Edgar Filing: CHAMPION INDUSTRIES INC

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________to_________

Commission File No. 0-21084

Champion Industries, Inc.

(Exact name of Registrant as specified in its charter)

West Virginia		55-0717455
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2450-90 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes _____No ü .

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.

Class		Outstanding at July 31, 2006
Common stock, $1.00 par value per share		9,906,913 shares

Champion Industries, Inc.

INDEX

	Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)	3
Consolidated Statements of Operations (Unaudited)	5
Consolidated Statements of Cash Flows (Unaudited)	6
Notes to Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3. Quantitative and Qualitative Disclosure About Market Risk	19
Item 4. Controls and Procedures	19
Part II. Other Information
Item 6. Exhibits	20
Signatures	21

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Champion Industries, Inc. and Subsidiaries

Consolidated Balance Sheets

ASSETS	July 31,		October 31,
	2006 (Unaudited)		2005 (Audited)
Current assets:
Cash and cash equivalents	$ 1,617,942		$ 3,661,622
Accounts receivable, net of allowance of $1,341,000 and $1,410,000	21,014,698		19,300,453
Inventories	11,001,049		11,079,726
Other current assets	756,273		629,381
Deferred income tax assets	1,168,526		1,168,526
Total current assets	35,558,488		35,839,708


Property and equipment, at cost:
Land	2,023,375		2,006,375
Buildings and improvements	8,518,381		8,368,720
Machinery and equipment	45,497,933		43,668,900
Equipment under capital leases	-		426,732
Furniture and fixtures	3,594,922		3,492,535
Vehicles	3,444,693		3,629,268
	63,079,304		61,592,530
Less accumulated depreciation	(44,709,659	)	(42,894,910	)
	18,369,645		18,697,620

Cash surrender value of officers’ life insurance	1,117,484		1,117,484
Goodwill	2,060,786		2,060,786
Other intangibles, net of accumulated amortization	3,426,513		3,697,368
Other assets	271,120		232,204
	6,875,903		7,107,842
Total assets	$ 60,804,036		$ 61,645,170

See notes to consolidated financial statements.

Champion Industries, Inc. and Subsidiaries

Consolidated Balance Sheets (continued)

LIABILITIES AND SHAREHOLDERS’ EQUITY	July 31,		October 31,
	2006 (Unaudited)		2005 (Audited)
Current liabilities:
Accounts payable		$ 2,765,280		$ 3,584,323
Accrued payroll		1,986,522		1,714,078
Taxes accrued and withheld		1,447,319		1,106,910
Accrued income taxes		481,292		681,763
Accrued expenses		948,298		987,228
Current portion of long-term debt:
Notes payable		1,840,117		1,667,797
Capital lease obligations		-		16,483
Total current liabilities		9,468,828		9,758,582

Long-term debt, net of current portion:
Notes payable, line of credit		-		1,612,000
Notes payable, term		3,973,542		5,148,503
Other liabilities		388,525		388,930
Deferred income tax liabilities		3,714,351		3,984,934
Total liabilities		17,545,246		20,892,949
Shareholders’ equity:
Common stock, $1 par value, 20,000,000 shares authorized; 9,906,913 and 9,745,913 shares issued and outstanding		9,906,913		9,745,913
Additional paid-in capital		22,611,940		22,297,670
Retained earnings		10,739,937		8,708,638
Total shareholders’ equity		43,258,790		40,752,221
Total liabilities and shareholders’ equity		$ 60,804,036		$ 61,645,170

See notes to consolidated financial statements.

Champion Industries, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

Three Months Ended

July 31,

Nine Months Ended

July 31,

2006

2005

2006

2005

Revenues:

Printing

25,152,367

23,769,526

79,159,693

72,591,117

Office products and office furniture

9,357,973

8,485,145

29,062,924

27,655,827

Total revenues

34,510,340

32,254,671

108,222,617

100,246,944

Cost of sales:

Printing

18,259,210

16,965,434

55,964,784

52,602,808

Office products and office furniture

6,493,508

6,031,285

20,390,685

19,667,757

Total cost of sales

24,752,718

22,996,719

76,355,469

72,270,565

Gross profit

9,757,622

9,257,952

31,867,148

27,976,379

Selling, general and administrative expenses

8,341,628

8,437,318

25,783,239

26,675,091

Hurricane and relocation costs, net of recoveries

(301,693

)

Income from operations

1,415,994

820,634

6,385,602

1,301,288

Other income (expense):

Interest income

10,074

3,152

24,200

12,791

Interest expense

(153,057

)

(149,488

)

(493,627

)

(420,791

)

Other

23,129

(7,203

)

26,057

68,481

(119,854

)

(153,539

)

(443,370

)

(339,519

)

Income before income taxes

1,296,140

667,095

5,942,232

961,769

Income tax expense

(519,398

)

(285,622

)

(2,441,398

)

(414,470

)

Net income

776,742

381,473

3,500,834

547,299

Earnings per share

Basic

0.08

0.04

0.36

0.06

Diluted

0.08

0.04

0.35

0.06

Weighted average shares outstanding:

Basic

9,865,000

9,734,000

9,786,000

9,734,000

Diluted

10,089,000

9,812,000

9,956,000

9,806,000

Dividends per share

0.05

0.15

See notes to consolidated financial statements.

Champion Industries, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended July 31,
	2006			2005
Cash flows from operating activities:
Net income	$	3,500,834		$	547,299
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		3,104,526			3,536,056
Loss (gain) on sale of assets		5,274			(11,406	)
Deferred income taxes		(270,583	)		(120,674	)
Increase in deferred compensation		2,681			5,362
Bad debt expense		512,429			394,160
Hurricane and relocation costs, net of recoveries		(301,693	)		-
Changes in assets and liabilities:
Accounts receivable		(2,148,997	)		2,607,204
Inventories		(115,496	)		290,260
Other current assets		(126,892	)		95,531
Accounts payable		(400,853	)		(1,181,876	)
Accrued payroll		272,444			(409,250	)
Taxes accrued and withheld		340,409			536,367
Income taxes		(200,471	)		(36,884	)
Accrued expenses		(38,930	)		(44,565	)
Other liabilities		(3,086	)		(31,259	)
Net cash provided by operating activities		4,131,596			6,176,325

Cash flows from investing activities:
Purchases of property and equipment		(1,397,118	)		(2,043,395	)
Proceeds from sales of property		95,146			155,481
Goodwill additions		-			(34,685	)
Other assets		(47,916	)		97,590
Net cash used in investing activities		(1,349,888	)		(1,825,009	)

Cash flows from financing activities:
Borrowings on line of credit		9,097,000			5,024,000
Payments on line of credit		(10,709,000	)		(6,324,000	)
Proceeds from term debt		80,010			605,000
Principal payments on long-term debt		(2,299,133	)		(1,260,610	)
Proceeds from exercise of stock options		475,270			-
Dividends paid		(1,469,535	)		(1,460,087	)
Net cash used in financing activities		(4,825,388	)		(3,415,697	)
Net (decrease) increase in cash and cash equivalents		(2,043,680	)		935,619
Cash and cash equivalents, beginning of period		3,661,622			1,745,457
Cash and cash equivalents, end of period	$	1,617,942		$	2,681,076

See notes to consolidated financial statements.

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

July 31, 2006

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, 2005, and related notes thereto contained in Champion Industries, Inc.’s Form 10-K dated January 16, 2006. The accompanying interim financial information is unaudited. The results of operations for the period are not necessarily indicative of the results to be expected for the full year. The balance sheet information as of October 31, 2005 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 224,000 and 170,000 shares for the three and nine months ended July 31, 2006 and 78,000 and 72,000 shares for the three and nine months ended July 31, 2005.

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,
	2006		2005
Printing:
Raw materials	$	2,200,094	$	2,198,882
Work in process		1,767,836		1,766,862
Finished goods		4,015,253		4,013,041
Office products and office furniture		3,017,866		3,100,941
	$	11,001,049	$	11,079,726

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (continued)

4. Long-Term Debt

Long-term debt consisted of the following:

	July 31,		October 31,
	2006		2005
Secured term note payable	$	1,315,142	$	3,024,861
Installment notes payable to banks		4,498,517		3,791,439
Capital lease obligations		-		16,483
		5,813,659		6,832,783
Less current portion		1,840,117		1,684,280
Long-term debt, net of current portion	$	3,973,542	$	5,148,503

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. The line of credit expires in July 2008 and contains certain restrictive financial covenants. The Company had outstanding borrowings under this facility of $0 and approximately $1.6 million at July 31, 2006 and October 31, 2005.

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 2007 and contains certain financial covenants. There were no borrowings outstanding under this facility at July 31, 2006 and October 31, 2005.

There was $1.2 million of non-cash investing and financing activities for the three and nine months ended July 31, 2006 and $277,000 for the three and nine months ended July 31, 2005. The Company entered into a $1.2 million term note agreement with a bank, due in initial monthly principal and interest installments approximating $24,549 with interest at the Wall Street Journal prime rate maturing July 2011, collateralized by equipment.

5. Shareholders’ Equity

The Company paid a dividend of five cents per share on June 26, 2006 to stockholders of record on June 9, 2006. Also, the Company declared a dividend of five cents per share to be paid on September 22, 2006 to stockholders of record on September 5, 2006.

The Company issued 161,000 shares for the exercise of stock options during the third quarter of 2006.

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (continued)

6. Commitments and Contingencies

As of July 31, 2006 the Company had contractual obligations in the form of leases and debt as follows:

	Payments Due by Fiscal Year
Contractual Obligations	2006		2007		2008		2009		2010		Residual		Total

Non-cancelable operating leases	$	304,391	$	1,138,554	$	936,651	$	552,766	$	299,426	$	186,622	$	3,418,410


Term debt		625,783		2,038,735		921,653		729,038		1,290,036		208,414		5,813,659

Equipment purchase obligations		512,000		-		-		-		-		-		512,000

	$	1,442,174	$	3,177,289	$	1,858,304	$	1,281,804	$	1,589,462	$	395,036	$	9,744,069

The Company entered into a purchase commitment for pre-press equipment with a manufacturer for $642,000. As a result of this commitment the Company paid this manufacturer a deposit of $130,000 as of July 31, 2006.

7. Accounting for Stock-Based Compensation

In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment.” This statement revises SFAS No. 123, “Accounting for Stock-Based Compensation,” and requires companies to expense the value of employee stock options and similar awards. The effective date of this standard initially was for interim and annual periods beginning after June 15, 2005. On April 14, 2005, the United States Securities and Exchange Commission amended the effective date of this standard to the beginning of a company’s fiscal year that begins after June 15, 2005. Therefore, the effective date of this standard for the Company was November 1, 2005. Since the Company’s outstanding employee stock options vested immediately in the year granted, the initial adoption of this standard had no effect on the Company’s financial statements. However, the Company will be required to expense the fair value of the employee stock options when future options are granted or when existing options are modified or repurchased pursuant to the provisions of SFAS No. 123R.

The Company did not issue any employee stock options for the three and nine months ended July 31, 2006 and 2005.

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (continued)

	Three Months Ended July 31,				Nine Months Ended July 31,
		2006		2005		2006		2005

Net income, as reported	$	776,742	$	381,473	$	3,500,834	$	547,299
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		—		—		—		—

Pro forma net income	$	776,742	$	381,473	$	3,500,834	$	547,299

Earnings per share:
Basic, as reported	$	0.08	$	0.04	$	0.36	$	0.06
Basic, pro forma		0.08		0.04		0.36		0.06

Diluted, as reported	$	0.08	$	0.04	$	0.35	$	0.06
Diluted, pro forma		0.08		0.04		0.35		0.06

8. Acquisitions

On September 7, 2004, the Company acquired all the issued and outstanding capital stock of Syscan Corporation (“Syscan”), a West Virginia corporation, for a cash price of $3,500,000 and a contingent purchase price, dependent upon satisfaction of certain conditions, not to exceed the amount of $1,500,000.

The Williams Land Corporation has the option to put the 3000 Washington Street building occupied by Syscan to the Company for a price of $1.5 million and the Company has the option to purchase the building for $1.5 million at the conclusion of the five year lease term ending September 1, 2009. This option may be exercised no later than 60 days prior to the end of the lease and closing of said purchase cannot exceed 45 days from the end of the lease.

9. Accounting for Costs Associated with Exit or Disposal Activities and Impact of Hurricane Katrina

During the second quarter of 2005, the Company relocated its Chapman Printing Company Charleston division to a facility leased by the Company as a result of the acquisition of Syscan. The Company is currently evaluating its facility needs in Charleston, West Virginia and the future use, if any, of the building formerly occupied by the Chapman Printing Charleston division.

The Company moved its Dallas operations to an existing facility in Baton Rouge, Louisiana in August 2005. The Company is currently evaluating its options regarding the Dallas facility.

On August 29, 2005, Hurricane Katrina made landfall and subsequently caused extensive flooding and destruction along the coastal areas of the Gulf of Mexico, including New Orleans and other communities in Louisiana and Mississippi in which Champion conducts business. Operations in many of the Company's markets were disrupted by both the evacuation of large portions of the population as well as damage and/or lack of access to the Company's operating facility in New Orleans.

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (continued)

The Company filed insurance claims related to both actual and contingent losses. The Company received an advance to claim from an insurance company of $300,000 in February 2006. A second advance to claim of $200,000 was received in April 2006 and a check in the amount of $78,000 in full settlement of any and all claims was received in May 2006. The Company recorded all of the payments as insurance recoveries for the nine months ended July 31, 2006.

The Company has categorized the costs associated with Hurricane Katrina as follows:

1.) Personnel costs representing costs associated with payment of personnel primarily in New Orleans during the time period the city was essentially shut down;

2.) Plant costs represent all facilities, equipment and inventory charges incurred as a result of the hurricane using the most current available information;

3.) The allowance for doubtful accounts charge represents accounts receivable specifically reserved based on a collectibility analysis performed by the Company using the most current available information for customers located in the New Orleans area;

4.) The relocation costs represent costs of closing the New Orleans production facility and associated costs of moving equipment.

The following table summarizes the cumulative costs incurred as of July 31, 2006 relating to Hurricane Katrina.

Personnel	$	88,423
Plant		745,035
Allowance for doubtful accounts		208,310
Moving and relocation costs		255,215

Total pre-tax hurricane expense		1,296,983

Insurance recoveries		577,677

Cumulative impact of Hurricane Katrina, net	$	719,306

The Company recorded costs of $1,020,999 for the three months ended October 31, 2005 and costs of $275,984 and recoveries of $577,677 for the nine months ending July 31, 2006 relating to Hurricane Katrina.

The costs and recoveries associated with Hurricane Katrina are reflected in the consolidated statements of operations in the category “Hurricane and relocation costs, net of recoveries” and are part of the printing segment.

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (continued)

10. 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 Products
2006 Quarter 3	Printing			& Furniture			Total

Revenues	$	28,430,713		$	11,523,272		$	39,953,985
Elimination of intersegment revenue		(3,278,346	)		(2,165,299	)		(5,443,645	)
Consolidated revenues	$	25,152,367		$	9,357,973		$	34,510,340

Operating income		775,321			640,673			1,415,994
Depreciation & amortization		986,691			48,158			1,034,849
Capital expenditures		1,416,391			71,189			1,487,580
Identifiable assets		50,608,573			10,195,463			60,804,036
Goodwill		1,774,344			286,442			2,060,786

	Office Products
2005 Quarter 3	Printing			& Furniture			Total

Revenues	$	27,073,545		$	10,862,695		$	37,936,240
Elimination of intersegment revenue		(3,304,019	)		(2,377,550	)		(5,681,569	)
Consolidated revenues	$	23,769,526		$	8,485,145		$	32,254,671

Operating income		708,280			112,354			820,634
Depreciation & amortization		1,096,947			79,223			1,176,170
Capital expenditures		720,282			11,750			732,032
Identifiable assets		50,579,411			9,727,134			60,306,545
Goodwill		1,774,344			286,442			2,060,786


	Office Products
2006 Year to Date	Printing			& Furniture			Total

Revenues	$	90,132,905		$	35,823,711		$	125,956,616
Elimination of intersegment revenue		(10,973,212	)		(6,760,787	)		(17,733,999	)
Consolidated revenues	$	79,159,693		$	29,062,924		$	108,222,617

Operating income		4,444,034			1,941,568			6,385,602
Depreciation & amortization		2,981,653			122,873			3,104,526
Capital expenditures		2,421,831			175,287			2,597,118
Identifiable assets		50,608,573			10,195,463			60,804,036
Goodwill		1,774,344			286,442			2,060,786

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (continued)

	Office Products
2005 Year to Date	Printing			& Furniture			Total

Revenues	$	82,971,580		$	33,667,921		$	116,639,501
Elimination of intersegment revenue		(10,380,463	)		(6,012,094	)		(16,392,557	)
Consolidated revenues	$	72,591,117		$	27,655,827		$	100,246,944

Operating income		738,149			563,139			1,301,288
Depreciation & amortization		3,302,189			233,867			3,536,056
Capital expenditures		2,187,115			133,305			2,320,420
Identifiable assets		50,579,411			9,727,134			60,306,545
Goodwill		1,774,344			286,442			2,060,786

A reconciliation of total segment revenues and of total segment operating income to consolidated income before income taxes, for the three and nine months ended July 31, 2006 and 2005, is as follows:

Three months

Nine months

2006

2005

2006

2005

Revenues:

Total segment revenues

39,953,985

37,936,240

125,956,616

116,639,501

Elimination of intersegment revenue

(5,443,645

)

(5,681,569

)

(17,733,999

)

(16,392,557

)

Consolidated revenue

34,510,340

32,254,671

108,222,617

100,246,944

Operating income:

Total segment operating income

1,415,994

820,634

6,385,602

1,301,288

Interest income

10,074

3,152

24,200

12,791

Interest expense

(153,057

)

(149,488

)

(493,627

)

(420,791

)

Other income

23,129

(7,203

)

26,057

68,481

Consolidated income before income taxes

1,296,140

667,095

5,942,232

961,769

Identifiable assets:

Total segment identifiable assets

60,804,036

60,306,545

60,804,036

60,306,545

Elimination of intersegment assets

—

Total consolidated assets

60,804,036

60,306,545

60,804,036

60,306,545

11. Commitments and Contingencies

On May 21, 2006 a collective bargaining agreement covering 72 employees or approximately 10% of the Company's workforce, was ratified by the bargaining unit. The Company expects a final agreement to be signed during the fourth quarter of 2006 with an effective date of June 1, 2006 and expiring May 31, 2010. The previous collective bargaining agreement for this workforce expired on May 31, 2006.

Champion Industries, Inc. and Subsidiaries

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The following table sets forth, for the periods indicated, information derived from the Consolidated Statements of Operations as a percentage of total revenues.

Percentage of Total Revenues

Three Months Ended

July 31,

Nine Months Ended

July 31,

2006

2005

2006

2005

Revenues:

Printing

72.9

73.7

73.1

72.4

Office products and office furniture

27.1

26.3

26.9

27.6

Total revenues

100.0

Cost of sales:

Printing

52.9

52.6

51.7

52.5

Office products and office furniture

18.8

18.7

18.9

19.6

Total cost of sales

71.7

71.3

70.6

72.1

Gross profit

28.3

28.7

29.4

27.9

Selling, general and administrative expenses

24.2

26.2

23.8

26.6

Hurricane and relocation costs, net of recoveries

0.0

(0.3

)

0.0

Income from operations

4.1

2.5

5.9

1.3

Interest income

0.0

Interest expense

(0.4

)

(0.4

)

(0.4

)

(0.4

)

Other income

0.1

0.0

0.1

Income before taxes

3.8

2.1

5.5

1.0

Income tax expense

(1.5

)

(0.9

)

(2.3

)

(0.4

)

Net income

2.3

1.2

3.2

0.6

The following table is a reconciliation of net income as reported to core net income, which is defined as generally accepted accounting principles (GAAP) net income adjusted for insurance recoveries, net of expenses associated with Hurricane Katrina. The Company believes that events associated with Hurricane Katrina require additional disclosure and therefore, the Company has disclosed additional non-GAAP financial measures in an effort to make the quarterly financial statements more useful to investors.

	Three Months Ended July 31,				Nine Months Ended July 31,
		2006		2005		2006		2005
Net income	$	777,000	$	381,000	$	3,501,000	$	547,000
Insurance recoveries, net of expenses		-		-		176,000		-
Core net income	$	777,000	$	381,000	$	3,325,000	$	547,000

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

Three Months Ended July 31, 2006 Compared to Three Months Ended July 31, 2005

Revenues

Total revenues increased 7.0% in the third quarter of 2006 compared to the same period in 2005 from $32.3 million to $34.5 million. Printing revenue increased 5.8% in the third quarter of 2006 to $25.2 million from $23.8 million in the third quarter of 2005. Office products and office furniture revenue increased 10.3% in the third quarter of 2006 to $9.4 million from $8.5 million in the third quarter of 2005. The increase in printing sales as well as office products and office furniture sales was primarily due to organic growth since there were no new acquisitions since the fourth quarter of 2004. The growth in the office products and office furniture segment was reflective of strong furniture sales partially offset by office supply sales.

Cost of Sales

Total cost of sales increased 7.6% in the third quarter of 2006 to $24.8 million from $23.0 million in the third quarter of 2005. Printing cost of sales in the third quarter of 2006 increased $1.3 million over the prior year and increased as a percentage of printing sales from 71.4% in 2005 to 72.6% in 2006. The printing cost of sales dollar increase resulted from increased sales volume coupled with higher cost of goods sold as a percentage of sales resulting from higher material and outside purchase costs as a percentage of sales. Office products and office furniture cost of sales increased in 2006 from 2005 levels due to increased sales and decreased as a percent of sales from 71.1% in 2005 to 69.4% in 2006.

Operating Expenses

In the third quarter of 2006, selling, general and administrative expenses decreased on a gross dollar basis to $8.3 million from $8.4 million in 2005, a decrease of $100,000 or 1.1%. As a percentage of total sales, the expenses decreased on a quarter to quarter basis in 2006 to 24.2% from 26.2% in 2005.

The Company benefited from the closing of the Company's facility in Jackson, Mississippi and the consolidation of the Company's New Orleans plant into the Company's Baton Rouge facility; these actions occurred subsequent to the third quarter of 2005. These decreases were offset by additional costs associated with revenue growth of 7.0% for the third quarter of 2006 compared to the third quarter of 2005.

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

Income from Operations and Other Income and Expenses

Income from operations increased in the third quarter of 2006 to $1.4 million from $821,000 in the third quarter of 2005. This increase is the result of increased sales and gross profit dollars, coupled with a decrease in selling, general and administrative expenses (S,G & A) and a decrease in S,G & A as a percent of sales.

Income Taxes

The Company’s effective income tax rate was 40.1% for the third quarter of 2006 and 42.8% for the third quarter of 2005. The decrease in income taxes as a percentage of income before taxes is primarily related to improved absorption regarding the nondeductibility of certain selling related expenses. The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate.

Net Income

Net income for the third quarter of 2006 was $777,000 compared to $381,000 in the third quarter of 2005. Basic and diluted earnings per share for the three months ended July 31, 2006 and 2005 were $0.08 and $0.04.

Nine Months Ended July 31, 2006 Compared to Nine Months Ended July 31, 2005

Revenues

Total revenues increased 8.0% in the first nine months of 2006 compared to the same period in 2005 to $108.2 million from $100.2 million. Printing revenue increased 9.0% in the nine month period ended July 31, 2006 to $79.2 million from $72.6 million in the same period in 2005. Office products and office furniture revenue increased 5.1% in the nine month period ended July 31, 2006 to $29.1 million from $27.7 million in the same period in 2005. The increase in printing sales as well as office products and office furniture sales was primarily due to organic growth since there were no new acquisitions since the fourth quarter of 2004. The growth in the office products and office furniture segment was reflective of strong furniture sales partially offset by office supply sales.

Cost of Sales

Total cost of sales increased 5.7% in the nine months ended July 31, 2006 to $76.4 million from $72.3 million in the nine months ended July 31, 2005. Printing cost of sales increased 6.4% in the nine months ended July 31, 2006 to $56.0 million from $52.6 million in the nine months ended July 31, 2005. The increase in printing cost of sales was primarily due to the increase in printing sales noted above partially offset by gross margin improvement resulting from lower material and outside purchase costs as a percentage of sales coupled with improved labor and overhead absorption. Office products and office furniture cost of sales increased 3.7% in the nine months ended July 31, 2006 to $20.4 million from $19.7 million in the nine months ended July 31, 2005 and decreased as a percent of sales from 71.1% in 2005 to 70.2% in 2006. The increase in office products and office furniture cost of sales is attributable to an increase in office products and office furniture sales. The decrease in office products and office furniture cost of sales as a percent of sales is reflective of wholesale pricing factors at Syscan for office supplies in 2005 mitigated via the office products consolidation during the second quarter of 2005 of which the benefits were fully reflected in the nine months ended July 31, 2006.

Operating Expenses

During the nine months ended July 31, 2006 compared to the same period in 2005, selling, general and administrative expenses decreased as a percentage of sales to 23.8% from 26.6%. Total selling, general and administrative expenses (S,G & A) decreased $900,000. The decrease in selling, general and administrative expenses is primarily due to approximately $800,000 in legal related costs associated with various legal settlements, accruals, and expenses including a $440,000 settlement related to a Mississippi lawsuit, which were incurred during 2005.

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

The decrease in S,G& A as a percent of sales is reflective of the $800,000 in legal costs not being present in the current year coupled with the consolidation of Chapman Printing Charleston and Syscan in 2005, the closing of the Company's facility in Jackson, Mississippi and the consolidation of the Company's New Orleans plant into the Company's Baton Rouge facility. These decreases were offset by additional costs associated with revenue growth of 8.0% on a year to date basis.

On August 29, 2005, Hurricane Katrina made landfall and subsequently caused extensive flooding and destruction along the coastal areas of the Gulf of Mexico, including New Orleans and other communities in Louisiana and Mississippi in which Champion conducts business. Operations in many of the Company’s markets were disrupted by both the evacuation of large portions of the population as well as damage and/or lack of access to the Company’s operating facility in New Orleans.

The Company filed insurance claims related to both actual and contingent losses. The Company received an advance to claim payment from an insurance company of $300,000 in February 2006 and final settlement claims of $278,000 in April and May 2006. The Company recorded the $300,000 payment as an insurance recovery and related receivable at January 31, 2006. The Company recorded additional charges of approximately $42,000 in the first quarter of 2006 associated with Hurricane Katrina. The Company received a second advance to claim check in April of 2006 in the amount of $200,000 and a full and final settlement of any and all claims check of $78,000 in May of 2006. The Company recorded the aggregate amount of these checks as an insurance recovery and the $78,000 as a related receivable at April 30, 2006. The Company incurred additional charges of $234,000, primarily related to additional inventory valuation reserves and costs associated with relocation in the second quarter of 2006.

The Company is currently unable to accurately assess the short and long term effects of Hurricane Katrina on its business and on the macro operating environment in the Gulf States in which the Company operates.

Income from Operations and Other Income and Expenses

Income from operations increased 390.7% in the nine month period ended July 31, 2006 to $6.4 million from $1.3 million in the same period of 2005. This increase is the result of increased gross profit contribution due to increased sales and improved gross margins discussed above as well as decreases in S,G&A and a reduction of S,G&A as a percent of sales in 2006 compared to 2005. Other expense increased $104,000 to $443,000 in 2006 from $340,000 in 2005. This increase is primarily due to a $73,000 increase in interest expense resulting from higher interest rates for 2006 compared to 2005 and a reduction of other income of approximately $42,000.

Income Taxes

The Company’s effective income tax rate was 41.1% for the nine months ended July 31, 2006, down from 43.1% in the same period of 2005. The decrease in income taxes as a percentage of income before taxes is primarily related to improved absorption regarding the nondeductibility of certain selling related expenses. The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate and is partially impacted by the geographic profitability mix of our operations.

Net Income

Net income for the first nine months of 2006 increased 539.7% to $3.5 million from $547,000 in the same period of 2005 due to the reasons discussed above. Basic and diluted earnings per share for the nine months ended July 31, 2006 were $0.36 and $0.35 and for the nine months ended July 31, 2005 were $0.06. The Company reported core net income of $3,325,000 or $0.34 and $0.33 per share on a basic and diluted basis for the nine months ended July 31, 2006. Core net income does not include the insurance recovery, net of expenses. (See Explanatory Table in "Results of Operations" section.)

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 nine months ended July 31, 2006, was $4.1 million compared to net cash provided by operations of $6.2 million during the same period in 2005. This change in net cash from operations is due primarily to timing changes in assets and liabilities primarily related to an increase in accounts receivable in 2006 compared to a decrease in accounts receivable in 2005 partially offset by increased net income.

Net cash used in investing activities for the nine months ended July 31, 2006 was $1.3 million compared to $1.8 million during the same period in 2005. The net cash used in investing activities during the first nine months of 2006 primarily relates to equipment and vehicle purchases including mail service equipment upgrades, software purchases in the office products and office furniture segment, press additions and upgrades and numerous information technology related expenditures. The net cash used in investing activities during the first nine months of 2005 primarily related to vehicle and equipment additions including pre-press expenditures at three of the Company's sheetfed plants and print on demand expenditures.

Net cash used in financing activities for the nine months ended July 31, 2006 was $4.8 million compared to $3.4 million during the same period in 2005. This change is primarily due to net payments on the Company’s debt of $3.8 million compared with net payments on the Company's debt of approximately $2.0 million in 2005. The Company incurred a non-cash financing activity related to indebtedness in the third quarter of 2006 in the amount of $1.2 million for the purchase of a printing press at one of the Company's sheetfed locations.

The Company’s off balance sheet arrangements at July 31, 2006 relate to the Syscan acquisition and are associated with potential contingent purchase price consideration of $1.5 million payable in October 2006 and a put option from Williams Land Corporation to sell a building to the Company for $1.5 million. This option may be exercised no later than 60 days prior to the end of the lease and closing of said purchase cannot exceed 45 days from the end of the lease. The lease term concludes effective September 1, 2009.

Working capital on July 31, 2006 and October 31, 2005 was $26.1 million. Management believes that working capital and operating ratios remain at acceptable levels.

The Company expects that the combination of funds available from working capital, borrowings available under the Company’s credit facilities and anticipated cash flows from operations will provide sufficient capital resources for the foreseeable future. In the event the Company seeks to accelerate internal growth or make acquisitions beyond these sources, additional financing would be necessary.

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

Environmental Regulation

The Company is subject to the environmental laws and regulations of the United States, and the states in which it operates, concerning emissions into the air, discharges into the waterways and the generation, handling and disposal of waste materials. The Company’s past expenditures relating to environmental compliance have not had a material effect on the Company. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they may have upon the capital expenditures, earnings, and competitive position of the Company in the future. Based upon information currently available, management believes that expenditures relating to environmental compliance will not have a material impact on the financial position of the Company.

Special Note Regarding Forward-Looking Statements

Certain statements contained in this Form 10-Q, including without limitation statements including the word “believes,” “anticipates,” “intends,” “expects” or words of similar import, constitute “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, general economic and business conditions, general economic and business conditions in the Company’s market areas affected by Hurricane Katrina, changes in business strategy or development plans and other factors referenced in this Form 10-Q , including without limitations under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

ITEM 3. Quantitative and Qualitative Disclosure About Market Risk

The Company does not have any significant exposure relating to market risk.

ITEM 4. Controls and Procedures

Company management, including the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15c as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There were no changes in internal controls over financial reporting during the last fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 6. Exhibits

Exhibits:

(10.1)	$1.2 million term promissory note with commercial security agreement and business loan agreement between Champion Industries, Inc. and Community Trust Bank, Inc. dated as of July 28, 2006	Exhibit 10.1 Page Exhibit 10.1-p1
(31.1)	Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Marshall T. Reynolds	Exhibit 31.1 Page Exhibit 31.1-p1
(31.2)	Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Todd R. Fry	Exhibit 31.2 Page Exhibit 31.2-p1
(31.3)	Principal Operating Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Toney K. Adkins	Exhibit 31.3 Page Exhibit 31.3-p1
(32)	Marshall T. Reynolds, Todd R. Fry and Toney K. Adkins Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley act of 2002	Exhibit 32 Page Exhibit 32-p1

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: August 31, 2006	/s/ Marshall T. Reynolds
	Marshall T. Reynolds
	Chief Executive Officer


Date: August 31, 2006	/s/ Toney K. Adkins
	Toney K. Adkins
	President and Chief Operating Officer


Date: August 31, 2006	/s/ Todd R. Fry
	Todd R. Fry
	Senior Vice President and Chief Financial Officer