CHAMPION INDUSTRIES INC - 10-Q Quarterly Report

Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 – Marshall T. Reynolds

Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 – Todd R. Fry

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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, 2003

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.

9,713,913 shares of common stock of the Registrant were outstanding at April 30, 2003.

Champion Industries, Inc.

INDEX


			Page No.
Part I. Financial Information
	Item 1. Financial Statements
		Consolidated Balance Sheets		3
		Consolidated Statements of Operations		5
		Consolidated Statements of Cash Flows		6
		Notes to Consolidated Financial Statements		7
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
	Item 3a. Quantitative and Qualitative Disclosure About Market Risk			18
	Item 4. Controls and Procedures			18
Part II. Other Information
	Item 4. Submission of Matters to a Vote of Security Holders			19
	Item 6. Exhibits and Reports on Form 8-K			19
Signatures				20

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)

April 30,

October 31,

2003

2002

ASSETS

Current assets:

Cash and cash equivalents

4,106,822

4,507,139

Accounts receivable, net of allowance of $1,096,000 and $1,397,000

17,378,085

18,546,989

Inventories

11,428,791

11,427,581

Other current assets

1,111,735

1,745,563

Deferred income tax assets

1,027,059

1,027,059

Total current assets

35,052,492

37,254,331

Property and equipment, at cost:

Land

2,028,372

1,028,372

Buildings and improvements

7,238,251

6,120,122

Machinery and equipment

37,343,173

36,362,178

Equipment under capital leases

983,407

983,407

Furniture and fixtures

2,880,584

2,872,212

Vehicles

3,195,196

3,082,258

53,668,983

50,448,549

Less accumulated depreciation

(33,277,172

)

(31,442,360

)

20,391,811

19,006,189

Cash surrender value of officers’ life insurance

924,534

947,955

Goodwill

1,733,750

1,725,941

Other assets

512,244

573,087

3,170,528

3,246,983

Total assets

58,614,831

59,507,503

See notes to consolidated financial statements.

Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
(Unaudited)


				April 30,		October 31,
				2003		2002

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	2,351,336	$	3,258,095
	Accrued payroll				1,363,053		2,004,046
	Taxes accrued and withheld				1,257,955		1,416,900
	Accrued income taxes				334,096		873,136
	Accrued expenses				765,885		819,234
	Current portion of long-term debt:
		Notes payable			2,430,222		2,615,422
		Capital lease obligations			202,391		195,035

			Total current liabilities		8,704,938		11,181,868
Long-term debt, net of current portion:
	Notes payable, term				2,336,126		1,445,837
	Capital lease obligations				255,958		359,027
Notes payable, line of credit					1,000,000		—
Other liabilities					427,038		429,842
Deferred income tax liability					3,225,119		3,225,119

			Total liabilities		15,949,179		16,641,693

Shareholders’ equity:
	Common stock, $1 par value, 20,000,000 shares authorized; 9,713,913 shares issued and outstanding				9,713,913		9,713,913
	Additional paid-in capital				22,242,047		22,242,047
	Retained earnings				10,709,692		10,909,850

Total shareholders’ equity					42,665,652		42,865,810

			Total liabilities and shareholders’ equity	$	58,614,831	$	59,507,503

See notes to consolidated financial statements.

Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)

Three Months Ended

Six Months Ended

April 30,

2003

2002

2003

2002

Revenues:

Printing

23,904,047

24,641,820

46,510,694

47,499,429

Office products and office furniture

5,425,140

6,027,208

11,437,434

12,960,141

Total revenues

29,329,187

30,669,028

57,948,128

60,459,570

Cost of sales:

Printing

17,276,671

17,486,285

33,810,597

34,013,755

Office products and office furniture

3,560,676

4,149,123

7,727,942

9,109,103

Total cost of sales

20,837,347

21,635,408

41,538,539

43,122,858

Gross profit

8,491,840

9,033,620

16,409,589

17,336,712

Selling, general and administrative expenses

7,572,601

7,660,744

15,028,285

15,445,030

Income from operations

919,239

1,372,876

1,381,304

1,891,682

Other income (expense):

Interest income

595

3,271

2,048

9,784

Interest expense

(53,416

)

(118,105

)

(105,440

)

(230,559

)

Other

21,264

26,463

46,787

56,583

(31,557

)

(88,371

)

(56,605

)

(164,192

)

Income before income taxes

887,682

1,284,505

1,324,699

1,727,490

Income taxes

(370,769

)

(533,790

)

(553,469

)

(719,144

)

Net income

516,913

750,715

771,230

1,008,346

Earnings per share

Basic

0.05

0.08

0.10

Diluted

0.05

0.08

0.10

Weighted average shares outstanding:

Basic

9,714,000

Diluted

9,750,000

9,737,000

9,740,000

9,731,000

Dividends per share

0.05

0.10

See notes to consolidated financial statements.


		Champion Industries, Inc. and Subsidiaries
		Consolidated Statements of Cash Flows
		(Unaudited)


			Six Months Ended
			April 30,
			2003			2002

Cash flows from operating activities:
Net income			$	771,230		$	1,008,346
Adjustments to reconcile net income to cash provided by operating activities:
	Depreciation and amortization			2,026,944			2,074,096
	Gain on sale of assets			(4,450	)		(6,341	)
	Increase in deferred compensation			7,149			8,936
	Bad debt expense			(16,466	)		244,029
	Changes in assets and liabilities:
		Accounts receivable		1,185,370			1,235,805
		Inventories		(1,210	)		252,371
		Other current assets		633,828			(329,450	)
		Accounts payable		(906,757	)		(1,192,569	)
		Accrued payroll		(640,993	)		(429,312	)
		Taxes accrued and withheld		(158,945	)		101,833
		Income taxes		(539,040	)		382,709
		Accrued expenses		(53,349	)		(365,574	)
		Other liabilities		(9,953	)		(11,121	)

Net cash provided by operating activities				2,293,358			2,973,758
Cash flows from investing activities:
Purchases of property and equipment				(1,953,099	)		(1,979,278	)
Proceeds from sales of property				81,448			45,764
Decrease in other assets				53,034			26,072
Decrease (increase) in cash surrender value life insurance				23,421			(58,103	)

Net cash used in investing activities				(1,795,196	)		(1,965,545	)
Cash flows from financing activities:
Borrowings on line of credit				1,500,000			500,000
Payments on line of credit				(500,000	)		—
Proceeds from term debt and leases				572,550			—
Principal payments on long-term debt				(1,499,639	)		(1,837,772	)
Dividends paid				(971,390	)		(971,390	)

Net cash used in financing activities				(898,479	)		(2,309,162	)

Net decrease in cash				(400,317	)		(1,300,949	)
Cash and cash equivalents, beginning of period				4,507,139			5,764,716

Cash and cash equivalents, end of period			$	4,106,822		$	4,463,767

See notes to consolidated financial statements.

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

April 30, 2003

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 (“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, 2002, and related notes thereto contained in Champion Industries, Inc.’s Form 10-K dated January 25, 2003. The accompanying interim financial information is unaudited. The balance sheet information as of October 31, 2002 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 36,000 and 26,000 shares for the three and six months ended April 30, 2003 and 23,000 and 17,000 shares for the three and six months ended April 30, 2002.

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,
		2003		2002

Printing:
	Raw materials	$	2,450,301	$	2,421,973
	Work in process		1,816,800		1,795,796
	Finished goods		3,988,631		3,942,518
Office products and office furniture			3,173,059		3,267,294

		$	11,428,791	$	11,427,581

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,
	2003		2002

Unsecured term note payable	$	1,785,877	$	2,678,733
Installment notes payable to banks		2,980,471		1,382,526
Capital lease obligations		458,349		554,062

		5,224,697		4,615,321
Less current portion		2,632,613		2,810,457

Long-term debt, net of current portion	$	2,592,084	$	1,804,864

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 interest rates at LIBOR plus 1% to 1.5%. This line of credit expires in March 2005 and contains certain restrictive financial covenants. There was $1,000,000 outstanding under this facility at April 30, 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 April 2004 and contains certain financial covenants. There were no borrowings outstanding under this facility at April 30, 2003.

The Company’s non-cash activities for the six months ended April 30, 2003 and 2002 included vehicle purchases of approximately $96,000 and $165,000, which were financed by a bank and for the six months ended April 30, 2003 the purchase of a building in Baton Rouge, Louisiana of which $1,440,000 of the purchase price was financed by a bank.

5. Shareholders’ Equity

The Company paid a dividend of five cents per share on March 24, 2003 to stockholders of record on March 7, 2003. Also, the Company declared a dividend of five cents per share to be paid on June 23, 2003 to stockholders of record on June 6, 2003.

6. Commitments and Contingencies

On February 16, 2002, a jury verdict was rendered against the Company in a civil action brought against the Company in state court in Jackson, Mississippi.

The 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.

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (continued)

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 has been advised that it has no insurance coverage for this award. The Company under Mississippi law has a guaranteed right to appeal. The Company has been advised by counsel that it has multiple grounds for an appeal and a reasonable basis for believing that an appeal would be successful in eliminating the jury award. However, there can be no assurance that the jury award will be overturned upon appeal. If the verdict is not overturned, the impact on the operating results of the Company could be material.

7. New Accounting Pronouncements and Significant Accounting Policy Updates

In July 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (Statement No. 146), which supercedes EITF No. 94-3, “Liability Recognition for Certain Employment Termination Benefits and Other Costs to Exit an Activity.” Statement 146 requires companies to record liabilities for costs associated with exit or disposal activities to be recognized only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard did not have a significant impact on the Company’s financial statements.

Accounting for 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 2003 and 2002, respectively: risk-free interest rates of 3.97% and 3.91%; dividend yields of 7.22% and 8.03%; volatility factors of the expected market price of the Company’s common stock of 46.4% and 45.4%; and a weighted-average expected life of the option of 4 years.

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (continued)

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:


	Three Months Ended				Six Months Ended
	April 30				April 30

	2003		2002		2003		2002

Net Income, as reported	$	516,913	$	750,715	$	771,230	$	1,008,346
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		—		—		47,200		38,704

Pro Forma net income	$	516,913	$	750,715	$	724,030	$	969,642

Earnings per share:
Basic, as reported	$	0.05	$	0.08	$	0.08	$	0.10
Basic, pro forma		0.05		0.08		0.07		0.10
Diluted, as reported	$	0.05	$	0.08	$	0.08	$	0.10
Diluted, pro forma		0.05		0.08		0.07		0.10

8. Restructuring Charge, Asset Impairment Charge and Other Charges

In the third quarter of 2001, the Company recorded charges related to a restructuring and profitability enhancement plan. This plan was implemented to effectuate certain key initiatives including plant and office consolidations, headcount reductions, asset impairment issues and a general response to a deteriorating economic environment. The third quarter of 2001 pre-tax charge resulting from these actions was $6.1 million ($4.3 million after-tax or $0.44 per share on a basic and diluted basis.) The charge related to approximately $3.1 million from asset impairments including goodwill, facility and equipment write-downs. The Company recorded charges for restructuring and other special charges of $3.0 million comprised primarily of severance payments, charge-offs related to duplicative facility leases, increases in allowance for doubtful accounts and inventory obsolescence and valuation reserves, costs related to the impairment of the Company’s information systems hardware and software, charges related to termination and related fees of a pension plan of an acquired Company, and other charges and expenses related to plant consolidations and restructuring.

As a result of the Company’s restructuring plan, approximately 35 employees were terminated from the Company primarily as a result of plant and office consolidations at the Company’s Carolina Cut Sheets operation, Chapman Printing Lexington location and the Garrison Brewer division of Stationers. In addition, the Company anticipates the elimination of additional positions resulting from retirements and

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (continued)

normal attrition within the next twelve to eighteen months. As of October 31, 2001 35 employees were notified of their termination and one retired position was eliminated.

The cash and non-cash elements of the Company’s restructuring charge, asset impairment charge, and other unusual charges approximated $1.5 million in cash and $4.6 million non-cash. The printing segment charges approximated $3.5 million and the office products and furniture segment charges approximated $2.6 million. Details of the approximated charges and the status of the related obligations are as follows as of April 30, 2003:


			Utilized
							Ended balance
	Original accrual		Cash		Noncash		April 30, 2003

Write-down of goodwill, facilities and equipment	$	3,060,000	$	168,000	$	2,892,000	$	—
Employee severance and termination benefits		55,000		25,000		—		30,000
Inventory obsolescence and valuation reserves		978,000		—		978,000		—
Restructuring and other charges		1,998,000		871,000		768,000		359,000

Total	$	6,091,000	$	1,064,000	$	4,638,000	$	389,000

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 six months ended April 30:


				Office Products
2003 Quarter 2	Printing			& Furniture			Total

Revenues	$	26,372,039		$	6,666,610		$	33,038,649
Elimination of intersegment revenue		(2,467,992	)		(1,241,470	)		(3,709,462	)

Consolidated revenues	$	23,904,047		$	5,425,140		$	29,329,187

Operating income		797,482			121,757			919,239
Depreciation & amortization		983,395			36,754			1,020,149
Capital expenditures		2,895,686			24,951			2,920,637
Identifiable assets		49,339,095			9,275,736			58,614,831
Goodwill		1,447,308			286,442			1,733,750

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (continued)


				Office Products
2002 Quarter 2	Printing			& Furniture			Total

Revenues	$	26,845,993		$	6,780,896		$	33,626,889
Elimination of intersegment revenue		(2,204,173	)		(753,688	)		(2,957,861	)

Consolidated revenues	$	24,641,820		$	6,027,208		$	30,669,028

Operating income		1,185,996			186,880			1,372,876
Depreciation & amortization		1,010,007			15,928			1,025,935
Capital expenditures		297,715			44,211			341,926
Identifiable assets		50,222,660			10,807,031			61,029,691
Goodwill		1,062,926			286,442			1,349,368


				Office Products
2003 Year to date	Printing			& Furniture			Total

Revenues	$	51,606,315		$	13,884,759		$	65,491,074
Elimination of intersegment revenue		(5,095,621	)		(2,447,325	)		(7,542,946	)

Consolidated revenues	$	46,510,694		$	11,437,434		$	57,948,128

Operating income		1,271,906			109,398			1,381,304
Depreciation & amortization		1,957,040			69,904			2,026,944
Capital expenditures		3,430,224			59,341			3,489,565
Identifiable assets		49,339,095			9,275,736			58,614,831
Goodwill		1,447,308			286,442			1,733,750


				Office Products
2002 Year to date	Printing			& Furniture			Total

Revenues	$	51,932,301		$	14,511,253		$	66,443,554
Elimination of intersegment revenue		(4,432,872	)		(1,551,112	)		(5,983,984	)

Consolidated revenues	$	47,499,429		$	12,960,141		$	60,459,570

Operating income		1,604,743			286,939			1,891,682
Depreciation & amortization		2,025,725			48,371			2,074,096
Capital expenditures		2,084,184			60,056			2,144,240
Identifiable assets		50,222,660			10,807,031			61,029,691
Goodwill		1,062,926			286,442			1,349,368

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 six months ended April 30, 2003 and 2002, is as follows:

Three months

Six months

2003

2002

2003

2002

Revenues:

Total segment revenues

33,038,649

33,626,889

65,491,074

66,443,554

Elimination of intersegment revenue

(3,709,462

)

(2,957,861

)

(7,542,946

)

(5,983,984

)

Consolidated revenue

29,329,187

30,669,028

57,948,128

60,459,570

Operating Income:

Total segment operating income

919,239

1,372,876

1,381,304

1,891,682

Interest income

595

3,271

2,048

9,784

Interest expense

(53,416

)

(118,105

)

(105,440

)

(230,559

)

Other income

21,264

26,463

46,787

56,583

Consolidated income before income taxes

887,682

1,284,505

1,324,699

1,727,490

Identifiable assets:

Total segment identifiable assets

58,614,831

61,029,691

58,614,831

61,029,691

Elimination of intersegment assets

—

Total consolidated assets

58,614,831

61,029,691

58,614,831

61,029,691

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 Revenues

Three Months Ended

Six Months Ended

April 30,

2003

2002

2003

2002

Revenues:

Printing

81.5

80.3

78.6

Office products and office furniture

18.5

19.7

21.4

Total revenues

100.0

Cost of sales:

Printing

58.9

57.0

58.4

56.3

Office products and office furniture

12.1

13.5

13.3

15.0

Total cost of sales

71.0

70.5

71.7

71.3

Gross profit

29.0

29.5

28.3

28.7

Selling, general and administrative expenses

25.8

25.0

25.9

25.6

Income from operations

3.2

4.5

2.4

3.1

Interest income

0.0

0.1

Interest (expense)

(0.2

)

(0.4

)

(0.2

)

(0.4

)

Other income

0.1

Income before taxes

3.1

4.2

2.3

2.9

Income tax expense

(1.3

)

(1.7

)

(1.0

)

(1.2

)

Net income

1.8

2.5

1.3

1.7

Three Months Ended April 30, 2003 Compared to Three Months Ended April 30, 2002

Revenues

Total revenues decreased 4.4% in the second quarter of 2003 compared to the same period in 2002 from $30.7 million to $29.3 million. Printing revenue decreased 3.0% in the second quarter of 2003 to $23.9 million from $24.6 million in the second quarter of 2002. Office products and office furniture revenue decreased 10.0% in the second quarter of 2003 to $5.4 million from $6.0 million in the second quarter of 2002. The revenue decrease was primarily attributable to an industry-wide slowdown in office furniture sales, with office furniture sales down approximately $670,000. The reduction in printing sales was reflective of a continued sluggish market in most of the Company’s geographic regions.

Cost of Sales

Total cost of sales decreased 3.7% in the second quarter of 2003 to $20.8 million from $21.6 million in the second quarter of 2002. Printing cost of sales in the second quarter of 2003 decreased $210,000 but increased as a percentage of printing sales from 71.0% in 2002 to 72.3% in 2003 primarily due to

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

increased labor and overhead costs. Office products and office furniture cost of sales decreased 14.2% or approximately $588,000 in 2003 to $3.6 million from $4.1 million in 2002. The decrease in office products and office furniture cost of sales is attributable to the lower sales discussed above and enhanced gross margins for remaining office furniture sales.

Operating Expenses

In the first quarter of 2003, selling, general, and administrative expenses decreased on a gross dollar basis to $7.6 million from $7.7 million in 2002 a decrease of $88,000 or 1.2%. As a result of decreased sales, selling, general and administrative expenses as a percentage of sales increased to 25.8% in 2003 from 25.0% in 2002.

The reduction in selling, general and administrative expenses is primarily due to a decrease in bad debt expense resulting from a customer in bankruptcy who will pay in full and lower legal expenses, partially offset by increased insurance, information systems and payroll related costs.

Income from Operations and Other Income and Expenses

Income from operations decreased 33.0% in the second quarter of 2003 to $919,000 from $1.4 million in the second quarter of 2002. This decrease is primarily the result of decreased sales partially offset by a reduction in selling, general and administrative expenses. Other expense (net), decreased approximately $57,000 due to lower total interest expense resulting from a decrease in total interest bearing debt.

Income Taxes

The Company’s effective income tax rate was 41.8% for the second quarter of 2003 and 41.6% for the second quarter of 2002. 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 second quarter of 2003 was $517,000 compared to net income of $751,000 in the second quarter of 2002. Basic and diluted earnings per share for the three months ended April 30, 2003 and 2002 were $0.05 and $0.08.

Six Months Ended April 30, 2003 Compared to Six Months Ended April 30, 2002

Revenues

Total revenues decreased 4.2% in the first six months of 2003 compared to the same period in 2002 to $57.9 million from $60.5 million. Printing revenue decreased 2.1% in the six month period ended April 30, 2003 to $46.5 million from $47.5 million in the same period in 2002. Office products and office furniture revenue decreased 11.7% in the six month period ended April 30, 2003 to $11.4 million from $13.0 million in the same period in 2002. The revenues in the printing and office products and office furniture segment decreased primarily due to an overall sluggish market in most of the geographic regions served by the Company. Office furniture sales accounted for $1.6 million of the total sales decrease or 65%.

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Cost of Sales

Total cost of sales decreased 3.7% in the six months ended April 30, 2003 to $41.5 million from $43.1 million in the six months ended April 30, 2002. Printing cost of sales decreased 0.6% in the six months ended April 30, 2003 to $33.8 million from $34.0 million in the six months ended April 30, 2002, due primarily to the decrease in printing sales noted above. The printing cost of sales decrease was partially offset by increased labor and overhead costs. Office products and office furniture cost of sales decreased 15.2% in the six months ended April 30, 2003 to $7.7 million from $9.1 million in the six months ended April 30, 2002. The decrease in office products and office furniture cost of sales is attributable to a decrease in office products and office furniture sales coupled with enhanced gross margins for remaining furniture sales.

Operating Expenses

During the six months ended April 30, 2003 compared to the same period in 2002, selling, general and administrative expenses increased slightly as a percentage of sales to 25.9% from 25.6%. Total selling, general and administration expensed decreased $417,000 primarily as a result of decreases in payroll expenses, bad debt expense and telecommunication expenses. These decreases were offset by increases in health and other insurance related costs.

Income from Operations and Other Income and Expenses

Income from operations decreased 27.0% in the six month period ended April 30, 2003 to $1.4 million from $1.9 million in the same period of 2002. This decrease is primarily the result of lower sales partially offset by reductions in selling, general and administration expenses. Other expense decreased approximately $108,000 primarily due to lower total interest expense resulting from a decrease in interest bearing debt.

Income Taxes

The Company’s effective income tax rate was 41.8% for the six months ended April 30, 2003, up from 41.6% in the same period of 2002. 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 2003 decreased 23.5% to $771,230 from $1,008,346 in the same period of 2002 due to the reasons discussed above. Basic and diluted earnings per share for the six months ended April 30, 2003 and 2002, were $0.08 and $0.10.

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.

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Seasonality

Historically, the Company has experienced a greater portion of its profitability in the second and fourth quarters than in the first and third quarters. The second quarter generally reflects increased orders for printing of corporate annual reports and proxy statements. A post-Labor Day increase in demand for printing services and office products coincides with the Company’s fourth quarter.

Liquidity and Capital Resources

Net cash provided by operations for the six months ended April 30, 2003, was $2.3 million compared to net cash provided by operations of $3.0 million during the same period in 2002. This change in net cash from operations is due primarily to lower net income in 2003 and a reduction of certain non-cash charges to net income including depreciation and bad debt expense.

Net cash used in investing activities for the six months ended April 30, 2003 was $1.8 million compared to $2.0 million during the same period in 2002. The net cash used in investing activities during the first six months of 2003 and 2002 primarily relates to purchases of property and equipment.

Net cash used in financing activities for the six months ended April 30, 2003 was $898,000 compared to $2.3 million during the same period in 2002. This change is primarily due to $500,000 in additional borrowings on the Company’s line of credit, proceeds from term debt borrowings secured by equipment, and lower principal payments in 2003.

Working capital on April 30, 2003 was $26.3 million, an increase of $275,000 from October 31, 2002. Management believes that working capital and operating ratios remain at acceptable levels.

The Company purchased a building in Baton Rouge, Louisiana for an aggregate purchase price of $1.8 million in March of 2003. As a result of this transaction the Company entered into a term debt agreement with a bank for $1,440,000 of the purchase price.

Even though the Company believes that the legal contingency (See Note 6 of the Consolidated Financial Statements) that it faces will be resolved favorably, the possibility for an adverse decision on appeal is also inherent in the legal process. The Company believes that adequate liquidity is available to fund this contingency, if required.

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 expendi-

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

tures, 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 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.

Champion Industries, Inc. and Subsidiaries

PART II – OTHER INFORMATION

ITEM 4. Submission of Matters to a Vote of Security Holders

At the annual meeting of shareholders held March 17, 2003, the following matters were voted upon:

Fixing the number of directors at eight (8) 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
Robert H. Beymer		9,133,998		24,032		-0-
Philip E. Cline		9,071,646		86,384		-0-
Harley F. Mooney, Jr.		9,139,148		18,882		-0-
Todd L. Parchman		9,139,507		18,523		-0-
A. Michael Perry		9,139,007		19,023		-0-
Marshall T. Reynolds		9,077,929		80,101		-0-
Neal W. Scaggs		9,137,847		20,183		-0-
Glenn W. Wilcox, Sr.		9,141,447		16,583		-0-

Item 6. Exhibits and reports on Form 8-K

a) Exhibits:

b) The following reports on Form 8-K were filed during the quarter for which this report is filed:

None.

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: June 12, 2003		/s/ Marshall T. Reynolds Marshall T. Reynolds
		Chief Executive Officer

Date: June 12, 2003		/s/ Kirby J. Taylor Kirby J. Taylor
		President and Chief Operating Officer

Date: June 12, 2003		/s/ Todd R. Fry Todd R. Fry
		Vice President and Chief Financial Officer

CERTIFICATIONS

I, Marshall T. Reynolds, Chairman of the Board of Directors and Chief Executive Officer of Champion Industries, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Champion Industries, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that

could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: June 12, 2003		/s/ Marshall T. Reynolds Marshall T. Reynolds
		Chairman of the Board of Directors and
		Chief Executive Officer

CERTIFICATIONS

I, Todd R. Fry, Vice President and Chief Financial Officer of Champion Industries, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Champion Industries, Inc.;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that

could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: June 12, 2003		/s/ Todd R. Fry Todd R. Fry
		Vice President and Chief Financial Officer

CERTIFICATIONS

I, Kirby J. Taylor, President and Chief Operating Officer of Champion Industries, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Champion Industries, Inc.;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that

could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: June 12, 2003		/s/ Kirby J. Taylor Kirby J. Taylor
		President and Chief Operating Officer