Champion Industries (CHMP) 10-Q 2010 Q2 Quarterly report

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 April 30, 2010

OR

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________to_________

Commission File No. 0-21084

Champion Industries, Inc.

(Exact name of Registrant as specified in its charter)

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

2450-90 1st Avenue

P.O. Box 2968

Huntington, WV 25728

(Address of principal executive offices)

(Zip Code)

(304) 528-2700

(Registrant’s telephone number,

including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes üNo _____.

    Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website , if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (SEC. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes___ No___.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

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

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

Class	Outstanding at April 30, 2010
Common stock, $1.00 par value per share	9,987,913 shares

Champion Industries, Inc.

INDEX

	Page No.
Part I.   Financial Information
Item 1.  Financial Statements
Consolidated Balance Sheets (Unaudited)	3
Consolidated Statements of Operations (Unaudited)	5
Consolidated Statements of Shareholders' Equity (Unaudited)	6
Consolidated Statements of Cash Flows (Unaudited)	7
Notes to Consolidated Financial Statements	8
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3a.  Quantitative and Qualitative Disclosure About Market Risk	22
Item 4T.  Controls and Procedures	22
Part II. Other Information
Item 1A.  Risk Factors	23
Item 6.  Exhibits	23
Signatures	24

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Champion Industries, Inc. and Subsidiaries

Consolidated Balance Sheets

ASSETS		April 30,			October 31,
		2010 (Unaudited)			2009 (Audited)
Current assets:
Cash and cash equivalents	$	-		$	1,159,282
Accounts receivable, net of allowance of $1,437,000 and $1,353,000		17,880,390			18,424,310
Inventories		10,193,261			11,161,977
Income tax refund		1,974,678			1,911,400
Other current assets		1,309,117			925,120
Deferred income tax assets		1,060,509			1,000,847
Total current assets		32,417,955			34,582,936
Property and equipment, at cost:
Land		2,016,148			2,016,148
Buildings and improvements		11,823,196			11,806,238
Machinery and equipment		57,304,123			57,481,742
Furniture and fixtures		4,134,979			4,129,537
Vehicles		3,141,722			3,145,772
		78,420,168			78,579,437
Less accumulated depreciation		(54,623,569	)		(53,170,108	)
		23,796,599			25,409,329
Goodwill		15,332,283			15,332,283
Deferred financing costs		1,309,464			1,199,199
Other intangibles, net of accumulated amortization		5,420,285			5,645,078
Trademark & masthead		10,001,812			10,001,812
Deferred tax asset, net of current portion		8,526,272			8,799,518
Other assets		343,308			51,738
		40,933,424			41,029,628
Total assets	$	97,147,978		$	101,021,893

See notes to consolidated financial statements.

3

Champion Industries, Inc. and Subsidiaries

Consolidated Balance Sheets (continued)

LIABILITIES AND SHAREHOLDERS’ EQUITY	April 30,			October 31,
	2010 (Unaudited)			2009 (Audited)
Current liabilities:
Notes payable, line of credit	$	-		$	8,725,496
Negative book cash balances		1,298,725			-
Accounts payable		4,768,715			4,637,199
Accrued payroll and commissions		2,085,166			2,392,971
Taxes accrued and withheld		1,620,605			1,391,718
Accrued expenses		2,148,271			2,027,266
Other current liabilities		442,560			962,893
Current portion of long-term debt:
Notes payable		5,389,767			57,024,424
Total current liabilities		17,753,809			77,161,967
Long-term debt, net of current portion:
Notes payable, line of credit		10,105,496			-
Notes payable, term		46,085,557			918,436
Other liabilities		6,450			7,350
Total liabilities		73,951,312			78,087,753
Shareholders’ equity:
Common stock, $1 par value, 20,000,000 shares authorized; 9,987,913 shares issued and outstanding		9,987,913			9,987,913
Additional paid-in capital		22,768,610			22,768,610
Retained deficit		(9,701,608	)		(9,822,383)
Other comprehensive income		141,751			-
Total shareholders’ equity		23,196,666			22,934,140
Total liabilities and shareholders’ equity	$	97,147,978		$	101,021,893

See notes to consolidated financial statements.

4

Champion Industries, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended April 30,						Six Months Ended April 30,
					(Restated)						(Restated)
		2010			2009			2010			2009
Revenues:
Printing	$	21,716,395		$	23,172,311		$	41,465,866		$	46,313,132
Office products and office furniture		8,352,579			9,105,845			16,614,293			18,343,247
Newspaper		3,670,371			3,861,516			8,046,432			8,374,306
Total revenues		33,739,345			36,139,672			66,126,591			73,030,685
Cost of sales & newspaper operating costs:
Printing		15,494,951			17,143,914			30,216,325			35,118,707
Office products and office furniture		5,817,480			6,424,851			11,748,501			13,121,501
Newspaper cost of sales & operating costs		2,022,702			2,132,349			4,151,308			4,572,651
Total cost of sales & newspaper operating costs		23,335,133			25,701,114			46,116,134			52,812,859
Gross profit		10,404,212			10,438,558			20,010,457			20,217,826
Selling, general and administrative expenses		8,466,761			8,813,674			17,183,406			18,590,787
Income from operations		1,937,451			1,624,884			2,827,051			1,627,039
Other income (expenses):
Interest income		-			47			-			2,771
Interest expense		(1,362,639	)		(1,169,984	)		(2,932,450	)		(2,269,317	)
Other		7,085			10,653			311,666			34,766
		(1,355,554	)		(1,159,284	)		(2,620,784	)		(2,231,780	)
Income (loss) before income taxes		581,897			465,600			206,267			(604,741)
Income tax (expense) benefit		(248,436	)		(170,185	)		(85,492	)		265,787
Net income (loss)	$	333,461		$	295,415		$	120,775		$	(338,954)
Earnings (loss) per share
Basic	$	0.03		$	0.03		$	0.01		$	(0.03)
Diluted	$	0.03		$	0.03		$	0.01		$	(0.03)
Weighted average shares outstanding:
Basic		9,988,000			9,988,000			9,988,000			9,988,000
Diluted		9,988,000			9,988,000			9,988,000			9,988,000
Dividends per share	$	-		$	-		$	-		$	0.06

See notes to consolidated financial statements.

5

Champion Industries, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(Unaudited)

					Additional					Other
	Common Stock				Paid-In		Retained			Comprehensive
	Shares		Amount		Capital		Deficit			Income		Total
Balance, October 31, 2009		9,987,913	$	9,987,913	$	22,768,610	$	(9,822,383	)	$	-	$	22,934,140
Comprehensive income:
Net income for 2010		-		-		-		120,775			-		120,775
Other comprehensive income (net of tax)		-		-		-		-			141,751		141,751
Total comprehensive income		-		-		-		120,775			141,751		262,526
Balance, April 30, 2010		9,987,913	$	9,987,913	$	22,768,610	$	(9,701,608	)	$	141,751	$	23,196,666

See notes to consolidated financial statements.

6

Champion Industries, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended April 30,
				(Restated)
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	120,775		$	(338,954)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization		2,188,029			2,622,704
Gain on sale of assets		10,686			(15,844	)
Deferred income taxes		119,082			889,435
Deferred financing costs or compensation		161,550			154,735
Bad debt expense		201,298			514,607
Gain on hedging agreements		(284,079	)		-
Changes in assets and liabilities:
Accounts receivable		342,622			4,532,512
Inventories		968,716			904,526
Other current assets		(383,997	)		(588,923	)
Accounts payable		131,517			(1,261,903	)
Accrued payroll		(307,805	)		(464,739	)
Taxes accrued and withheld		228,887			446,397
Income taxes		(63,280	)		(1,160,406)
Accrued expenses		121,005			316,229
Other liabilities		(900	)		(900	)
Net cash provided by operating activities		3,554,106			6,549,476
Cash flows from investing activities:
Purchases of property and equipment		(179,393	)		(1,544,375	)
Proceeds from sales of property		20,192			55,008
Change in other assets		(297,570	)		2,584
Net cash used in investing activities		(456,771	)		(1,486,783	)
Cash flows from financing activities:
Borrowings on line of credit		20,440,000			600,000
Payments on line of credit		(19,060,000	)		-
Increase (decrease) in negative book cash balances		1,298,725			(459,355)
Principal payments on long-term debt		(6,663,527	)		(4,604,061	)
Payments on debt amendment costs		(271,815	)		-
Dividends paid		-			(599,277	)
Net cash used in financing activities		(4,256,617	)		(5,062,693	)
Net decrease in cash and cash equivalents		(1,159,282	)		-
Cash and cash equivalents, beginning of period		1,159,282			-
Cash and cash equivalents, end of period	$	-		$	-

See notes to consolidated financial statements.

7

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

April 30, 2010

1. Basis of Presentation and Business Operations and Recent Accounting Pronouncements

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, 2009, and related notes thereto contained in Champion Industries, Inc.’s Form 10-K dated January 27, 2010. 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, 2009 was derived from our audited financial statements.

The Company identified approximately $0.3 million or $0.03 per share on a basic and diluted basis of non-cash deferred tax related adjustment for each of the first and second quarters of 2009. This adjustment was initially recorded in the fourth quarter of 2009 for the full year and therefore the interim periods for 2009 have been restated accordingly to reflect such adjustment. Accordingly, the Consolidated Financial Statements for the three and six months ended April 30, 2009 have been restated to increase deferred income tax expense and to increase deferred income tax liability. This adjustment is related to the goodwill, trade name and masthead associated with the acquisition of The Herald-Dispatch. This deferred tax liability will remain on the balance sheet until such time as the associated intangible assets are impaired, sold, or otherwise disposed of. Certain prior-year amounts have been reclassified to conform to the current year financial statement presentation.

In February 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-11, which amends the Subsequent Events Topic of the Accounting Standards Codification (ASC) to eliminate the requirement for public companies to disclose the date through which subsequent events have been evaluated. The Company will continue to evaluate subsequent events through the date of issuance of the financial statements, however, consistent with the guidance, this date will no longer be disclosed. ASU 2010-11 does not have any impact on the Company's results of operations, financial condition or liquidity.

8

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (continued)

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. There was no dilutive effect of stock options effect for the three and six months ended April 30, 2010 and April 30, 2009.

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,
	2010		2009
Printing and newspaper:
Raw materials	$	2,847,382	$	2,854,938
Work in process		1,371,423		1,405,320
Finished goods		3,400,416		3,765,244
Office products and office furniture		2,574,040		3,136,475
	$	10,193,261	$	11,161,977

4. Long-Term Debt

Long-term debt consisted of the following:

	April 30,		October 31,
	2010		2009
Installment notes payable to banks & shareholder	$	4,292,882	$	1,310,418
Term loan facility with a bank		47,182,442		56,632,442
		51,475,324		57,942,860
Less current portion		5,389,767		57,024,424
Long-term debt, net of current portion	$	46,085,557	$	918,436

9

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

On March 31, 2010, the Company, Fifth Third Bank, as a Lender, L/C Issuer and Administrative Agent for Lenders (the "Administrative Agent") and the other Lenders party to Champion's Credit Agreement dated September 14, 2007 (the "Credit Agreement") entered into a Second Amendment and Waiver to Credit Agreement ("the "Second Amendment"). All conditions precedent to the effectiveness of the Second Amendment were satisfied on April 6, 2010.

In the Second Amendment the Administrative Agent and Lenders waived any default or event of default arising from Champion's previously disclosed violations of provisions of the Credit Agreement. The Second Amendment amended various provisions of the Credit Agreement, including but not limited to:

• a $17,000,000 revolving credit facility with a sublimit of up to $3,000,000 for letters of credit and $3,000,000 for swing line loans. Outstanding borrowings, thereunder, may not exceed the sum of (1) up to 85% of eligible receivables plus (b) up to the lesser of $6,000,000 or 50% of eligible inventory.
• at Champions option, interest at a LIBOR Rate, so long as no default exists.
• post-default increase in interest rate of 2%.
• amendment of various financial covenants.
• fixed charge coverage ratio is required to be 1.0:1.0 through January 31, 2011; 1.1:1.0 through January 31, 2012 and 1.20:1.00 thereafter.
• leverage ratio shall not be greater the 6.5:1.00 at April 30, 2010 with 0.5:1.00 stepdowns quarterly through April 30, 2011 and 0.25:1.00 quarterly stepdowns through April 30, 2012.
• minimum EBITDA pursuant to a quarterly build up commencing with the three months ended April 30, 2010 of $2,700,000, the six months ended July 31, 2010 of $5,400,000, the nine months ended October 31, 2010 of $8,900,000 and the twelve months ended January 31, 2011 of $11,800,000, thereafter varying quarterly stepups culminating in twelve months trailing EBITDA of $14,300,000 at October 31, 2012.
• maximum capital expenditures are limited to $2,000,000 per fiscal year  for the years ended October 31, 2010 and 2011 and $2,500,000 thereafter.
• enhanced reporting by Champion to Administrative Agent, including monthly reports and conference calls, quarterly reports by Champions independent auditors of restructuring charges and organizational expense reductions.
• application of Champion's income tax refunds applied to reduce indebtedness under the Credit Agreement.

As required by the Second Amendment, the Company, Marshall T. Reynolds and the Administrative Agent entered into a Contribution Agreement and Cash Collateral Security Agreement dated March 31, 2010 (the "Contribution Agreement") pursuant to which Mr. Reynolds deposited $2,500,000 as cash collateral with the Administrative Agent, which the Administrative Agent may withdraw upon an event of default under the Credit Agreement.

Mr. Reynolds has granted the Administrative Agent a first priority security interest in the cash collateral.

Amounts drawn down by the Administrative Agent will be applied to repayment of Champion's obligations under the Credit Agreement. The Contribution Agreement expires upon the earliest of (i) full drawdown of the $2,500,000 deposited, (ii) repayment in full of all obligations under the Credit Agreement and termination of all commitments thereunder and (iii) the Administrative Agent's determination that Champion has achieved a fixed charge coverage ratio of at least 1.2 to 1.0 as of the last day of two consecutive fiscal quarters of Champion.

In connection with the Contribution Agreement, Champion has executed and delivered to Mr. Reynolds a Subordinated Promissory Note in amount of $2,500,000, payment of principal and interest on which is prohibited prior to January 31, 2011, and thereafter only with the Administrative Agent's consent. The Subordinated Promissory Note bears interest at the Wall Street Journal prime rate (currently 3.25%), matures September 14, 2014 and is unsecured. 

Pursuant to the terms of the Second Agreement, the Company's borrowing base certificate as submitted to the Administrative Agent reflected minimum excess availability of $7.4 million as of April 30, 2010. The minimum excess availability is subject to a $1.0 million reserve.

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. This line of credit expires in July 2010 is subject to a floor of 4.25% and contains certain financial covenants. There were no borrowings outstanding under this facility at April 30, 2010 and October 31, 2009.

There were no non-cash financing and investing activities for the three and six months ended April 30, 2009 and equipment and vehicle purchases of $93,000 and $196,000 for the three and six months ended April 30, 2010.

10

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (continued)

5. Commitments and Contingencies

As of April 30, 2010, the Company had contractual obligations in the form of leases and debt as follows:

	Payments Due by Fiscal Year
Contractual Obligations	2010		2011		2012		2013		2014		Total
Non-cancelable operating leases	$	682,638	$	1,096,190	$	932,343	$	845,884	$	271,640	$	3,828,695
Revolving line of credit		-		-		10,105,496		-		-		10,105,496
Term debt		2,709,650		5,358,068		5,218,711		35,118,880		3,070,015		51,475,324
	$	3,392,288	$	6,454,258	$	16,256,550	$	35,964,764	$	3,341,655	$	65,409,515

The Company incurred costs in 2010 related to facility consolidations, employee termination costs and other restructuring related activities of $139,000 and $161,000 for the three and six months ended April 30, 2010. These costs were incurred, in part, as a response to the Company's efforts to overcome the impact of the global economic crisis. The Company believes that additional costs will be incurred in future quarters to address the impact of the economic crisis.

6. Share-Based Compensation

FASB ASC 718 (ASC 718) requires companies to expense the value of employee stock options and similar awards. Since the Company's outstanding employee stock options vested immediately in the year granted, the initial adoption of this standard had no effect on the Company's financial statements. However, the Company will be required to expense the fair value of the employee stock options when future options are granted or when existing options are modified or repurchased pursuant to the provisions of ASC 718.

The Company did not issue any employee stock options for the three and six months ended April 30, 2010 and 2009.

11

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (continued)

7. Industry Segment Information

The Company operates principally in three industry segments organized on the basis of product lines: the production, printing and sale, principally to commercial customers, of printed materials (including brochures, pamphlets, reports, tags, continuous and other forms) the sale of office products and office furniture including interior design services, and publication of The Herald-Dispatch daily newspaper in Huntington, WV with a total daily and Sunday circulation of approximately 25,000 and 30,000, respectively.

Our financial reporting systems present various data which is used to operate and measure our operating performance, including internal statements of operations which are prepared on a basis inconsistent with GAAP. Therefore, the segment reporting may not necessarily be consistent with GAAP reporting. Furthermore, because of our integrated business structure, operating costs included in one segment may benefit other segments. As a result of this structure these segments are not specifically designed to measure operating income or loss directly related to the products or services included in each segment.

The identifiable assets are reflective of non-GAAP assets reported on the Company's internal balance sheets and are typically adjusted for negative book cash balances, taxes, and other items excluded for segment reporting. The total assets reported on the Company's balance sheets as of April 30, 2010 and 2009 are $97,147,978 and $135,608,808. The identifiable assets reported below represent $85,348,303 and $133,209,957 at April 30, 2010 and 2009. Amounts for prior periods have been recast to conform to the current management view.

The table below presents information about reported segments for the three and six months ended April 30:

2010 Quarter 2	Printing			Office Products & Furniture			Newspaper		Total
Revenues	$	24,535,723		$	9,954,527		$	3,670,371	$	38,160,621
Elimination of intersegment revenue		(2,819,328	)		(1,601,948	)		-		(4,421,276	)
Consolidated revenues	$	21,716,395		$	8,352,579		$	3,670,371	$	33,739,345
Operating income		646,608			582,585			708,258		1,937,451
Depreciation & amortization		766,334			31,103			172,951		970,388
Capital expenditures		141,388			5,442			18,088		164,918
Identifiable assets		42,351,465			7,135,218			35,861,620		85,348,303
Goodwill		2,226,837			1,230,485			11,874,961		15,332,283
2009 Quarter 2	Printing			Office Products & Furniture			Newspaper		Total
Revenues	$	25,871,730		$	10,777,243		$	3,861,516	$	40,510,489
Elimination of intersegment revenue		(2,699,419	)		(1,671,398	)		-		(4,370,817	)
Consolidated revenues	$	23,172,311		$	9,105,845		$	3,861,516	$	36,139,672
Operating income		691,331			548,318			385,235		1,624,884
Depreciation & amortization		834,143			45,569			426,672		1,306,384
Capital expenditures		968,343			10,734			4,551		983,628
Identifiable assets		45,622,789			8,929,626			78,657,542		133,209,957
Goodwill		2,226,837			1,230,485			35,437,456		38,894,778

12

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (continued)

2010 Year to Date	Printing			Office Products & Furniture			Newspaper		Total
Revenues	$	46,931,754		$	19,846,919		$	8,046,432	$	74,825,105
Elimination of intersegment revenue		(5,465,888	)		(3,232,626	)		-		(8,698,514	)
Consolidated revenues	$	41,465,866		$	16,614,293		$	8,046,432	$	66,126,591
Operating income		152,045			951,837			1,723,169		2,827,051
Depreciation & amortization		1,552,524			68,936			566,569		2,188,029
Capital expenditures		322,467			9,488			43,429		375,384
Identifiable assets		42,351,465			7,135,218			35,861,620		85,348,303
Goodwill		2,226,837			1,230,485			11,874,961		15,332,283

2009 Year to Date	Printing			Office Products & Furniture			Newspaper		Total
Revenues	$	51,684,048		$	21,788,166		$	8,374,306	$	81,846,520
Elimination of intersegment revenue		(5,370,916	)		(3,444,919	)		-		(8,815,835	)
Consolidated revenues	$	46,313,132		$	18,343,247		$	8,374,306	$	73,030,685
Operating income (loss)		(218,420)			797,969			1,047,490		1,627,039
Depreciation & amortization		1,674,256			95,958			852,490		2,622,704
Capital expenditures		1,436,316			67,871			40,188		1,544,375
Identifiable assets		45,622,789			8,929,626			78,657,542		133,209,957
Goodwill		2,226,837			1,230,485			35,437,456		38,894,778

13

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 consolidated income (loss) before income taxes, for the three and six months ended April 30, 2010 and 2009, is as follows:

	Three months						Six months
		2010			2009			2010			2009
Revenues:
Total segment revenues	$	38,160,621		$	40,510,489		$	74,825,105		$	81,846,520
Elimination of intersegment revenue		(4,421,276	)		(4,370,817	)		(8,698,514	)		(8,815,835	)
Consolidated revenue	$	33,739,345		$	36,139,672		$	66,126,591		$	73,030,685
Operating income:
Total segment operating income	$	1,937,451		$	1,624,884		$	2,827,051		$	1,627,039
Interest income		-			47			-			2,771
Interest expense		(1,362,639	)		(1,169,984	)		(2,932,450	)		(2,269,317	)
Other income		7,085			10,653			311,666			34,766
Consolidated income (loss) before income taxes	$	581,897		$	465,600		$	206,267		$	(604,741)
Identifiable assets:
Total segment identifiable assets	$	85,348,303		$	133,209,957		$	85,348,303		$	133,209,957
Assets not allocated to a segment		11,799,675			2,398,851			11,799,675			2,398,851
Total consolidated assets	$	97,147,978		$	135,608,808		$	97,147,978		$	135,608,808

8. Derivative Instruments and Hedging Activities

The Company manages exposure to changes in market interest rates. The Company's use of derivative instruments is limited to highly effective fixed and floating interest rate swap agreements used to manage well-defined interest rate risk exposures. The Company monitors its positions and the credit ratings of its counterparties and does not anticipate non-performance by the counterparties. Interest rate swap agreements are not entered into for trading purposes.

At September 28, 2007, the Company was party to an interest rate swap agreement which terminates on October 29, 2010. The swap agreement is with a major financial institution and aggregates $25 million in notional principal amount representing approximately $20.2 million and $21.1 million of outstanding notional principal at April 30, 2010 and October 31, 2009. This swap agreement effectively converted $25 million of variable interest rate debt to fixed rate debt. The swap agreement requires the Company to make fixed interest payments based on an average effective rate of 4.78% and receive variable interest payments from its counterparties based on one-month LIBOR (actual rate of 0.27% at April 30, 2010). The remaining term of this swap agreement is approximately 6 months. In the three and six months ended April 30, 2009, the Company recorded a net change in the fair value of the fixed interest rate swap agreement in the amount of $50,000 and $(216,000) net of income tax as other comprehensive gain (loss). Due to the termination of LIBOR borrowing eligibility from the Administrative Agent, the Company recorded a loss in in the fourth quarter of 2009 from ineffectiveness in its hedging arrangement. Therefore, in the three months ended January 31, 2010 the Company recorded as a component of other income $284,000  related to its hedging arrangement, or $170,000 net of income tax. Effective with the Second Amendment the Company's eligibility for LIBOR borrowings was reinstated. Therefore, for the three months ended April 30, 2010, the Company recorded a net change in the fair value of the fixed interest rate swap agreement in the amount of $142,000, net of income tax, as other comprehensive income.

The fair value of this derivative instrument is discussed further in Footnote 9, Fair Value of Financial Instruments.

14

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (continued)

9.Fair Value of Financial Instrument

FASB ASC 820 (ASC 820) provides guidance for using fair value to measure assets and liabilities and only applies when other standards require or permit the fair value measurement of assets and liabilities. It does not expand the use of fair value measurements. The Company adopted ASC 820 for financial assets and liabilities only on November 1, 2008. The Company's interest rate swap derivative liability is based on third party valuation models, and is therefore classified as having Level 2 inputs. The adoption of ASC 820 for financial assets and liabilities did not have a material impact on the Company's results of operation, financial condition or liquidity. The full adoption of ASC 820 for nonfinancial assets and nonfinancial liabilities is also not expected to have a significant impact on the Company's results of operations, financial condition or liquidity.

FASB ASC 825 (ASC 825) permits entities to choose to measure at fair value many financial instruments and certain other items at fair value that are not currently required to be measured. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. ASC 825 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. The Company elected not to apply the provisions of ASC 825; therefore, the adoption of ASC 825 did not affect our consolidated financial condition, results of operations or cash flows.

The Company measures and records in the accompanying consolidated financial statements certain liabilities at fair value on a recurring basis. ASC 820 establishes a fair value hierarchy for those instruments measured at fair value that distinguish between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). The hierarchy consists of three levels:

Level 1 - Quoted market prices in active markets for identical assets or liabilities;

Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable; and

Level 3 - Unobservable inputs developed using estimates and assumptions developed by the company, which reflect those that a market participant would use.

The following table summarizes the financial instruments measured at fair value in the accompanying consolidated balance sheet as of April 30, 2010 and 2009:

	Fair Value Measurements as of
	April 30, 2010
	Level 1		Level 2		Level 3		Total
Liabilities:
Interest rate swap	$	-	$	442,560	$	-	$	442,560

	Fair Value Measurements as of
	April 30, 2009
	Level 1		Level 2		Level 3		Total
Liabilities:
Interest rate swap	$	-	$	1,289,119	$	-	$	1,289,119

15

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 Income as a percentage of total revenues.

The Company identified approximately $0.3 million or $0.03 per share on a basic and diluted basis of non-cash deferred tax related adjustments for each of the first and second quarters of 2009. This adjustment was initially recorded in the fourth quarter of 2009 for the full year and therefore the interim periods for 2009 have been restated accordingly to reflect such adjustment. Accordingly, the Consolidated Financial Statements for the three and six months ended April 30, 2009 have been restated to increase deferred income tax expense and to increase deferred income tax liability. This adjustment is related to the goodwill, trade name and masthead associated with the acquisition of The Herald-Dispatch. This deferred tax liability will remain on the balance sheet until such time as the associated intangible assets are impaired, sold, or otherwise disposed of. Certain prior-year amounts have been reclassified to conform to the current year financial statement presentation.

	Percentage of Total Revenues
	Three Months Ended April 30,					Six Months Ended April 30,
				(Restated)					(Restated)
		2010		2009			2010		2009
Revenues:
Printing		64.4	%	64.1	%		62.7	%	63.4	%
Office products and office furniture		24.8		25.2			25.1		25.1
Newspaper		10.8		10.7			12.2		11.5
Total revenues		100.0		100.0			100.0		100.0
Cost of sales and newspaper operating costs:
Printing		45.9		47.4			45.7		48.0
Office products and office furniture		17.3		17.8			17.7		18.0
Newspaper cost of sales and operating costs		6.0		5.9			6.3		6.3
Total cost of sales and newspaper operating costs		69.2		71.1			69.7		72.3
Gross profit		30.8		28.9			30.3		27.7
S  Selling, general and administrative expenses		25.1		24.4			26.0		25.5
Income from operations		5.7		4.5			4.3		2.2
Interest income		0.0		0.0			0.0		0.0
Interest expense		(4.0	)	(3.2	)		(4.4	)	(3.1	)
Other income		0.0		0.0			0.4		0.0
Income (loss) before taxes		1.7		1.3			0.3		(0.9)
Income tax benefit (expense)		(0.7	)	(0.5	)		(0.1	)	0.4
Net income (loss)		1.0	%	0.8	%		0.2	%	(0.5)	%

16

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

Three Months Ended April 30, 2010 Compared to Three Months Ended April 30, 2009 (Restated)

Revenues

Total revenues decreased 6.6% in the second quarter of 2010 compared to the same period in 2009, to $33.7 million from $36.1 million. Printing revenue decreased 6.3% in the second quarter of 2010, to $21.7 million from $23.2 million in the second quarter of 2009. Office products and office furniture revenue decreased 8.3% in the second quarter of 2010, to $8.4 million from $9.1 million in the second quarter of 2009. The decrease in printing sales was primarily associated with the continued impact of the global economic crisis. Office products and office furniture sales were weaker in the second quarter of 2010 when compared to the second quarter of 2009. The Company recorded newspaper revenues associated with The Herald-Dispatch of approximately $3.7 million, consisting of advertising revenue of approximately $2.8 million and $0.9 million in circulation revenues, for the three months ended April 30, 2010. The Company recorded newspaper revenues associated with The Herald-Dispatch of approximately $3.9 million, consisting of advertising revenue of approximately $2.9 million and $1.0 million in circulation revenues, for the three months ended April 30, 2009. The on-line revenues for the three months ended April 30, 2010 and April 30, 2009 approximated $299,000 and $230,000 and are recorded as a component of advertising revenue. The reduction in newspaper revenues is primarily associated with a decrease in advertising revenues attributable to decreased advertising demand due, in part, to the global economic crisis.

Cost of Sales

Total cost of sales decreased 9.2% in the second quarter of 2010, to $23.3 million from $25.7 million in the second quarter of 2009. Printing cost of sales in the second quarter of 2010 decreased $1.6 million over the prior year and decreased as a percentage of printing sales from 74.0% in 2009 to 71.4% in 2010. The printing gross margin dollar increase is attributed to lower materials costs as a percentage of printing sales partially offset by lower overall printing sales. Office products and office furniture cost of sales decreased in 2010 from 2009 levels due to lower sales and lower cost of goods sold as a percentage of office products and office furniture sales of  70.6% in 2009 to 69.6% in 2010, thus representing improved gross margin percent in the office products and office furniture segment.  Newspaper cost of sales and operating costs as a percent of newspaper sales were 55.1% and 55.2% for the three months ended April 30, 2010 and 2009.

Operating Expenses

In the second quarter of 2010, selling, general and administrative expenses decreased on a gross dollar basis to $8.5 million from $ 8.8 million in 2009, a decrease of $347,000 or 3.9%. As a percentage of total sales, the selling, general and administrative expenses increased on a quarter to quarter basis in 2010 to 25.1% from 24.4% in 2009. The decrease in selling, general and administrative expenses is primarily the result of personnel cost related reductions associated in part with cost reduction initiatives, lower bad debt expense and lower amortization expense. The decrease in SG&A was partially offset by various costs associated with the Company's successful defense of a legal action approximating $270,000.

17

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 second quarter of 2010, to $1.9 million from $1.6 million in the second quarter of 2009. This increase is the result of lower selling, general, and administrative expenses and relatively flat gross margin dollar contributions. The improvement in income from operations was offset in part by the expenses associated with the successful defense of a legal action approximating $270,000 in the second quarter of 2010 and restructuring related costs, primarily associated with equipment relocation related costs to effectuate and streamline plant productivity, severance and operational realignment costs approximating $139,000 in the second quarter of 2010. Other expense (net), increased approximately $196,000 from 2009 to 2010, primarily due to increases in interest expense resulting from higher rates associated with the Administrative Agent instituting the default rate and eliminating the LIBOR borrowing expense option for most of the second quarter of 2010 and various deferred financing interest related expenses associated with this debt.

Income Taxes

The Company’s effective income tax expense rate was an expense of 42.7% for the second quarter of 2010 and an expense of 36.6%  for the second quarter of 2009.  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 2010 was $333,000 compared to $295,000 in the second quarter of 2009. Basic and diluted earnings per share for the three months ended April 30, 2010 and 2009 were $0.03 and $0.03.

18

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued

Six Months Ended April 30, 2010 Compared to Six Months Ended April 30, 2009 (Restated)

Revenues

Total revenues decreased 9.5% in the first six months of 2010 compared to the same period in 2009, to $66.1 million from $73.0 million. Printing revenue decreased 10.5% in the six month period ended April 30, 2010 to $41.5 million from $46.3 million in the same period in 2009. Office products and office furniture revenue decreased 9.4% in the six month period ended April 30, 2010, to $16.6 million from $18.3 million in the same period in 2009. The decrease in printing sales was primarily associated with the continued impact of the global economic crisis. The decrease in office products and office furniture sales was primarily due to lower office product and office furniture sales.  The Company recorded newspaper revenues associated with The Herald-Dispatch of approximately $8.0 million consisting of advertising revenues of approximately $6.1 million and $1.9 million in circulation revenues for the six months ended April 30, 2010.  The Company recorded newspaper revenues associated with The Herald-Dispatch of approximately $8.4 million consisting of advertising revenues of approximately $6.4 million and $2.0 million in circulation revenues for the six months ended April 30, 2009. The on-line revenues for the six months ended April 30, 2010 and 2009 approximated $0.6 and $0.5 million and are recorded as a component of advertising revenue. The reduction in newspaper revenues is primarily associated with a decrease in advertising revenues associated, in part, with decreased advertising demand due to the global economic crisis.

Cost of Sales

Total cost of sales decreased 12.7% in the six months ended April 30, 2010 to $46.1 million from $52.8 million in the six months ended April 30, 2009. Printing cost of sales decreased 14.0% in the six months ended April 30, 2010 to $30.2 million from $35.1 million in the six months ended April 30, 2009. The decrease in printing cost of sales was primarily due to the decrease in printing sales coupled with improved  gross margin percent. Office products and office furniture cost of sales decreased 10.5% in the six months ended April 30, 2010 to $11.7 million from $13.1 million for the six months ended April 30, 2009. Newspaper cost of sales and operating costs as a percent of newspaper sales were 51.6% and 54.6% for the six months ended April 30, 2010 and 2009. 

Operating Expenses

During the six months ended April 30, 2010 compared to the same period in 2009, selling, general and administrative expenses increased as a percentage of sales to 26.0% from 25.5%. Total selling, general and administrative expenses (S,G & A) decreased $1.4 million. The increase in S, G & A expenses as a percent of sales is primarily due to lower sales. The decrease in total S,G & A costs is primarily reflective of personnel cost related reductions associated in part with cost reduction initiatives, lower bad debt expense and lower amortization expense. The decrease in SG&A was partially offset by various costs associated with the Company's successful defense of a legal action approximating $330,000.             

19

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 73.8% in the six month period ended April 30, 2010 to $2.8 million from $1.6 million in the same period of 2009. This increase is the result of lower selling, general and administrative expenses partially offset by revenue reductions and lower gross margin contribution at the Company's office products and office furniture segment. The improvement in income from operations was further offset, in part, by expenses associated with the successful defense of a legal action approximating $330,000 for the six months ended April 30, 2010 and restructuring related costs primarily associated with equipment relocation related costs to effectuate and streamline plant productivity, severance and operational realignment costs approximating $161,000 in the six months ended April 30, 2010. Other expense (net), increased approximately $389,000 from 2009 to 2010 primarily due to increases in interest expense, resulting from higher rates associated with the Administrative Agent instituting, the default rate and eliminating the LIBOR borrowing expense option for most of the first six months of 2010 and various deferred financing interest related expenses associated with this debt. This increase was partially offset by an increase in other income resulting from a hedging arrangement recorded in the first quarter of 2010.

Income Taxes

The Company’s effective income tax (expense) benefit rate was an expense of  (41.4)% for the six months ended April 30, 2010, and a benefit of 44.0%  in the same period of 2009. The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate.

20

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

Net Income (Loss)

Net income for the six months ended April 30, 2010 was $121,000 compared to a loss of $(339,000) for the same period in 2009. Net income for the first six months of 2010 increased over 2009 levels due to the reasons discussed above. Basic and diluted earnings (loss) per share for the six months ended April 30, 2010 was $0.01 compared to 2009 at $(0.03).

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.

The United States economy has been in a recession since December 2007, according to the National Bureau of Economic Research, and it it widely believed that certain elements of the economy, such as housing, were in decline before that time. The duration and depth of an economic recession in markets in which the Company operates may further reduce its future advertising and circulation revenue, printing revenue, office products revenue and office furniture revenue operating results and cash flows.

Seasonality

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

Our business is subject to seasonal fluctuations that we expect to continue to be reflected in our operating results in future periods. On a historical basis The Herald-Dispatch's first and third calendar quarters of the year tended to be the weakest because advertising volume is at its lowest levels following the holiday season and a seasonal slowdown in the summer months. Correspondingly, on a historical basis the fourth calendar quarter followed by the second calendar quarter tended to be the strongest quarters. The fourth calendar quarter includes heavy holiday season advertising. Other factors that affect our quarterly revenues and operating results may be beyond our control, including changes in the pricing policies of our competitors, the hiring and retention of key personnel, wage and cost pressures, distribution costs, changes in newsprint prices and general economic factors.

Liquidity and Capital Resources

Net cash provided by operations for the six months ended April 30, 2010 was $3.6 million compared to net cash provided by operations of $6.5 million during the same period in 2009. This change in net cash from operations is due primarily to timing changes in assets and liabilities.

Net cash used in investing activities for the six months ended April 30, 2010 was $457,000 compared to $1.5 million during the same period in 2009. The net cash used in investing activities during the first six months of 2010 and 2009 primarily relate to the purchase of equipment and vehicles.

Net cash used in financing activities for the six months ended April 30, 2010 was $4.3 million compared to $5.1 million during the same period in 2009. This change was primarily due to an increase in negative book cash balances.

Working capital on April 30, 2010 was $14.7 million and at October 31, 2009 was $(42.6) million. The working capital deficit at October 31, 2009 was associated with the classification as a current liability of $60.5 million of debt which was long-term. This debt was reclassified due to the Company's inability to remain in compliance with certain of its financial covenants. The Company entered into a Second Amendment and Waiver to Credit Agreement in the second quarter of 2010; therefore the debt is reflected in the Company's financial statements based on contractual maturity.

21

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, 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 3a. Quantitative and Qualitative Disclosure About Market Risk

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

ITEM 4T. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls were effective as of the end of the period covered by this quarterly report.

(b) Changes in Internal Controls. There have been no changes in our internal controls over financial reporting that occurred during the first six months of fiscal year 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

22

PART II - OTHER INFORMATION

Item 1A. Risk Factors

There were no material changes in risk factors from disclosures previously reported in our annual report on Form 10-K for the fiscal year ended October 31, 2009.

Item 6. Exhibits

a) Exhibits:

(10.1) Second Amendment and Waiver to Credit Agreement dated March 31, 2010 among Champion Industries, Inc. and Fifth Third Bank, as Lender, L/C Issuer and Administrative Agent for Lenders, filed as Exhibit 10.1 to Current Report on Form 8-K filed on April 6, 2010, is incorporated herein by reference.

(10.2) Contribution Agreement and Cash Collateral Security Agreement dated March 31, 2010 among Marshall Reynolds, Champion Industries, Inc. and Fifth Third Bank, as Administrative Agent for Lenders, filed as Exhibit 10.2 to Current Report on Form 8-K filed on April 6, 2010, is incorporated herein by reference.

(10.3) Subordinated Promissory Note dated March 31, 2010 from Champion Industries, Inc. to Marshall Reynolds, filed as Exhibit 10.3 to Current Report on Form 8-K filed on April 6, 2010, is incorporated herein by reference.

(31.1)	Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Marshall T. Reynolds	Exhibit 31.1 Page Exhibit 31.1-p1
(31.2)	Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Todd R. Fry	Exhibit 31.2 Page Exhibit 31.2-p1
(31.3)	Principal Operating Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Toney K. Adkins	Exhibit 31.3 Page Exhibit 31.3-p1
(32)	Marshall T. Reynolds, Todd R. Fry and Toney K. Adkins Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley act of 2002	Exhibit 32 Page Exhibit 32-p1

23

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 10, 2010	/s/ Marshall T. Reynolds
	Marshall T. Reynolds
	Chief Executive Officer
Date: June 10, 2010	/s/ Toney K. Adkins
	Toney K. Adkins
	President and Chief Operating Officer
Date: June 10, 2010	/s/ Todd R. Fry
	Todd R. Fry
	Senior Vice President and Chief Financial Officer

24