-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JkYdIWeF8LYXd7ZuxpGbZ8y/DjJQdURMqyu+DF+0juvgTePHbOh+eeZ9p26uC42g Kyux9PItm6SJl0Y353k+aw== 0000950147-98-000928.txt : 19981118 0000950147-98-000928.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950147-98-000928 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAMPION FINANCIAL CORP /MD/ CENTRAL INDEX KEY: 0000877050 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 521949024 STATE OF INCORPORATION: UT FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-19499 FILM NUMBER: 98749737 BUSINESS ADDRESS: STREET 1: 9495 EAST SAN SALVADOR DR STREET 2: STE 1820 CITY: SCOTTSDALE STATE: AZ ZIP: 85258 BUSINESS PHONE: 6026144260 MAIL ADDRESS: STREET 1: 19 HILLSYDE COURT CITY: COCKEYSVILLE STATE: MD ZIP: 21030 10QSB 1 QUARTERLY REPORT FOR THE QTR ENDED 9/30/98 U. S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT For the transition period from to -------------- --------------- Commission file number 0-19499 CHAMPION FINANCIAL CORPORATION (Exact name of small business issuer as specified in its charter) UTAH 88-0169547 (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification no.) 9495 E. San Salvador Drive Scottsdale, Arizona 85258 (Address of principal executive offices) (602) 451-8575 (Issuer's telephone number) (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the last practicable date: Common stock, $0.001 par value, 6,769,903 outstanding as of November 12, 1998. Champion Financial Corporation Index Part I: Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1998 and March 31, 1998........................................... 3 Consolidated Statements of Operations for the Three Months and Six Months Ended September 30, 1998 and 1997...... 4 Consolidated Statements of Cash Flows for the Six Months Ended September 30, 1998 and 1997................. 5 Notes to Unaudited Consolidated Financial Statements......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 10 Part II: Other Information Item 4. Submission of Matters to a Vote of Security Holders......... 14 Exhibits - None Signatures........................................................... 15 2 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets September 30, March 31, 1998 1998 ----------- ----------- (UNAUDITED) Assets Current assets: Cash and cash equivalents $ 157,350 $ 199,466 Trade accounts receivable, less allowance for doubtful accounts of $101,777 and $250,000, respectively 2,370,657 2,512,446 Other current assets 91,072 69,126 ----------- ----------- Total current assets 2,619,079 2,781,038 ----------- ----------- Property and equipment, net 2,785,973 2,851,957 Investment in healthcare technology company 309,626 309,626 Intangibles, net of accumulated amortization of $378,407 and $146,030, respectively 8,774,088 9,006,465 Other assets, at cost 86,810 499,577 ----------- ----------- $14,575,576 $15,448,663 =========== =========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 1,181,580 $ 1,163,741 Accrued expenses 1,750,817 2,269,678 Current portion of long-term debt 475,000 400,000 Note payable 200,000 200,000 ----------- ----------- Total current liabilities 3,607,397 4,033,419 ----------- ----------- Line of credit 450,000 300,000 Long-term debt 2,825,000 6,100,000 ----------- ----------- Total liabilities $ 6,882,397 $10,433,419 Shareholders' equity: Common stock, $.001 par value 100,000,000 shares authorized, 6,769,903 shares issued and outstanding at September 30, 1998 and 5,855,802 at March 31, 1998 6,770 5,856 Additional paid-in-capital 7,148,179 4,617,015 Retained earnings 538,230 392,373 ----------- ----------- Total shareholders' equity 7,693,179 5,015,244 ----------- ----------- Total liabilities and shareholders' equity $14,575,576 $15,448,663 =========== =========== See accompanying notes to unaudited consolidated financial statements. 3 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations and Retained Earnings (Unaudited)
Three Months Ended Six Months Ended September 30, September 30, ---------------------- ---------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues: Capitated fees $2,498,772 $ 99,094 $5,230,208 $ 238,070 Repricing fees 1,842,609 565,847 3,644,088 1,144,291 Other fees 155,075 4,995 352,045 10,585 ---------- ---------- ---------- ---------- 4,496,456 669,936 9,226,341 1,392,946 ---------- ---------- ---------- ---------- Operating expenses: Cost of services 578,906 245,145 1,281,774 528,062 Salaries and wages 2,036,600 240,113 4,066,272 468,242 General and administrative 1,439,378 144,904 2,830,847 301,942 Depreciation and amortization 293,185 14,701 582,299 28,239 Interest expense 88,949 -- 249,292 -- ---------- ---------- ---------- ---------- 4,437,018 644,863 9,010,484 1,326,485 ---------- ---------- ---------- ---------- Earnings before income taxes 59,438 25,073 215,857 66,461 Income tax 15,000 -- 70,000 10,000 ---------- ---------- ---------- ---------- Net earnings 44,438 25,073 145,857 56,461 Retained earnings at beginning of period 493,792 119,656 392,373 88,268 ---------- ---------- ---------- ---------- Retained earnings at end of period 538,230 144,729 538,230 144,729 ========== ========== ========== ========== Earnings per share-Basic and Diluted $ 0.01 $ 0.01 $ 0.02 $ 0.01 ========== ========== ========== ========== Weighted average shares outstanding- Basic and Diluted 6,230,772 5,473,302 6,126,661 5,473,302 ========== ========== ========== ========== Proforma adjusted earnings per share for anticipated reverse stock split $ 0.01 $ 0.01 $ 0.05 $ 0.02 ========== ========== ========== ========== Adjusted weighted average shares outstanding 3,115,386 2,736,651 3,063,331 2,736,651 ========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements. 4 Champion Financial Corporation Consolidated Statements of Cash Flows Six Months Ended September 30, ------------------------------ 1998 1997 ---- ---- Operating activities: Net earnings $ 145,857 $ 56,461 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 582,299 28,239 Bad debt expense 90,000 -- Stock-based employee compensation 15,000 Interest expense on debentures 29,578 -- Increase (decrease) in cash resulting from changes in operating assets and liabilities: Trade accounts receivable 51,789 (49,864) Other current assets (21,946) (2,346) Accounts payable 17,839 (101,577) Accrued expenses (518,861) (23,022) Deferred revenue -- (58,909) ---------- --------- Net cash provided by (used in) operating activities 391,555 (151,018) ---------- --------- Investing activities: Purchases of equipment (289,051) (29,321) Proceeds from the sale of equipment 5,113 -- Preaquisition cost -- (18,516) Investment in healthcare technology company -- (309,626) ---------- --------- Net cash provided by (used in) investing activities (283,938) (357,463) ---------- --------- Financing activities: Increase in other assets (99,733) -- Payments on long term debt (200,000) -- Net proceeds(payments) from line of credit 150,000 (24,340) ---------- --------- Net cash provided by (used in) financing activities (149,733) (24,340) ---------- --------- Net decrease in cash and cash equivalents (42,116) (532,821) Cash and cash equivalents at beginning of year $ 199,466 $ 896,096 ---------- --------- Cash and cash equivalents at end of period $ 157,350 $ 363,275 ========== ========= Supplemental schedule of noncash financing activities: Settlement on convertible debenture 3,000,000 ========== Issuance of common stock 2,532,078 ========== See accompanying notes to unaudited consolidated financial statements. 5 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Champion Financial Corporation and Subsidiaries have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for a complete financial statement presentation. In the opinion of management such unaudited interim information reflects all adjustments, consisting only of normal recurring adjustments, necessary to present the Company's financial position and results of operations for the periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full fiscal year. The consolidated Balance Sheet as of March 31, 1998 was derived from audited consolidated financial statements as of that date but does not include all the information and footnotes required by generally accepted accounting principles. It is suggested that these consolidated financial statements be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report Form 10-KSB, for the year ended March 31, 1998. DESCRIPTION OF BUSINESS Champion Financial Corporation is a healthcare management company dedicated to controlling the cost, improving the quality and enhancing the delivery of healthcare services. The Company also provides related products and services designed to reduce healthcare costs. The Company markets and provides programs and services to insurance companies, self-insured businesses for their medical plans and third parties that administer employee medical plans. These programs and services assist clients in reducing healthcare costs for group health plans and for workers' compensation coverage and automobile accident injury claims. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of the Company and its two wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. CASH EQUIVALENTS The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. EARNINGS PER SHARE The Company adopted Statement of Accounting Standards No. 128 "Earnings per Share" (SFAS 128) during 1997. The Company's Earnings per Common Share (EPS) figures for the prior period were not effected by adoption of SFAS 128. In accordance with SFAS 128, basic EPS is computed by dividing net income, after deducting preferred stock dividends requirements (if any), by the weighted average number of shares of common stock outstanding. 6 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements, Continued Diluted EPS reflects the maximum dilution that would result after giving effect to dilutive stock options and warrants and to the assumed conversion of all dilutive convertible securities and stock. For purposes of the diluted earnings per share calculation, the convertible debentures had an antidilutive effect. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. Management believes that the recorded amounts of current assets and current liabilities approximate fair value because of the short maturity of these instruments. The recorded balance of long-term debt approximates fair value, as the terms of the debt are similar to rates currently offered to the Company for similar debt instruments. REVENUE RECOGNITION The Company receives monthly capitation fees based upon the number of each customer's members regardless of services actually provided. Repricing fees are derived from a negotiated percentage of the medical savings generated from customer claims managed by the Company or on a per member per month basis. The percentage of savings fees are recognized as revenue as the Company renders services and notifies the health care provider of their required billings reduction for a specified period of time. COST OF SERVICES The major components of cost of services consist of utilization review, case management and external marketing commissions. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which approximates three years for equipment to seven years for furniture and fixtures. Computer software is amortized over three to five years. INTANGIBLES Intangibles, which represent the excess of purchase price over fair value of net tangible assets acquired, are amortized on a straight-line basis over the expected periods to be benefited, generally 20 years. The Company assesses the recoverability of intangible assets by determining whether the amortization of the intangibles over their remaining lives can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of intangible impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of intangibles will be impacted if estimated future operating cash flows are not achieved. 7 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements, Continued INCOME TAXES The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance must be established to reduce deferred income tax benefits if it is more likely than not that a portion of the deferred income tax benefits will not be realized. It is management's opinion that the entire deferred tax benefit may not be recognized in future years. Therefore, a valuation allowance equal to the deferred tax benefit has been established. IMPAIRMENT OF LONG-LIVED ASSETS Management reviews the possible impairment of long-lived assets and certain identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. YEAR 2000 Management has developed a plan to address the Year 2000 problem and all computer systems are in the process of conversion to be Year 2000 compliant. The Year 2000 problem is the result of computer programs being written using two digits rather than four digits to define the applicable year. The total cost of the project is not material and the Company is expensing all associated costs as they are incurred. (2) PROPERTY AND EQUIPMENT A summary of property and equipment by major classification at September 30, 1998 follows: Furniture and fixtures $ 905,908 Computer software 602,077 Equipment 1,916,461 ---------- 3,424,446 Accumulated depreciation (638,473) ---------- $2,785,973 ========== 8 CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements, Continued (3) DEBT The Company maintains a $1,500,000 line of credit with Harris Trust and Savings Bank. The line of credit bears interest at prime (8.5% at September 30, 1998). The line is collateralized by substantially all the assets of the Company. There were $450,000 in borrowings against this line of credit at September 30, 1998. In connection with the acquisition of HealthStar, the Company issued $4,000,000 Series A 8% Senior Subordinated Convertible Redeemable debentures. On August 31, 1998, $3,000,000 of the debentures were converted into 800,000 shares of common stock and $1,000,000 of the debentures were converted into a promissory note. Debt consists of the following at September 30, 1998: 8% Convertible Promissory Note due March 31, 1999 1,000,000 Note payable to Harris Trust and Savings Bank due on December 14, 2000, with quarterly principal payments ranging from $100,000 - $150,000 plus interest on the unpaid balance at prime (8.5% at September 30, 1998), secured by substantially all the assets of the Company 2,300,000 Unsecured note payable to an individual, interest payable monthly at 8%, due December 15, 1998 200,000 ---------- 3,500,000 Less current maturities 675,000 ---------- $2,825,000 ========== (4) ACCRUED EXPENSES A summary of accrued expenses at September 30, 1998 follows: Salaries and benefits $ 758,603 Professional fees 296,593 Income taxes 44,735 Transaction and restructuring costs 41,596 Other 609,290 ---------- $1,750,817 ========== (5) REVERSE STOCK SPLIT On October 8, 1998, at the annual shareholders meeting of the Company, the shareholders approved a 1for 2 reverse stock split of the Company's outstanding common stock to be effective on November 16, 1998. The effect of the reverse stock split is reflected in proforma earnings per share. 9 ITEM2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and footnotes for the quarter ended September 30, 1998 and the year ended March 31, 1998 contained in the Company's Form 10-KSB filed with the Securities and Exchange Commission on June 29, 1998. The managed healthcare cost containment industry is highly fragmented, with a large number of competitors. The Company does not believe that any single company commands significant market share. The management of the Company believes the level of competition will continue to increase in the future. Most of the Company's competitors are national managed care providers, insurance companies, HMOs, and third-party administrators that have implemented their own managed care programs. Several large insurance companies for workers' compensation, health and automobile have also implemented their own cost-containment programs through the carrier's own personnel. Many of the Company's current and potential competitors are significantly larger and have greater financial, technical, marketing, and management resources than the Company. The Company competes on the basis of its specialized knowledge and expertise in the managed healthcare services industry and on its ability to deliver effective services to the customer with a high level of customer satisfaction at a very affordable price. There can be no assurance that the Company will be able to compete successfully. The managed healthcare industry has experienced significant changes in recent years, primarily as a result of rising healthcare costs. The Company will be required to respond to various competitive factors affecting the healthcare industry, including new medical technologies that may be introduced; general trends relating to the demand for healthcare services; regulatory, economic, and political factors; changes in patient demographics; and competitive pricing strategies by HMOs and other healthcare plans. RESULTS OF OPERATIONS When comparing the Company's financial results for the three and six months ended September 30, 1998 to the three and six months ended September 30, 1997, it is important to note that the majority of the increase in the level of revenues and expenses is due primarily to the Company's acquisition of HealthStar, Inc., which was completed on December 15, 1997. REVENUE The Company derives the majority of its revenue from fees charged to clients for access to the Company's network of contracted providers. The Company's client base consists of a variety of payors of medical claims such as insurance companies, third-party administrators and self-insured employers. Access fees can be either a fixed, monthly fee per enrolled subscriber which is called a capitated fee or can be based on a percentage of the amount of the discount off of billed charges which is granted by a contracted provider. The Company's participation in the amount saved varies from 20% to 25% with the exact amount determined by contractual provisions with the Company's clients. Total revenue increased $3,826,520 to $4,496,456 for the three months ended September 30, 1998 compared to $669,936 for the three months ended September 30,1997, an increase of 571%. Total revenue for the six months ended September 30, 1998 increased $7,833,395 or 562% to $9,226,341, compared to $1,392,946 for the six months ended September 30, 1997. The increase was a result of operations 10 from the newly acquired subsidiary HealthStar, Inc. Revenues for the Company's NHBC division were unchanged from prior year's levels. OPERATING EXPENSES Cost of services includes the cost of outsourcing the case management and utilization review functions, commissions paid to outside brokers, fees paid to other regional PPO networks for access to providers not contracted directly with the Company and other products and services provided by outside vendors. Cost of services increased $333,761 to $578,906 for the three months ended September 30, 1998 from $245,145 in 1997. Cost of services for the six months ended September 30, 1998 increased $753,712 to $1,281,774 compared to $528,062 for the six months ended September 30, 1997. The entire increase is attributable to HealthStar and is primarily related to the cost of outsourcing the case management and utilization review functions. As a percentage of revenue, cost of services for the six months ended September 30, 1998 decreased from 38% in 1997 to 14% in 1998. This margin improvement is a result of the fact that HealthStar contracts directly with healthcare providers which limits the fees paid to access other PPO networks. Salaries and wages includes all employee compensation including payroll taxes, health insurance and other employee benefits. Also included are commissions paid to in-house sales and marketing personnel. For the quarter ended September 30, 1998, salaries and wages were $2,036,600 compared to $240,113 for the quarter ended September 30, 1997, an increase of $1,796,487. For the six months ended September 30, 1998 salaries and wages increased $3,598,030 to $4,066,272 from $468,242. Approximately $1.7 million of this increase is due to the addition of HealthStar for the three months ended September 30, 1998 and $3.4 million of the increase for the six months ended September 30, 1998. General and administrative expenses include all other operating expenses such as telephone charges, office supplies, postage, travel and entertainment, professional fees, insurance, rent and utilities. For the quarter ended September 30, 1998, general and administrative expenses were $1,439,378 compared to $144,904 for the quarter ended September 30, 1997. General and administrative expenses for the six months ended September 30, 1998 were $2,830,847 compared with $301,942 for the six months ended September 30, 1997. The majority of this increase is due to the addition of HealthStar and legal expenses incurred by the Company for the lawsuit filed in March 1998 against the holders of the convertible debentures. For the three months ended September 30, 1998, depreciation and amortization increased $278,484 to $293,185 from $14,701 for the three months ended September 30, 1997. For the six months ended September 30, 1998, depreciation and amortization was $582,299 compared with $28,239 for the six months ended September 30, 1997, an increase of $554,060. This significant increase is due to goodwill created as a result of the HealthStar acquisition. Goodwill of approximately $9,000,000 is being amortized over 20 years. For the quarter ended September 30, 1998, the Company incurred interest expense of $88,949. The Company's interest expense for the six months ended September 30, 1998 was $249,292. Interest expense relates to the indebtedness incurred as a result of the HealthStar acquisition. The interest rate on the Company's term loan and line of credit was 8.5% at September 30, 1998. The interest rate on the convertible promissory note is 8.0%, and the interest rate on the seller note payable is 8.0%. 11 Net earnings for the three months ended September 30, 1998 increased $19,365 or 77% to $44,438 from $25,073 in the quarter ended September 30, 1997. For the six months ended September 30, 1998, net earnings increased $89,396 to $145,857 or 158%, compared to $56,461 for the six months ended September 30, 1997. YEAR 2000 The Company has started reviewing, modifying, and testing its computer applications to ensure their functionality with respect to the Year 2000 changes. At present, the Company does not anticipate that material incremental costs will be incurred in any single future year. The Company is also dependent on its contracting medical providers and payer clients to successfully address their respective Year 2000 technology issues in connection with their claims processing functions. The Company has not determined whether such providers or clients face Year 2000 problems that if not resolved, may have a material adverse affect on the Company's business or results of operations. LIQUIDITY AND CAPITAL RESOURCES The Company has historically funded its working capital requirements and capital expenditures primarily from cash flow generated from operations supplemented by borrowings under the Company's line of credit. The Company had approximately $157,350 in cash and cash equivalents at September 30, 1998. In connection with the acquisition of HealthStar, the Company issued $4,000,000 Series A 8% Senior Subordinated Convertible Redeemable debentures. The entire proceeds of the issuance and the debentures were utilized in the acquisition. Beginning on January 17, 1998, the debentures were convertible into common shares of the Company's stock based upon a formula related to the market price of the stock. Due to certain matters and litigation related to assertions made by the debenture holders, the Company entered into a settlement agreement. Under the terms of that agreement, on August 31, 1998, $3,000,000 of the debentures were converted into 800,000 shares of common stock and $1,000,000 of the debentures were converted into a promissory note with the same terms as the original debentures. The net effect of the settlement was essentially the same as under the original terms of the debentures. The Company has the option to make principal payments on the debenture as part of the settlement agreement with the debenture holders. If principal payments are not made by the Company, the settlement agreement reverts back to the conversion terms of the original debenture agreement. Also in connection with the acquisition of HealthStar, the Company secured a $1,500,000 line of credit with Harris Trust and Savings Bank. The line of credit bears interest at the Prime rate (8.5% at September 30, 1998) and is secured by substantially all of the assets of Champion and its subsidiaries. At September 30, 1998, the Company had borrowed $450,000 on the line of credit, and due to a bank covenant restriction had approximately $500,000 of additional availability. Although there can be no assurances, management of the Company anticipates growth and expansion to continue to accelerate through fiscal year 1999 with the acquisition of complementary businesses or business lines, management personnel and infrastructure additions. The Company believes additional sources of cash flow may be required in conjunction with any such acquisition activity. There can be no assurance that the Company may be able to obtain such funds on terms acceptable to the Company. Management currently believes that cash on hand, amounts available under the revolving line of credit and cash generated from future operations will be sufficient to fund the Company's operations and anticipated expansion plans. 12 LEGAL PROCEEDINGS On August 31, 1998, the Company settled and resolved its disputes and misunderstandings with Thomson Kernaghan & Co., Ltd., and Bronia Gmbh (collectively referred to as "Thomson"). The Company dismissed Thomson from the lawsuit filed by the Company against Thomson in Federal District Court in Arizona, and Thomson has dismissed its arbitration proceeding commenced against the Company in New York. From time to time, the Company is named as a defendant in routine litigation incidental to its business. Based on the information currently available, the Company believes that none of such current proceedings, individually or in the aggregate, will have a material adverse effect on the Company. 13 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. (a) The 1998 Annual Meeting of Stockholders of the Company was held on Thursday, October 8, 1998. (b) Not applicable, pursuant to Instruction 3 to Item 4 of this Form 10-QSB. (c) A description of the matters voted upon at the meeting along with an indication of the results of the votes on such matters are set forth below: 1. To adopt the 1998 Stock Option Plan: For: 3,807,333; Against: 1,120,090; Abstentions: 6,706. 2. To adopt the 1998 Employee Stock Purchase Plan: For: 3,434,211; Against: 1,479,462; Abstention: 20,456. 3. To approve a reverse stock split of the Company's outstanding common stock: For: 4,753,904; Against: 1,685,795; Abstention: 6,264. 4. To approve the reincorporation of the Company from Utah to Delaware: For: 4,870,250; Against: 58,805; Abstention: 6,526. 5. To ratify KPMG Peat Marwick LLP as the Company's independent auditors for the fiscal year ending March 31, 1999: For: 6,394,467; Against: 32,290; Abstentions: 20,766. (d) Not applicable. 14 CHAMPION FINANCIAL CORPORATION Pursuant to the requirements 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 Financial Corporation DATE: November 12, 1998 BY: /s/ STEPHEN J. CARDER -------------------------------- STEPHEN J. CARDER PRESIDENT CHIEF EXECUTIVE OFFICER AND PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF SEPTEMBER 30, 1998, AND STATEMENT OF INCOME FOR THE SIX MONTHS ENDING SEPTEMBER 30, 1998, OF CHAMPION FINANCIAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS MAR-31-1999 SEP-30-1998 157,350 0 2,472,434 101,777 0 2,619,079 3,424,446 638,473 14,575,576 3,607,397 0 0 0 6,770 0 0 0 9,226,341 0 0 9,010,484 0 0 215,857 70,000 145,857 0 0 0 145,857 0.02 0.02
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