
    $
    23,258,426
    
    
    $
    7,340,074
    
    
    $
    30,598,500Operating income (loss)
    
    
    443,634
    
    
    
    (12,274
    )
    
    
    431,360Depreciation & amortization
    
    
    973,400
    
    
    
    35,535
    
    
    
    1,008,935Capital expenditures
    
    
    407,201
    
    
    
    57,132
    
    
    
    464,333Identifiable assets
    
    
    47,676,732
    
    
    
    9,814,574
    
    
    
    57,491,306Goodwill
    
    
    1,447,308
    
    
    
    286,442
    
    
    
    1,733,750
 Office Products2004 Year to date
    
    Printing
    
    & Furniture
    
    TotalRevenues
    
    $
    78,754,355
    
    
    $
    24,138,607
    
    
    $
    102,892,962Elimination of intersegment revenue
    
    
    (8,607,320
    )
    
    
    (4,373,052
    )
    
    
    (12,980,372
    )Consolidated revenues
    
    $
    70,147,035
    
    
    $
    19,765,555
    
    
    $
    89,912,590Operating income (loss)
    
    
    427,430
    
    
    
    (20,435
    )
    
    
    406,995Depreciation & amortization
    
    
    3,116,547
    
    
    
    106,646
    
    
    
    3,223,193Capital expenditures
    
    
    3,943,903
    
    
    
    43,317
    
    
    
    3,987,220Identifiable assets
    
    
    48,691,447
    
    
    
    9,597,794
    
    
    
    58,289,241Goodwill
    
    
    1,774,344
    
    
    
    286,442
    
    
    
    2,060,786
 Office Products2003 Year to date
    
    Printing
    
    & Furniture
    
    TotalRevenues
    
    $
    77,344,144
    
    
    $
    22,483,171
    
    
    $
    99,827,315Elimination of intersegment revenue
    
    
    (7,575,024
    )
    
    
    (3,705,663
    )
    
    
    (11,280,687
    )Consolidated revenues
    
    $
    69,769,120
    
    
    $
    18,777,508
    
    
    $
    88,546,628Operating income (loss)
    
    
    2,068,081
    
    
    
    (255,416
    )
    
    
    1,812,665Depreciation & amortization
    
    
    2,955,155
    
    
    
    80,724
    
    
    
    3,035,879Capital expenditures
    
    
    3,837,425
    
    
    
    116,473
    
    
    
    3,953,898Identifiable assets
    
    
    47,676,732
    
    
    
    9,814,574
    
    
    
    57,491,306Goodwill
    
    
    1,447,308
    
    
    
    286,442
    
    
    
    1,733,750
 12




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##### 



Champion Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (continued) A reconciliation of total segment revenues and of total segment operating
income to income before income taxes, for the three and nine months ended July
31, 2004 and 2003, is as follows: Three months
    
    Nine months2004
    
    2003
    
    2004
    
    2003Revenues:Total segment revenues
    
    $
    34,695,630
    
    
    $
    34,336,242
    
    
    $
    102,892,962
    
    
    $
    99,827,315Elimination of intersegment revenue
    
    
    (4,597,411
    )
    
    
    (3,737,742
    )
    
    
    (12,980,372
    )
    
    
    (11,280,687
    )Consolidated revenue
    
    $
    30,098,219
    
    
    $
    30,598,500
    
    
    $
    89,912,590
    
    
    $
    88,546,628Operating Income:Total segment operating income
    
    $
    85,836
    
    
    $
    431,360
    
    
    $
    406,995
    
    
    $
    1,812,665Interest income
    
    
    1,079
    
    
    
    1,154
    
    
    
    3,877
    
    
    
    3,201Interest expense
    
    
    (78,462
    )
    
    
    (8,208
    )
    
    
    (181,729
    )
    
    
    (113,648
    )Other income
    
    
    121,577
    
    
    
    8,143
    
    
    
    194,656
    
    
    
    54,930Consolidated income before income
taxes
    
    $
    130,030
    
    
    $
    432,449
    
    
    $
    423,799
    
    
    $
    1,757,148Identifiable assets:Total segment identifiable assets
    
    $
    58,289,241
    
    
    $
    57,491,306
    
    
    $
    58,289,241
    
    
    $
    57,491,306Elimination of intersegment assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total consolidated assets
    
    $
    58,289,241
    
    
    $
    57,491,306
    
    
    $
    58,289,241
    
    
    $
    57,491,306
 10. Acquisitions On September 7, 2004, the Company acquired all the issued and outstanding
capital stock of Syscan Corporation, 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 May 13, 2004, the Company acquired certain assets of Cincinnati, Ohio based
Westerman Print Company. 13




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##### 



Champion Industries, Inc. and Subsidiaries 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table sets forth, for the periods indicated, information derived
from the Consolidated Income Statements as a percentage of total revenues. Percentage of Total RevenuesThree Months Ended
    
    Nine Months EndedJuly 31,
    
    July 31,2004
    
    2003
    
    2004
    
    2003Revenues:Printing
    
    
    76.5
    %
    
    
    76.0
    %
    
    
    78.0
    %
    
    
    78.8
    %Office products and office furniture
    
    
    23.5
    
    
    
    24.0
    
    
    
    22.0
    
    
    
    21.2Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales:Printing
    
    
    56.2
    
    
    
    56.0
    
    
    
    57.2
    
    
    
    57.6Office products and office furniture
    
    
    16.1
    
    
    
    17.1
    
    
    
    14.8
    
    
    
    14.6Total cost of sales
    
    
    72.3
    
    
    
    73.1
    
    
    
    72.0
    
    
    
    72.2Gross profit
    
    
    27.7
    
    
    
    26.9
    
    
    
    28.0
    
    
    
    27.8Selling, general and administrative
expenses
    
    
    27.4
    
    
    
    25.5
    
    
    
    27.5
    
    
    
    25.8Income from operations
    
    
    0.3
    
    
    
    1.4
    
    
    
    0.5
    
    
    
    2.0Interest income
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Interest (expense)
    
    
    (0.3
    )
    
    
    0.0
    
    
    
    (0.2
    )
    
    
    (0.1
    )Other income
    
    
    0.4
    
    
    
    0.0
    
    
    
    0.2
    
    
    
    0.1Income before taxes
    
    
    0.4
    
    
    
    1.4
    
    
    
    0.5
    
    
    
    2.0Income tax expense
    
    
    (0.1
    )
    
    
    (0.6
    )
    
    
    (0.2
    )
    
    
    (0.8
    )Net income
    
    
    0.3
    %
    
    
    0.8
    %
    
    
    0.3
    %
    
    
    1.2
    %
 Three Months Ended July 31, 2004 Compared to Three Months Ended July 31, 2003 Revenues Total revenues decreased 1.6% in the third quarter of 2004 compared to the same
period in 2003 from $30.6 million to $30.1 million. Printing revenue decreased
1.1% in the third quarter of 2004 to $23.0 million from $23.3 million in the
third quarter of 2003. Office products and office furniture revenue decreased
3.5% in the third quarter of 2004 to $7.1 million from $7.3 million in the
third quarter of 2003. The revenue decrease was attributable to a reduction in
office product sales and a sales reduction at one of the Companys sheet-fed
plant operations. Cost of Sales Total cost of sales decreased from $22.4 million for the third quarter of 2003
to $21.8 million in the third quarter of 2004, respectively. Printing cost of
sales in the third quarter of 2004 decreased $200,000 and decreased as a
percentage of printing sales from 73.7% in 2003 to 73.5% in 2004 primarily due
to lower printing sales and a slight improvement in gross margin. Office
products and office furniture cost 14




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##### 



Champion Industries, Inc. and Subsidiaries Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued) of sales decreased 7.3% or approximately $400,000 in 2004 to $4.9 million from
$5.2 million in 2003. As a percentage of office products and office furniture
sales, cost of sales decreased to 68.4% in 2004 from 71.3% in 2003. The
decrease in office products and office furniture cost of sales is attributable
to the lower sales discussed above and enhanced gross margins for office
furniture sales, office product sales and increased vendor discounts. Operating Expenses In the third quarter of 2004, selling, general and administrative expenses
increased on a gross dollar basis to $8.2 million from $7.8 million in 2003, an
increase of $462,000 or 5.9%. Selling, general and administrative expenses as a
percentage of sales also increased to 27.4% in 2004 from 25.5% in 2003. The increase in selling, general and administrative expenses is primarily due
to an increase in bad debt expense, higher professional service related
expenses and higher payroll expenses associated with internal sales growth
initiatives and acquisitions. Income from Operations and Other Income and Expenses Income from operations decreased 80.1% in the third quarter of 2004 to $86,000
from $431,000 in the third quarter of 2003. This decrease is primarily the
result of increased selling, general and administrative expenses. Other
income/expense (net), changed $43,000 from income of $1,000 in 2003 to income
of $44,000 in 2004. This change was the result of a gain on the sale of the
Companys Knoxville facility of approximately $100,000, offset by higher
interest expense resulting from higher interest rates and outstanding
borrowings. Income Taxes The Companys effective income tax rate was 40.5% for the third quarter of 2004
and 41.5% for the third quarter of 2003. 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 2004 decreased 69.4% to $77,000 down from
$253,000 in 2003. Basic and diluted earnings per share for the three months
ended July 31, 2004 was $0.01 down from $0.03 in 2003. Nine Months Ended July 31, 2004 Compared to Nine Months Ended July 31, 2003 Revenues Total revenues increased 1.5% in the first nine months of 2004 compared to the
same period in 2003 to $89.9 million from $88.5 million. Printing revenue
increased 0.5% in the nine month period ended July 31, 2004 to $70.1 million
from $69.8 million in the same period in 2003. Office products and office
furniture revenue increased 5.3% in the nine month period ended July 31, 2004
to $19.8 million from $18.8 million in the same period in 2003. The revenues
in the printing and office products and office 15




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##### 



Champion Industries, Inc. and Subsidiaries Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued) furniture segment increased primarily due to strategic acquisitions completed
in the third quarter of 2003. Cost of Sales Total cost of sales increased 1.3% in the nine months ended July 31, 2004 to
$64.7 million from $63.9 million in the nine months ended July 31, 2003.
Printing cost of sales increased 0.9% in the nine months ended July 31, 2004 to
$51.4 million from $51.0 million in the nine months ended July 31, 2003 and
increased as a percent of printing sales to 73.3% in 2004 from 73.0% in 2003
due primarily to increased sales coupled with a slight reduction in gross
margin. Office products and office furniture cost of sales increased 2.7% in
the nine months ended July 31, 2004 to $13.3 million from $13.0 million in the
nine months ended July 31, 2003 and decreased as a percent of office products
and office furniture sales to 67.3% from 69.0%. The increase in office products
and office furniture cost of sales is attributable to an increase in office
products and office furniture sales partially offset by enhanced gross margins
for office products and furniture sales. Operating Expenses During the nine months ended July 31, 2004 compared to the same period in 2003,
selling, general and administrative expenses increased as a percentage of sales
to 27.5% from 25.8%. Total selling, general and administration expense
increased $2.0 million primarily as a result of increases in payroll expenses,
bad debt expense and professional service related expenses. Income from Operations and Other Income and Expenses Income from operations decreased 77.5% in the nine month period ended July 31,
2004 to $400,000 from $1.8 million in the same period of 2003. This decrease is
primarily the result of increased selling, general and administration expenses
partially offset by increased sales and gross profits. Other income improved
approximately $72,000 primarily due to gains on sale of property partially
offset by increased interest costs. Income Taxes The Companys effective income tax rate was 40.5% for the nine months ended
July 31, 2004, down from 41.7% in the same period of 2003. 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 nine months of 2004 decreased 75.4% to $252,000 from
$1.0 million in the same period of 2003 due to the reasons discussed above.
Basic and diluted earnings per share for the nine months ended July 31, 2004
and 2003, were $0.03 and $0.11. 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 16




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##### 



Champion Industries, Inc. and Subsidiaries Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued) and purchase contracts; therefore, to the extent permitted by competition, it
has the ability to pass through to the customer most cost increases resulting
from inflation, if any. Seasonality Historically, the Company has experienced a greater portion of its
profitability in the second and fourth quarters than in the first and third
quarters. The second quarter generally reflects 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 nine months ended July 31, 2004, was
$4.2 million compared to $3.7 million during the same period in 2003. This
increase primarily relates to timing changes in assets and liabilities and
increased depreciation expense partially offset by lower net income. Net cash used in investing activities for the nine months ended July 31, 2004
was $3.8 million compared to $2.5 million during the same period in 2003. The
net cash used in investing activities during the first nine months of 2004 and
2003 primarily relates to purchases and deposits for the purchase of property
and equipment partially offset by the sale of a building in Knoxville,
Tennessee and Baton Rouge, Louisiana. Net cash provided by financing activities for the nine months ended July 31,
2004 was $27,000 compared to net cash used in financing activities of $2.4
million during the same period in 2003. This change is primarily due to
$600,000 in additional net borrowings on the Companys lines of credit,
proceeds from term debt borrowings secured by equipment, and lower principal
payments in 2004. On September 7, 2004, the Company acquired all the
issued and outstanding capital stock of Syscan Corporation,
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. Working capital on July 31, 2004 was $26.9 million, a decrease of $39,000 from
October 31, 2003. Management believes that working capital and operating ratios
remain at acceptable levels. During the second quarter of 2004, the Company entered into a purchase
agreement with an equipment manufacturer for the purchase of a printing press
for approximately $479,000. As a result of this commitment the Company paid
this manufacturer a deposit of $96,000. 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 17




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##### 



Champion Industries, Inc. and Subsidiaries Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued) 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 Registrant is currently financing primarily with equity capital.
Therefore, changes in interest rates do not have a material impact on the
Companys Financial Statements. 
 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-14 as of a date within 90 days of the filing of 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 have been no significant changes in internal controls, or in
factors that could significantly affect internal controls, subsequent to the
date the Chief Executive Officer, Chief Operating
Officer and Chief Financial Officer completed their evaluation. 18




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##### 



PART II  OTHER INFORMATION 
 Item 6. Exhibits and reports on Form 8-K a) Exhibits: 10.1
    
    
    Companys 2003 Stock Option Plan, filed as Exhibit A
to proxy statement dated February 12, 2004, filed February 13,
2004, is incorporated herein by reference.10.2
    
    
    Form of Stock Option Agreement pursuant to
Companys 2003 Stock Option Plan.31.1
    
    
    Principal Executive Officer Certification Pursuant to
Section 302 of the Sarbanes-Oxley act of 2002  Marshall T.
Reynolds31.2
    
    
    Principal Financial Officer Certification Pursuant to
Section 302 of the Sarbanes-Oxley act of 2002  Todd R. Fry31.3
    
    
    Principal Operating Officer Certification
Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 
Kirby J. Taylor32
    
    
    Marshall T. Reynolds, Todd R. Fry and Kirby J. Taylor
Certification Pursuant to 18 U.SC. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley act of 2002
 b) The following reports on Form 8-K were filed during the quarter for which
this report is filed: Form 8-K dated May 21, 2004, filed May 21, 2004 regarding Champions press
release titled CHAMPION ANNOUNCES EARNINGS AND DIVIDEND FOR 2nd QUARTER 2004. Form 8-K dated June 23, 2004, filed June 24, 2004 regarding Champions press
release titled COURT UPHOLDS RULING REVERSING JURY VERDICT AND FEE
AWARD AGAINST CHAMPION. 19




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##### 



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 10, 2004
    
    /s/ Marshall T. ReynoldsMarshall T. ReynoldsChief Executive OfficerDate: September 10, 2004
    
    /s/ Kirby J. TaylorKirby J. TaylorPresident and Chief Operating OfficerDate: September 10, 2004
    
    /s/ Todd R. FryTodd R. FryVice President and Chief Financial Officer
 20