SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended March 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ________ to ________.
Commission file number 0-19499
CHAMPION FINANCIAL CORPORATION
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(Name of Small Business as specified in its Charter)
UTAH
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(State or other jurisdiction of incorporation or organization)
88-0169547
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(I. R. S. Employer Identification No.)
9495 East San Salvador Drive, Scottsdale, Arizona 85258
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (602) 614-4270
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class in which Registered
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Common Stock, $.001 per share NASDAQ Small Cap
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]
Check if there is disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $2,286,208.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the high and low
closing sales prices of such stock as of June 17, 1997 was $31,471,487. As of
such date, 5,473,302 shares of the Registrant's Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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PART I
ITEM 1. BUSINESS
Overview
Champion Financial Corporation ("Champion" or "Company") is a health
care management company dedicated to controlling the costs, improving the
quality and enhancing the delivery of health care services. The Company also
provides related products and services designed to reduce health care costs. The
Company markets and provides programs and services to insurance companies,
self-insured businesses for their medical plans and third parties who administer
employee medical plans. These programs and services assist its clients in
reducing health care costs for group health plans and for workers' compensation
coverage and automobile accident injury claims.
The Company provides a wide array of medical cost containment services
such as implementing and coordinating case management procedures, managing and
reviewing the utilization of health care services, providing independent medical
examinations and intervention in the early stages of medical care for the
injured party, and comprehensive bill review, claims processing and medical
repricing services. Through its subsidiaries National Health Benefit & Casualty
Corporation, a Nevada corporation ("NHBC"), and Three Rivers Provider Network, a
Nevada corporation ("TRPN"), the Company provides access to, and operates, one
of the largest independent preferred provider organizations ("PPO") of health
care professionals and facilities in the United States. The Company also
provides access to, and operates, one of the largest network of chiropractors in
the United States. In addition, the Company offers a point of service ("POS")
vision program, which offers members of the program an opportunity to obtain eye
exams at reduced fees and purchase eye wear substantially below retail prices
from participating providers.
The Company seeks to expand its presence as a national provider of
medical management services in the United States. To achieve this goal, the
Company's strategy is to (i) expand its range of services, (ii) enhance its
opportunities for growth through strategic acquisitions, and (iii) focus on
creating a stronger market presence in the workers' compensation and automobile
accident injury claim markets.
Development of Business
The Company is a Utah corporation organized in February 1981 as
"Bersham Energy & Minerals, Inc." In 1984, the Company changed its name to
"Champion Energy Corporation" and in 1989, changed its name to "Champion
Financial Corporation". Prior to 1997, the Company was primarily an inactive
corporation which most recently had been engaged in the business of distributing
synthetic polymers and other polymers in the United States.
In January 1997, the Company acquired all of the issued and outstanding
stock of NHBC in a business combination accounted for as a reverse acquisition.
NHBC was incorporated in Nevada in July 1996 to serve as the parent corporation
of National Property Casualty
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Corporation ("NPCC"). NPCC has been in business since 1994 providing management
of group health care services, workers' compensation claims and automobile
accident medical claims for property and casualty insurers, third-party
administrators, and self-insured employers, as well as a POS vision program.
In January 1997, the Company also acquired all of the issued and
outstanding stock of TRPN. TRPN is a PPO network comprised of acute care
hospitals, outpatient facilities, ancillary service providers and physicians.
In April 1997, the Company acquired 12.4% of the outstanding common
stock of Hayes, Incorporated ("Hayes"). Hayes is a company based in Philadelphia
engaged in the business of health care technology. Hayes produces health care
technology assessments, legal precedent reports and customized health and legal
research. A majority of these reports are provided through two quarterly
publications, The Hayes Directory of New Medical Technologies Status and The
Hayes Directory - Legal Precedents Reports.
Industry Overview
In response to escalating health care costs over the past 20 years,
federal and state governmental authorities have increasingly emphasized
stringent cost-containment measures and employers, consumers, and other
purchasers of health care have sought cost-effective alternatives to traditional
indemnity insurance, under which providers generally receive payment on a
fee-for-service basis.
Managed care encompasses various arrangements among health care
providers, payors, and enrollees that apply case management, utilization review,
utilization of authorization systems, and allocation of risks and rewards to
increase the efficiency of delivery of health care services. Managed care
delivery systems may include coalitions of independent medical practices,
alliances between hospitals and individual medical practices or physician
networks, PPOs, and health maintenance organizations ("HMOs"). Managed care
health plans create economic incentives designed to encourage providers to
monitor enrollees, eliminate inefficiencies, and reduce unnecessary utilization
of services while maintaining and improving the quality of patient care.
The managed care industry has recently expanded beyond the traditional
organizations providing cost containment services to group health insurance
companies and self-funded employers to include workers' compensation coverages
and automobile accident medical claims.
Medical provider reimbursement methods vary on a state-by-state basis.
A majority of the states have adopted fee schedules pursuant to which all health
care providers are uniformly reimbursed. The fee schedules are also mandated by
each state and typically establish the maximum amounts that are required to be
reimbursed for each procedure. In states without fee schedules, health care
providers are reimbursed based on usual, customary and reasonable ("UCR") fees
charged in the particular geographic area within the state in which the services
are provided.
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Workers' compensation is a statutorily defined employee benefit which
varies on a state-by-state basis. Workers' compensation laws generally require
employers to fully pay for employees' costs of medical treatment and a
significant portion of lost wages, legal fees and other costs associated with
work-related injuries and disabilities. Companies provide such coverage to their
employees through either the purchase of commercial insurance from private
insurance companies, participation in state-run funds or through self-insurance.
For workers' compensation claims, many states do not permit employers to
restrict a claimant's choice of health care provider, making it more difficult
for employers and private insurance companies to utilize traditional managed
care approaches. However, employers in 20 states currently have the right to
direct employees to a specific primary health care provider during the onset of
a workers' compensation case, subject to the right of the employee to change
physicians after a specific period. Recently, a number of states have adopted
legislation encouraging the use of workers' compensation managed care
organizations in an effort to allow employers to control their workers'
compensation costs.
The automobile casualty industry is slowly beginning to incorporate
managed care services into controlling the medical care cost for the clients
that are injured in an automobile accident. Like the workers' compensation
industry, the automobile insurance industry is regulated on a state-by-state
basis. While regulatory approval is not required for the Company to offer most
of its services to the automobile insurance market, state regulatory approval is
required in order to offer automobile insurers products that permit them to
direct claimants into a network of medical providers. Currently, several states
have legislated the optional use of PPOs by private automobile, property and
casualty insurance companies and in return, the insured receives a reduced
annual premium. Additionally, six states have adopted fee schedules for health
care providers to be reimbursed for automobile related injuries. Because of
escalating medical costs, the Company expects that additional states will pass
legislation adopting managed care components for insureds injured in an
automobile accident. The management of the Company believes that the growing
implementation of managed case services in the automobile casualty industry
creates significant market opportunities.
The Company's Programs and Services
The Company assists its customers in managing the increasing medical
costs of group health plans, workers' compensation claims and automobile related
injury claims through managed care techniques by providing access to a PPO
network, a network of chiropractors and the POS vision program, as well as a
variety of cost containment services such as utilization review, case
management, bill review, claims processing and medical repricing.
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PPO Networks
PPOs are typically groups of hospitals, physicians and other health
care providers that offer services at pre-negotiated rates to groups. PPO
networks offer the Company's clients a means of managing health care costs by
reducing the per-unit price of medical services provided to clients. The
Company's network is one of the largest networks of hospitals available in the
United States and includes acute care hospitals, out-patient facilities,
physical rehabilitation services, ancillary services and a panel of physicians.
The Company provides its customers with access to PPO networks by contracting
with existing networks organized by others and by working with networks chosen
by its customers which meet the Company's criteria for provider selection. The
Company uses the following guidelines in determining a provider's eligibility
for membership in the PPO: (a) a commitment to managed care as indicated by
their successful participation in risk contracting; (b) geographic locations to
meet the needs of our payors; (c) demonstrated cost effectiveness; (d) range of
service offered; and (e) verification of provider's adequate professional
liability insurance and all licenses and certifications as required by law.
The Company provides limited or full access to its PPO network
depending upon the client's business practices and the level of savings for
medical costs that the client is seeking. The Company's PPO program includes
access to an Exclusive Provider Organization ("EPO") of facilities that have
agreed to additional discounts in exchange for proper patient identification,
direction on the facilities that may be used, and greater financial incentives.
Over the years, the Company has become more involved in managing its client's
health care when the client selects to utilize the Company's EPO network.
Although some state legislation prohibits automobile insurance
companies from directing a patient to a facility when the insured has suffered
an injury, no state legislation prohibits the insured from electing to direct
their own treatment in time for medical need. Consequently, a cost containment
program called Elective Extension of Benefits was instituted by the Company on
behalf of its automobile insurance clients. The creation of Elective Extension
of Benefits was designed to permit the automobile policyholder the privilege of
extending the number of medical care visits by utilizing one of the Company's
contracted medical providers. When the provider accepts a medical reimbursement
below their usual and customary fees, the policyholder is able to receive more
treatments without exceeding the medical limits of their policy. Therefore, the
clients of the Company benefit their policyholders by permitting the
policyholder the privilege of accessing providers willing to reduce their fee
for service.
The Company conducts business with insurance companies of all sizes in
approximately 38 states. Each policyholder is given the opportunity to contact
the Company on its toll free line when requesting a qualified provider in his or
her own community. With more than 5,300 hospitals and approximately 184,000
physicians in the network, the Company is able to ensure that more than 80% of
its clients are within a 12 mile radius of one of its providers.
The Company's compensation for network access is based on a percentage
of savings, a fixed access fee per provider or a fixed fee based on the number
of insureds ("Capitation Fee"), as agreed to by the client.
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Although the Company currently maintains its own PPO, it also contracts
with other national and regional PPOs based on the needs and demographics of its
clients. The PPO access fee paid by the Company to these contracted PPOs ranges
from 8% to 23% of the savings.
In order to offer a full array of services, the Company also has a
chiropractic network which provides access to one of the largest networks of
chiropractors in the United States. This network is typically accessed by
individual clients for automobile and workers' compensation related claims.
Under the chiropractic network, the Company enrolls a selected number of
providers who are certified and licensed in their state to fully accommodate
client needs. Claims from a chiropractors' office are reviewed on a line-by-line
basis to detect miscoding issues and to make certain that claims are repriced in
accordance with the prenegotiated fee schedule for each provider. The fee
schedules are based on a declining basis whereby the fee paid to the provider is
reduced based on the frequency of use. This encourages the provider to
administer the necessary health care in a timely and precise manner.
Bill Review, Claims Processing and Medical Repricing Services
The Company offers retrospective bill review, claims processing and
medical repricing services for physician and hospital bills ("Bill Review").
Bill Review consists of an on-line computer-based information system which
stores and accesses state-mandated fee schedule and licensed usual and customary
charge information for the review of medical charges. The management of the
Company believes that Bill Review is one of the most comprehensive bill review
and medical repricing programs in today's market.
Under the Company's Bill Review program, each bill that is submitted by
a physician, either in or outside the Company's PPO network, is evaluated on a
line item basis. The Company's software systems monitor the bills by matching
procedure codes with the prevailing medical diagnosis thus making the necessary
adjustments. Prior to the application of a PPO fee schedule, the Bill Review
system screens each bill for more than 90 different unwarranted charges. After a
review of the entire bill, the Bill Review system automatically makes the
necessary corrections and adjustments. In addition, the Bill Review system
reveals duplicate procedures, validates medical procedures and analyzes the
relationship of diagnosis to procedures performed. As part of the contractual
arrangements with the PPO network, clients are able to access certain PPO
contracted rates that can result in costs below the stated fee schedule
representing additional savings.
Vision Program
The Company's First American Vision Services ("FAVS") program is a POS
vision program offering its members the opportunity to purchase eye wear
substantially below retail prices, if they are purchased from an independently
owned FAVS provider. In addition, members are entitled to an eye examination at
a pre-established reduced fee. The program benefits are extended to the members
and their immediate families and there are no restrictions on the number of
purchases.
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The Company maintains toll free telephone lines to assist its members
in accessing the nearest FAVS provider. FAVS providers consist primarily of
Doctors of Optometry and to a lesser extent, licensed opticians. As of March 31,
1997, there were approximately 3,200 vision care providers and 400,000 members
participating in the FAVS program.
In addition to receiving reductions in the cost of eye exam and eye
wear purchases, a member is entitled to purchase replacement contact lenses at
the wholesale price through the FAVS mail order program. The member simply
provides the Company with a current copy of their prescription in order to
purchase replacement contact lenses which are sent to them in the original
manufacturer's containers. This program is available in most states, while a few
states prohibit the dispensing of contact lenses directly to the patient.
Set forth below (for illustrative purposes only) is a table comparing
the retail price to the price a FAVS member might pay for an eye exam and the
purchase of single vision eyeglasses:
FAVS
Description Retail Costs* Member Cost
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Frame $ 125.00 $ 75.00
Lenses $ 55.00 $ 38.00
Tint $ 28.00 $ 18.00
Scratch Resistant Coating $ 35.00 $ 18.00
UV 400 Protection $ 24.00 $ 18.00
Dispensing Fee $ 12.00
Total Eye Wear Purchase $ 267.00 $ 179.00
Eye Examination $ 55.00 $ 35.00
FAVS members save.....................................$ 108.00
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* Prices will vary by manufacturer and selection
Customers
The Company's customers include group health insurance companies,
third-party administrators for self-funded employers covering both health and
workers' compensation, workers' compensation insurers and payors of automobile
accident medical claims. The Company performs services for customers located
throughout the United States. However, a limited number of customers represent
the majority of the Company's consolidated revenue and the loss of any one or
more would have a material adverse effect on the Company's financial condition
and results of operations. The four primary customers and the percentage of the
Company's revenues represented by these customers is as follows:
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March 31, 1997 March 31, 1996
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Employers Health Insurance 32% 25%
State Farm Insurance - Colorado 15% 20%
Health Claim Services 13% 17%
Prudential Property and Casualty 20% --
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Total Revenues 80% 62%
Sales and Marketing
The Company actively markets its services primarily to automobile
insurance companies, workers' compensation insurance companies, third-party
administrators, self-insured employers and HMOs through the Company's direct
sales force of eight full-time professionals. The Company creates interest and
demand for its programs and services primarily through direct contact with
potential customers and follow-up with marketing literature and information
designed to specifically address the clients needs. The Company also
participates in managed health care conventions and trade shows and advertises
its services on a limited basis in trade journals and other print media,
primarily to enhance name recognition and its reputation in the managed care
cost containment industry.
Competition
The managed health care 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 health care 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 health care industry
has experienced significant changes in recent years, primarily as a result of
rising health care costs. The Company will be required to respond to various
competitive factors affecting the health care industry, including new medical
technologies that may be introduced; general trends relating to demand for
health care services; regulatory, economic, and political factors; changes in
patient demographics; and competitive pricing strategies by HMOs and other
health care plans.
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Intellectual Property, Proprietary Rights, and Licenses
The Company regards certain features of its programs and services as
proprietary and relies on a combination of contract, copyright, and trade secret
laws and other measures to protect its proprietary information. As part of its
confidentiality procedures, the Company generally obtains nondisclosure
agreements from its employees and hospital-clients and limits access to and
distribution of its software, documentation, and other proprietary information.
The Company believes that trade secret and copyright protection are less
significant than factors such as the knowledge, ability, and experience of the
Company's employees and the timeliness and quality of the services it provides.
Government Regulation
Managed health care programs for group health care, workers'
compensation and automobile accident injuries are conducted within a regulated
environment. The Company's activities are regulated principally at the state
level, which means the Company may be required to comply with certain regulatory
standards which differ from state to state. Although the laws affecting the
Company's operations vary widely from state to state, these laws fall into four
principal categories: (i) laws that require licensing, certification or other
approval of businesses that provide managed health care services; (ii) laws
regulating the operation of managed care provider networks; (iii) laws that
restrict the methods and procedures that the Company may employ in its health,
workers' compensation and automobile managed care programs; and (iv) proposed
laws which, if adopted, would have as their objective the reform of the health
care system as a whole.
Generally, parties that actually provide or arrange for the provision
of health care services assume financial risk related to the provision of those
services, or undertake direct responsibility for making payment or payment
decisions for those services, are subject to a number of complex regulatory
schemes that govern many aspects of their conduct and operations. In contrast,
the services provided by the Company to its customers typically have not been
the subject of regulation by the federal government and most states. Since the
managed health care field is a rapidly expanding and changing industry and the
cost of providing health care continues to increase, it is possible that the
applicable state and federal regulatory frame works will expand to more fully
regulate the conduct and operation of the Company's business.
The Company's ability to provide comprehensive managed care services
depends in part on its ability to contract with or create networks of health
care facilities and providers which share the Company's objectives. The Company
offers access to networks of health care providers selected by the Company for
quality of care and pricing. New laws regulating the operation of managed care
provider networks have been adopted by a number of states. These laws may apply
to managed care provider networks having contracts with the Company or to
provider networks which the Company may organize or acquire. To the extent the
Company is governed by these regulations, it may be subject to additional
licensing requirements, financial oversight and procedural standards for
beneficiaries and providers. These regulations may result
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in increased costs of operations for the Company, which may have an adverse
impact upon the Company's ability to compete with other available alternatives
for health care cost control.
The Company does not itself engage in any professional practice or
control the cost of professional services. Likewise, the Company does not
believe that membership in the Company's programs constitutes insurance
subjecting the Company to laws and regulations governing health care insurers
and their operations. Certain regulations, present in most state and local
jurisdictions, relating to the standards governing licensed health care
professionals, prohibit such professionals from compensating any third person
for soliciting patients or patronage on their behalf. Although the Company has
not sought or received confirmation from government officials or an opinion of
counsel, the Company believes that payments to the Company by participating
vision and chiropractic providers do not violate such regulations since the
Company's programs involve only the purchase of products and services on a cost
containment basis.
The automobile insurance industry, like the workers' compensation
industry, is regulated on a state-by-state basis. While regulatory approval is
not required for the Company to offer most of its services to the automobile
insurance market, state regulatory approval is required in order to offer
automobile insurers products that permit them to direct claimants into a network
of medical providers. To date, only a few states have legislation that permits
such direction of care.
Regulations in the health care, workers' compensation and automobile
insurance fields are constantly evolving. The Company is unable to predict what
additional regulations, if any, affecting its business may be promulgated in the
future. The Company's business may be adversely affected by failure to comply
with existing laws and regulations, failure to obtain necessary licenses and
government approvals or failure to adapt to new or modified regulatory
requirements. Proposals for health care legislative reforms are regularly
considered at the federal and state levels. In addition, changes in workers'
compensation laws and regulations may impact demand for the Company's services,
require the Company to develop new or modified services to meet the demands of
the marketplace or modify the fees that the Company may charge for its services.
Recently, the managed care industry has received significant amounts of
negative publicity. This publicity, in turn, has contributed to increased
legislative activity, regulation and review of industry practices. These factors
may adversely affect the Company's ability to market its products or services,
could necessitate changes in the Company's products and services, and may
increase regulatory burdens under which the Company operates, further increasing
the costs of doing business and adversely affecting profitability.
Employees
As of March 31, 1997, the Company had 24 full-time employees, including
its two executive officers. Eight of the employees are employed in sales and
marketing capacities and 16 in administration. The Company has no collective
bargaining agreements with any unions and believes that its overall relations
with its employees are good.
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The operations and success of the Company are dependent in large part
upon the efforts and abilities of Paul F. Caliendo, the Company's Chairman of
the Board, and President and Chief Executive Officer, and Stephen J. Carder, the
Company's Executive Vice President and Chief Financial Officer. The loss of
services of Mr. Caliendo or Mr. Carder would have a material and adverse effect
upon the Company. The Company has not procured "keyman" insurance policies on
the lives of Mr. Caliendo and Mr. Carder.
The Company intends to hire additional executive personnel in sales and
marketing in connection with the proposed expansion of its promotional efforts.
There can be no assurance the Company will be successful in attracting or
retaining qualified personnel in such areas, and management's plan of operation
could be adversely affected if qualified personnel are not immediately available
as needed.
Cautionary Statements
The statements contained in the Business section and elsewhere in this
Form 10-KSB, and, the statement contained in the Management's Discussion and
Analysis of Financial Condition and Results of Operations, all include
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 ('PSLRA"). When used in this Form 10- KSB and in
future filings by the Company with the Securities and Exchange Commission, in
Company's press releases, and in oral statements made by or with the approval of
an authorized executive officer of the Company, the words or phrases "believes,"
"anticipates," "intends," "will likely result," "estimates," "projects" or
similar expressions are intended to identify such forward-looking statements.
Any of these forward-looking statements involve risks and uncertainties that may
cause the Company's actual results to differ materially from the results
discussed in the forward-looking statements.
The discussion contained herein involves cautionary statements
regarding Champion's business that investors and others should consider. These
discussions are intended to qualify under the "safe harbor" provisions of the
PSLRA. In making these cautionary statements, the Company is not undertaking to
address or update each factor in future filings or communications regarding the
Company's business or results, and is not undertaking to address how any of
these factors may have caused results to differ from discussions or information
contained in previous filings or communications. In addition, any of the matters
discussed herein may have affected Champion's past, as well as current,
forward-looking statements about future results, so that the Company's actual
results in the future may differ materially from those expressed in prior
communication.
Volatility of Stock Market. The market prices of the securities of
certain of the publicly-held companies in the industry in which Champion
operates have shown volatility and sensitivity in response to many factors,
including general market trends, public communications regarding managed care,
legislative or regulatory actions, health care costs trends, pricing trends,
competition, earnings and acquisition activity. There can be no assurance
regarding the level or stability of Champion's share price at any time or the
impact of these or any other factors on share price.
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Control By Management. The senior management of the Company
collectively have voting control of approximately 69.60% of the outstanding
shares of Common Stock. Consequently, senior management of the Company will have
a significant influence over the policies and affairs of the Company and will be
in a position to determine the outcome of corporate actions requiring
stockholder approval, including the election of directors, the adoption of
amendments to the Company's corporate documents and approval of mergers and
sales of the Company's assets. See "Security Ownership of Certain Beneficial
Owners and Management".
Possible Litigation and Legal Liability. The Company, through its
utilization management services and case management services, makes
recommendations concerning the appropriateness of providers medical treatment
plans of patients throughout the country, and it could share in potential
liabilities for adverse medical consequences. The Company does not grant or deny
claims for payment of benefits and the Company does not believe that it engages
in the practice of medicine or the delivery of medical services. There can be no
assurance however, that the Company will not be subject to claims or litigation
related to the grant or denial of claims for payment of benefits or allegations
that the Company engages in the practice of medicine or the delivery of medical
service. In addition, there can be no assurance that the Company will not be
subject to other litigation that may adversely affect the Company's business
or results of operations. The Company is subject to potential product liability
in its mail order contact lens distribution business arising from dispensing
incorrect prescriptions, potential product tampering or damage including that
occurring while in the mail distribution system, and lack of personal customer
and physician contact. In addition, it is possible that the Company could be
named as a party in any malpractice action which might be brought against a
physician or hospital in the Company's PPO network. The Company does not have
product liability insurance or insurance intended to protect against claims
which might be asserted in any malpractice action. If the Company were found
liable for any such claim, the cost of defending such claim as well as any
judgment against the Company, could materially adversely affect the Company's
financial condition and future prospects.
Risks Related To Growth Strategy. The Company's strategy is to continue
its internal growth and, as strategic opportunities arise, to consider
acquisitions of, or relationships with, other companies in related lines of
business. As a result, the Company is subject to certain growth-related risks,
including the risk that it will be unable to retain personnel or acquire other
resources necessary to service such growth adequately. Expenses arising from the
Company's efforts to increase its market penetration may have a negative impact
on operating results. In addition, there can be no assurance that any suitable
opportunities for strategic acquisitions or relationships will arise or, if they
do arise, that the transactions contemplated thereby could be completed. If such
a transaction does occur, there can be no assurance that the Company will be
able to integrate effectively any acquired businesses into the Company. In
addition, any such transactions would be subject to various risks associated
with the acquisition of businesses, including the financial impact of expenses
associated with the integration of businesses. There can be no assurance that
any future acquisition or strategic relationship will not have an adverse impact
on the Company's business, financial condition or results of operations. As
suitable opportunities arise, the Company anticipates that it would finance such
transactions, as well as
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internal growth, through working capital or in certain instances, through debt
or equity financing. There can be no assurance however, that such debt or equity
financing would be available to the Company on acceptable terms when and if
suitable strategic opportunities arise.
ITEM 2. PROPERTIES
The Company leases approximately 6,700 square feet in Scottsdale,
Arizona for its administrative and executive offices at a rate of $10,000 per
month for a term expiring April 30, 1999. This office space is adequate for the
Company's current operations.
The Company does not have a formal policy with respect to investments
in real estate and real estate related investments.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ Small Cap Market
over-the-counter bulletin board under the symbol "CPFC."
The following table sets forth the approximate high and low closing
sales prices per share as reported by the NASDAQ Small Cap Market for the
Company's Common Stock for the calendar periods indicated. The quotations do not
reflect retail markups, markdowns or commissions and may not reflect actual
transactions.
13
<PAGE>
Fiscal Quarter High Low
- --------------------------------------------------- --------- --------
April 1 to June 15, 1997 .......................... $ 7.00 $ 4.75
Quarter Ended March 31, 1997 ...................... $ 6.25 $ 4.25
Quarter Ended June 30, 1996 ....................... $ 7.50 $ 4.50
Quarter Ended September 30, 1996 .................. $ 7.75 $ 5.50
Quarter Ended December 31, 1996 ................... $ 8.25 $ 5.00
Quarter Ended March 31, 1996 ...................... $ 6.00 $ 2.00
Quarter Ended June 30, 1995 ....................... $ 5.75 $ 1.25
Quarter Ended September 30, 1995 .................. $ 4.50 $ 1.75
Quarter Ended December 31, 1995 ................... $ 4.00 $ 1.50
Quarter Ended March 31, 1995 ...................... $ 2.00 $ 0.75
Quarter Ended June 30, 1994 ....................... $ 1.00 $ 0.55
Quarter Ended September 30, 1994 .................. $ 0.875 $ 0.25
Quarter Ended December 31, 1994 ................... $ 0.875 $ 0.50
- ---------------
There were approximately 800 shareholders of record of the Company's
Common Stock as of March 31, 1997. The Company believes that there were
approximately 900 beneficial owners of the Company's Common Stock. The Company
has neither declared nor paid any cash dividends to date and does not plan to do
so in the immediate future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Champion acquired NHBC in a business combination accounted for as a
reverse acquisition with a publicly-traded shell company. In completing the
acquisition, Champion issued 2,200,000 shares of common stock for all of the
outstanding shares of the common stock of NHBC. To effect the combination, the
fair value of the net tangible assets of Champion were added to the equity of
NHBC. The historical financial statements of NHBC are presented as the
historical financial statements of the combined enterprise and the results of
operations of Champion are included in the financial statements of the combined
enterprise beginning on the acquisition date.
On January 9, 1997, the Company acquired the outstanding stock of TRPN
through the issuance of 100,000 shares of Champion common stock. The business
combination was treated as a purchase transaction which created $76,039 of
goodwill through excess purchase cost.
On January 14, 1997, Champion completed a private placement of common
stock. The Company received net proceeds of $753,556 for the issuance of 225,000
shares of common stock.
14
<PAGE>
In April, 1997, the Company acquired 12.4% of the outstanding stock of
Hayes.
Results of Operations
Champion derives the majority of its revenue from providing managed
health care programs to payors of health insurance benefits, workers'
compensation and automobile related injuries.
The Company reported consolidated operating revenues of $2,286,208 for
1997 compared to $1,286,047 for 1996, an increase of 78% or $1,000,161. The vast
majority of this increase was in the fees charged for managed health care
programs relating to the Company's preferred provider network of health care
facilities, physicians and ancillary medical services. The Company added a new
client in 1997, which contributed approximately 20% to the Company's total
consolidated revenues. Additionally, the Company's existing clients increased
the amount of claims submitted, primarily resulting from the Company's expanded
provider network.
The Company currently has access to approximately 5,600 acute care and
outpatient hospitals and approximately 184,000 physicians. The Company's fees
for services are typically based on a percentage of savings between the original
medical claim and the adjusted contracted amount, which rate is normally 35% of
the savings or differential. Occasionally, the Company will charge a fixed
monthly fee per number of participants accessing the preferred provider network,
commonly referred to as a "capitation rate."
The Company's vision program, FAVS generated $275,671 in revenue from
members and provider fees in 1997, compared to $67,993 in 1996, an increase of
$207,678. The increase is primarily attributable to an increase in the
membership and number of participating FAVS providers in 1997.
The Company does not expect inflation to have a material impact on
future revenue and/or profits.
Cost of Services
The Company's cost of services consists primarily of access fees paid
to regional PPO networks for providers not contracted directly with the Company,
commissions paid to outside brokers and in-house marketing personnel and other
services and products provided by outside vendors. Cost of services increased
50.1% in 1997, to $996,602 from $664,030 in 1996. The Company's cost of services
increased in 1997, as a direct result of the 78% increase in revenues for 1997.
Cost of services as a percentage of revenue for 1997, decreased to 43.6% from
51.6% in 1996. This substantial improvement is the result of contracting
directly with the health care facilities and providers, therefore relying less
on the regional network providers. Additionally, the Company began generating
revenue from its bill review services, which has a high profit margin.
15
<PAGE>
General and Administrative Expenses
For fiscal year 1997, general and administrative expenses were
$1,171,239, compared to $472,480 in 1996. This increase was due primarily to
expenses for additional management and administration personnel to accommodate
the increase in business and future growth. Additional factors include an
increase in office rent due to the Company's move to its existing corporate
offices in May 1996, and costs associated with being a publicly-traded entity.
Depreciation expense has increased substantially due to the purchase of computer
systems, office equipment and furniture to accommodate the additional personnel.
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 short-term borrowings under the Company's line of credit.
The Company's cash and cash equivalents increased $861,519 from the
March 31, 1996 balance of $34,577 to $896,096 at March 31, 1997. The Company's
principal source of funds was from the completion of its private placement
offering of common stock which resulted in net proceeds of $753,556. The
remaining increase was generated from operations of the Company.
The Company used $309,626 in May 1997, for the acquisition of the 12.4%
investment in Hayes.
The Company has an $80,000 secured line of credit with Norwest Bank of
Arizona. The line of credit bears interest at prime plus 2%, and is secured by
the Company's accounts receivable and furniture and equipment.
Although there can be no assurances, management of the Company
anticipates growth and expansion to accelerate in 1998 through the acquisition
of complementary businesses or business lines, management personnel and
infrastructure additions. The Company believes additional sources of cash flow
will be required, in addition to funds from the operations, in order to
accomplish its long-term strategies. There can be no assurance that the Company
will be able to obtain such funds on terms acceptable to the Company, if at all.
ITEM 7. FINANCIAL STATEMENTS
The financial statements attached to this Report on Form 10-KSB as
pages F-1 to F-12 are incorporated herein by reference.
16
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information set forth in Item 4 in the Company's report on Form
8-K, which was filed with the Securities and Exchange Commission on May 30,
1997, is incorporated herein by reference.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth certain information as of June, 1997, of
the directors and executive officers of the Company:
Name Age Position
- --------------------- --- ----------------------------------------------------
Paul F. Caliendo 50 President, Chief Executive Office and Director
Stephen J. Carder 42 Executive Vice President, Chief Financial
Officer, Treasurer, Secretary and Director
Gary L. Nielsen 54 Director
Gerald E. Finnell 57 Director
Robert H. Bedrossion 72 Director
Paul F. Caliendo, President and Chief Executive Officer of the Company,
has been principally employed as the President and Chief Executive Officer of
National Health Benefits Corporation since 1987 and of National Property and
Casualty Corporation since 1994. From 1981 until 1987, Mr. Caliendo served as
President and Chef Executive Officer of First American Health Concepts, a
publicly traded corporation listed on NASDAQ, which markets and administers a
national vision program.
Stephen J. Carder, Executive Vice President, Chief Financial
Officer/Treasurer, Secretary, has been principally employed since 1994 as
Executive Vice President and Chief Operating Officer of National Property and
Casualty Corporation. From 1989 to 1994, Mr. Carder served as vice president of
finance and administration for the Del Webb Development Corporation, a
subsidiary of Del Webb Corporation, a NYSE company that develops and markets
active adult communities. Mr. Carder served as vice president of finance for
National Health Benefits Corporation from 1987 to 1988. Prior to 1987, Mr.
Carder served as vice president of finance and administration for First American
Health Concepts, a publicly traded corporation listed on NASDAQ, which markets
and administers a national vision program. Mr. Carder is a certified public
accountant.
17
<PAGE>
Gary L. Nielsen has been a Director of the Company since June, 1997.
Mr. Nielsen is the Vice President Finance and Chief Executive Officer of Best
Western International, Inc. since May 1996. From October 1986 to May 1996, Mr.
Nielsen was Vice President and Treasurer of Giant Industries, Inc.
Gerald E. Finnell has been a Director of the Company since June, 1997.
Mr. Finnell has been a partner with the public accounting firm of KPMG Peat
Marwick LLP from 1970 to 1995. Mr. Finnell also serves as a Director of
Westminister Capital, Inc. of Beverly Hills, California.
Robert H. Bedrossion has been a Director of the Company since June,
1996. Dr. Bedrossion is an ophthalmologist who has been in practice for nearly
40 years. Dr. Bedrossion is currently a principal of Vancouver Eye Care in
Vancouver, Washington and has been a principal of the clinic or its predecessor
since 1957.
Dr. Bedrossion has failed to file on a timely basis the reports
required by Section 16(a) of the Exchange Act during the most recent fiscal
year.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid
for all services rendered to the Company in all capacities during the last three
completed fiscal years by the Company's Chief Executive Officer and one
executive officer of the Company. No other executive officers or individuals of
the Company received in excess of $100,000 during any of those years.
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------------------
Long Term All Other
Name and Position Year Salary Bonus Other Compensation Compensation(1)
- ------------------------------- ---- ------- ------- ----- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Paul F. Caliendo, 1997 $83,750 $33,500 --- --- $9,420
President and 1996 $55,000 $43,350 --- --- $7,600
Chief Executive Officer 1995 0 0 --- --- $6,100
and Director
Stephen J. Carder, 1997 $83,750 $33,500 --- --- $7,800
Executive Vice President, 1996 $55,000 $43,350 --- --- $7,600
Chief Financial Officer, 1995 0 0 --- --- $6,100
Treasurer and Secretary
and Director
<FN>
- ---------------
(1) The Company paid lease payments for one automobile for the exclusive use of
each of its executive officers through December 31, 1996.
</TABLE>
18
<PAGE>
Beginning on January 1, 1997, the executive officers are paid salaries
of $135,000 per year. The executive officers will also receive bonuses based on
the Company's net profits; these bonuses are anticipated to total 30% of each
officer's salary during fiscal 1998. The Company also pays each of its executive
officers an automobile allowance of $1,000 per month and pays or reimburses its
executive officers for business-related expenses. The Company provides certain
health insurance benefits for all full time employees, including its officers.
Champion's officers do not receive additional compensation for serving as
directors of the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 31, 1997, for (i)
each executive officer of the Company; (ii) each director of the Company; (iii)
all executive officers and directors of the Company as a group; and (iv) each
person known by the Company to be the beneficial owner of more than five percent
of the Common Stock.
% of
Shares Beneficially Outstanding
Beneficial Owner(1) Owned Stock(2)
- ---------------------------------------------- ------------------- -----------
Officers and Directors:
Paul F. Caliendo3........................ 2,600,000 47.51%
Stephen J. Carder4....................... 2,600,000 47.51%
Gary L. Nielsen.......................... 0 *
Gerald E. Finnell........................ 0 *
Robert H. Bedrossion..................... 93,000 1.7%
All officers and directors as a group
(5) persons)......................... 3,793,000 69.30%
5% Holders
Risk Resolution Group(5)................. 1,500,000 27.40%
- ---------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
the Common Stock.
(1) Unless otherwise indicated, the address of the beneficial owner is c/o
Champion Financial Corporation, 9495 East San Salvador Drive, Scottsdale,
Arizona 85258.
(2) Beneficial ownership is determined with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock subject to stock options and
warrants currently exercisable or exercisable within 60 days are deemed to
be outstanding for computing the percentage ownership of the person holding
such options and the percentage ownership of any group of which the holder
is a member, but are not deemed outstanding for computing the percentage of
any other person. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table have sole
voting and investment power with respect to all shares of capital stock
shown beneficially owned by them.
19
<PAGE>
(3) Includes shared voting control with Mr. Carder over 1,500,000 shares of
Common Stock beneficially owned by Risk Resolution Group, a Maryland
partnership ("Risk Resolution"). Mr. Caliendo disclaims any pecuniary
interest in the 1,500,000 shares.
(4) Includes shared voting control with Mr. Caliendo over 1,500,000 shares of
common stock beneficially owned by Risk Resolution. Mr. Carder disclaims any
pecuniary interest in the 1,500,000 shares.
(5) See Note 3 above. Mr. Caliendo and Mr. Carder share voting control over
1,500,000 shares of Common Stock held by Risk Resolution pursuant to an
Irrevocable Proxy by Risk Resolution, dated January 8, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K
(A) EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this Report.
(B) REPORTS ON FORM 8-K.
A report on Form 8-K was filed with the Securities and Exchange
Commission on January 29, 1997, relating to the acquisition on NHBC.
A report on Form 8-K, as amended, was filed with the Securities and
Exchange Commission on May 30, 1997, relating to a change in Registrant's
Certifying Accountants.
20
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----------
Independent Auditors' Report ........................................ F-2
Consolidated Balance Sheet for the year Ended March 31, 1997 ........ F-3
Consolidated Statements of Earnings and Retained Earnings for the
years ended March 31, 1997 and 1996 ............................... F-4
Consolidated Statements of Cash Flows for the years ended
March 31, 1997 and 1996 ........................................... F-5
Notes to Consolidated Financial Statements .......................... F-6 - F-12
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
KPMG PEAT MARWICK LLP
The Board of Directors and Shareholders
Champion Financial Corporation:
We have audited the accompanying consolidated balance sheet of Champion
Financial Corporation and subsidiaries as of March 31, 1997 and the related
consolidated statements of earnings and retained earnings, and cash flows for
the years ended March 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Champion Financial
Corporation and subsidiaries at March 31, 1997, and the results of their
operations and their cash flows for the years ended March 31, 1997 and 1996 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
June 6, 1997
F-2
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 1997
Assets
Current assets:
Cash and cash equivalents ........................................ $ 896,096
Trade accounts receivable, less allowance for doubtful accounts
of $15,000 (note 6) ............................................ 250,795
Other current assets ............................................. 14,415
----------
Total current assets ..................................... 1,161,306
----------
Property and equipment, net (note 3) ............................... 158,109
Other assets, at cost .............................................. 89,795
----------
$1,409,210
==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ................................................. $ 267,351
Accrued expenses (note 5) ........................................ 89,972
Note payable (note 4) ............................................ 24,340
Deferred revenue ................................................. 58,909
----------
Total current liabilities ................................ 440,572
Shareholders' equity:
Common stock, $.001 par value 100,000,000 shares authorized,
5,473,000 shares issued and outstanding ........................ 5,473
Additional paid-in capital ....................................... 874,897
Retained earnings ................................................ 88,268
----------
Total shareholders' equity ............................... 968,638
Commitments and contingencies (notes 6 and 7)
----------
Total liabilities and shareholders' equity ......................... $1,409,210
==========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Earnings and Retained Earnings
Years ended March 31, 1997 and 1996
1997 1996
----------- -----------
Revenues:
Repricing fees ................................... $ 2,002,952 1,218,054
Member fees ...................................... 275,671 67,993
Other fees ....................................... 7,585 --
----------- -----------
2,286,208 1,286,047
----------- -----------
Cost of services:
PPO network fees ................................. 725,443 590,218
Commissions ...................................... 222,649 63,277
Billing refunds .................................. 23,089 10,535
Contact lens purchases ........................... 11,654 --
Outside bill review .............................. 13,767 --
----------- -----------
996,602 664,030
----------- -----------
Gross profit from operations ....................... 1,289,606 622,017
----------- -----------
General and administrative expenses:
Wages and related ................................ 660,972 337,646
Other operating .................................. 476,263 125,834
Depreciation ..................................... 32,103 9,000
Amortization ..................................... 1,901 --
----------- -----------
1,171,239 472,480
----------- -----------
Earnings before income taxes ....................... 118,367 149,537
Income tax (note 8) ................................ 15,000 --
----------- -----------
Net earnings ............................. 103,367 149,537
Distribution to shareholders ....................... (100,000) --
Retained earnings (accumulated deficit) at
beginning of year ................................ 84,901 (64,636)
----------- -----------
Retained earnings at end of year ................... $ 88,268 84,901
=========== ===========
Earnings per share ................................. $ .03 .07
=========== ===========
Weighted average shares outstanding ................ 3,018,000 2,200,000
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1997 and 1996
1997 1996
--------- ---------
Operating activities:
Net earnings ......................................... $ 103,367 149,537
Adjustments to reconcile net income to net cash
provided y operating activities:
Depreciation ....................................... 32,103 9,000
Amortization ....................................... 1,901 --
Bad debt expense ................................... 15,000 --
Changes in operating assets and liabilities:
Increase in trade accounts receivable ............ (83,321) (177,474)
Increase in other current assets ................. (14,415) --
Increase in accounts payable ..................... 147,717 119,634
Increase in accrued expenses ..................... 72,993 16,979
Increase in deferred revenue ..................... 58,909 --
--------- ---------
Net cash provided by operating activities .............. 334,254 117,676
--------- ---------
Investing activities-- purchases of equipment .......... (101,499) (25,593)
--------- ---------
Financing activities:
Increase in other assets ............................. (4,737) (4,582)
Principal payments on line of credit ................. (10,000) --
Proceeds from line of credit ......................... -- 10,000
Principal payments on note payable ................... (10,055) (66,966)
Proceeds from issuance of common stock ............... 753,556 --
Distribution to shareholders ......................... (100,000) --
--------- ---------
Net cash provided by (used in) financing
activities ................................. 628,764 (61,548)
--------- ---------
Net increase in cash and cash equivalents .............. 861,519 30,535
Cash and cash equivalents at beginning of year ......... 34,577 4,042
--------- ---------
Cash and cash equivalents at end of year ............... $ 896,096 34,577
========= =========
SUPPLEMENTAL FINANCIAL DISCLOSURE:
Interest paid ........................................ $ 3,394 1,790
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH ASPECTS OF
ACQUISITIONS THROUGH ISSUANCE OF COMMON STOCK:
Assets acquired ...................................... $ 151,209 --
Liabilities assumed .................................. 34,395 --
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997
(1) DESCRIPTION OF BUSINESS
National Property Casualty Corporation (NPCC) began operations in
September 1994. On January 1, 1997, NPCC was merged into National Health
Benefits & Casualty Corporation (NHBC), which was owned by the same
shareholders. NHBC provides management of health care services and
workers' compensation claims for property and casualty companies. The
Company also operates a point of sale vision care program, First American
Vision Services (FAVS), which permits members to purchase eyewear at a
reduced price from its vision network providers, and a chiropractic
network designed to assist property and casualty insurance companies in
the reduction of costs associated with soft tissue claims.
On January 1, 1997, NHBC was acquired by Champion Financial Corporation
in a business combination accounted for as a reverse acquisition with a
publicly-traded shell company. In completing the acquisition, Champion
Financial Corporation (Champion) issued 2,200,000 shares of common stock
for all of the outstanding shares of NHBC common stock. To effect the
combination, the fair value of the net tangible assets of Champion were
added to the equity of NHBC. The historical financial statements of NHBC
are presented as the historical financial statements of the combined
enterprise and the results of operations of Champion are included in the
financial statements of the combined enterprise beginning on the
acquisition date. Due to this accounting treatment, pro forma results are
equivalent to actual results.
On January 9, 1997, Champion acquired the outstanding stock of Three
Rivers Provider Network (TRPN) through the issuance of 100,000 shares of
Champion common stock. The business combination was treated as a purchase
transaction which created $76,039 of goodwill through excess purchase
cost. The goodwill is being amortized over 10 years. Pro forma results
are not materially different from actual results.
On January 14, 1997, Champion completed a private placement of common
stock. The Company received net proceeds of $753,556 for the issuance of
225,000 shares of common stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
F-6
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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
Cash equivalents of $592,020 at March 31, 1997 consist of investments in
commercial paper with initial terms of less than three months. The
Company considers all highly liquid instruments with original maturities
of three months or less to be cash equivalents.
EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of shares
of common stock. There are no significant dilutive factors outstanding.
Earnings per share for the year ended March 31, 1996 have been restated
to reflect the number of equivalent shares received by NHBC.
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.
REVENUE RECOGNITION
Repricing fees are derived from a negotiated percentage of the medical
savings generated from customer claims managed by the Company. These fees
are recognized as revenue when the Company notifies the health care
provider of their required billings reduction.
Member fees are derived from companies that purchase annual memberships
in the FAVS program. The membership fees are received at the inception of
the annual contract; revenue is deferred at that point and recognized on
a straight-line basis over the 12-month period.
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 five years for
furniture and fixtures.
F-7
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
INCOME TAXES
Prior to its acquisition, NHBC had elected S Corporation status under the
regulations of the Internal Revenue Service. Consequently, the Company's
taxable income was passed through to its shareholders, and the
accompanying financial statements do not reflect a provision for income
taxes or deferred tax assets or liabilities relative to those operations.
On a proforma unaudited basis, the income tax expense for the March 31,
1996 period would have been $50,000. Subsequent to the acquisition, 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.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment by major classification at March 31,
1997 follows:
Furniture and fixtures ....... $ 55,110
Equipment .................... 144,158
---------
199,268
Accumulated depreciation ..... (41,159)
---------
$ 158,109
=========
F-8
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) NOTE PAYABLE
The Company maintains a $80,000 line of credit with a financial
institution. The line of credit bears interest at prime plus 2%. The line
is collateralized by the Company's accounts receivable and furniture and
equipment and is guaranteed by the Company's shareholders. There were no
drawings against this line of credit at March 31, 1997.
The Company has a note payable to a related party in the amount of
$24,340 at March 31, 1997. The note bore interest at 9%, and was paid in
full during May 1997.
(5) ACCRUED EXPENSES
A summary of accrued expenses at March 31, 1997 follows:
Commission .............. $29,972
Audit fees .............. 21,000
State income taxes ...... 15,000
Paid time off ........... 10,000
Other ................... 14,000
-------
$89,972
=======
(6) BUSINESS AND CREDIT CONCENTRATION
The Company operates in a very competitive market. Its success is
dependent upon the ability of its marketing group to continue to identify
and contract with insurance companies and self- funded companies; to
effectively administer repricing claims, and to expand into new markets
and opportunities through acquisition. Changes in the insurance and
health care industries may significantly affect management's estimates of
the Company's performance.
The Company's customers are located throughout the United States. Four
customers accounted for the majority of revenues as follows:
March 31,
----------------
1997 1996
------- -------
Employers Health Insurance ............. 32% 25%
State Farm Insurance ................... 15% 20%
Health Claim Services .................. 13% 17%
Prudential Property and Casualty ....... 20% --
F-9
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The allowance for doubtful accounts is based on the creditworthiness of
the Company's customers as well as consideration for general economic
conditions. Consequently, an adverse change in those factors could affect
the Company's estimate of its bad debts. The majority of accounts
receivable at March 31, 1997 are represented by the following customers:
Employers Health Insurance ............. 31%
Health Claim Services .................. 18%
Prudential Property and Casualty ....... 8%
(7) COMMITMENTS AND CONTINGENCIES
The Company is obligated under noncancelable operating leases for office
space and equipment which expire in March 1999. Rent expense under
noncancelable operating leases was $148,488 and $35,252 in 1996 and 1995,
respectively.
Future minimum lease payments under these leases are as follows:
Operating
leases
----------
Fiscal years ending March 31:
1998 ...................... $ 172,296
1999 ...................... 129,684
2000 and thereafter ....... --
----------
Total minimum lease payments $ 301,980
==========
The Company is the subject of various claims and litigation arising out
of the ordinary course of business. In the opinion of management, the
Company has adequate legal defenses and the outcome of these matters will
not materially affect the Company's financial position.
The repricing agreements with customer companies and physicians are
cancelable at the option of those parties with written notice which
varies from 30 to 90 days. Management generally attempts to renegotiate
any such canceled agreements. Management believes that there is very
little likelihood that there would be cancellations sufficient to have a
material adverse effect on operations.
F-10
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) INCOME TAXES
The net operating loss of Champion for the year ended March 31, 1996,
prior to the reverse acquisition, was approximately $260,000 which the
Company utilized in the current year to fully offset taxable income. The
utilization of these carryforwards is dependent on the Company's ability
to generate sufficient taxable income during the carryforward period.
However, in March 1995, there was an ownership change in the Company as
defined in Section 382 of the Internal Revenue Code. As a result, the
Company's ability to utilize net operating losses and capital losses
available before the ownership change is restricted to a total of
approximately $46,000 per year. Net operating losses and capital losses
incurred subsequent to March 1995 can be utilized at a rate of $780,000
per year.
At March 31, 1997, the Company has available net operating loss
carryforwards and capital loss carryforwards for Federal income tax
purposes, subject to the limitations discussed above, which may provide
future tax benefits expiring as follows:
Expiration Date Operating Capital
--------------- ---------- ----------
1999 $ -- 908,393
2000 -- 48,000
2001 -- 78,791
2002 -- --
2003 74,733 --
2004 106,376 --
2005 3,770 --
2006 201,008 --
2007 -- --
2008 -- --
2009 -- --
2010 11,465 --
2011 1,114 --
2012 172,000 --
---------- ----------
$ 570,466 1,035,184
========== ==========
Income tax expense for the year ended March 31, 1997 consists of:
Current Deferred Total
---------- ---------- ----------
U.S. Federal ............ $ -- -- --
State and local ......... 15,000 -- 15,000
---------- ---------- ----------
$ 15,000 -- 15,000
========== ========== ==========
F-11
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The provision for income taxes differs from the amount computed by
applying the statutory Federal income tax rate to income before taxes.
The sources and tax effects of the differences are as follows:
Computed "expected" federal income tax expense ........ $ 40,000
Expected state income taxes, net of federal benefit ... 7,000
Change in valuation allowance ......................... (34,000)
Other ................................................. 2,000
--------
$ 15,000
========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are as follows, there are no material
deferred tax liabilities:
Deferred tax assets:
Net operating loss carry forward ....... $ 545,921
Other .................................. 14,727
---------
Deferred tax asset ..................... 560,648
Less valuation allowance ................. (560,648)
---------
Net deferred tax asset ................. $ --
=========
A valuation allowance is recorded when it is more likely than not that a
portion of the deferred tax assets will not be realized. The Company has
determined that a full valuation allowance is appropriate because the
Company currently does not expect taxable income to be sufficient to
reverse temporary differences in the foreseeable future. The net increase
during the year in the total valuation allowance was approximately
$100,000.
(9) SUBSEQUENT EVENTS
On April 29, 1997, the Company entered into an agreement (Acquisition
Agreement) with Hayes, Incorporated (Hayes). In expectation of closing
under the Acquisition Agreement, the Company advanced to Hayes an
aggregate of $309,626. The Company has agreed to accept 338,476 shares of
the common stock of Hayes for an aggregate purchase price equal to the
amount of the advance. The issuance of Hayes common stock resulted in the
Company acquiring a 12.4% interest in Hayes. Between the date of the
agreement and December 1997, Hayes has the right to redeem its common
stock by paying an aggregate sum of $324,000 to the Company.
F-12
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Paul F. Caliendo and Stephen J. Carder,
or either of them, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
annual report on Form 10-KSB and any documents related to this report and filed
pursuant to the Securities and Exchange Act of 1934, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 and 15(2) 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
By: /s/ Paul F. Caliendo
-----------------------------------
Paul F. Caliendo
President, Chief Executive Officer
and Director
Date: June 25, 1997
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Date
- ----------------------------------------- -------------------------------------
/s/ Paul F. Caliendo June 25, 1997
- -----------------------------------------
Paul F. Caliendo
President and Chief Executive Officer and
Director (Principal Executive Officer)
/s/ Stephen J. Carder June 25, 1997
- -----------------------------------------
Stephen J. Carder
Executive Vice President, Chief Financial
Officer, Treasurer and Secretary and
Director (Principal Financial and
Accounting Officer)
21
<PAGE>
/s/ Gary L. Nielsen June 25, 1997
- ----------------------------------------
Gary L. Nielsen
Director
/s/ Gerald E. Finnell June 25, 1997
- ----------------------------------------
Gerald E. Finnell
Director
/s/ Robert H. Bedrossion June 25, 1997
- ----------------------------------------
Robert H. Bedrossion
Director
22
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------------------------------------------------------------
2.1 Agreement and Plan of Reorganization, dated December 16, 1996,
among the Company, Paul F. Caliendo and Stephen J. Carder, as the
Shareholders of National Health Benefits & Casualty Corporation
(incorporated by reference to Exhibit 2.2 to Company's report on
Form 8-K filed with the Commission on January 14, 1997).
2.2 Agreement and Plan of Acquisition, dated December 20, 1996, by
and among Champion Financial Corporation, a Utah corporation,
Mark D. Dyer and Darren Silvertsen (incorporated by reference to
Exhibit 2.2 to Company's report on Form 8-K filed with the
Commission on January 14, 1997).
3.1 Articles of Incorporation (incorporated by reference to the
Company's Annual Report on Form 10K for the fiscal year ended
March 31, 1992).
3.2 By-laws of Registrant (incorporated by reference to the Company's
Annual Report on Form 10K for the fiscal year ended March 31,
1992).
4.1 Specimen Stock Certificate (incorporated by reference to the
Company's Annual Report on Form 10K for the fiscal year ended
March 31, 1992).
9.1 Irrevocable Proxy, dated January 8, 1997 of Risk Resolution
Group.
10.1 Exchange Agreement between the Company and the Stockholders of
MPLC, Inc. dated as of December, 1996 (incorporated by reference
to Exhibit 10 to Company's quarterly report on Form 10-Q for the
quarter ended December 31, 1996).
10.2 Settlement, Release and Subscription Agreements dated April 29,
1997, by and among the Company MPLC, Inc., Info Plan, Inc., Risk
Resolution Group, Morey M. Englebrecht, Zirk Englebrecht,
Winifred S. Hayes, Incorporated, Dr. Winifred S. Hayes and Robert
E. Hayes, Jr.
16. Letter regarding change in accountants (incorporated by reference
to the Company's report on Form 8-K filed with the Commission on
May 30, 1997).
21. Subsidiaries of the Registrant.
27. Financial Data Schedule
23
EXHIBIT 9
IRREVOCABLE PROXY
Risk Resolution Group, a Maryland partnership ("RRG"), a shareholder of
champion financial Corporation, a Utah corporation (the "Corporation") hereby
irrevocably appoints Messrs. Paul F. Caliendo and Stephen J. Carder, RRG's proxy
agents (the "Proxy Agents"), with full power of substitution, and to vote an
aggregate of 1.5 million shares (the "Shares") of the Corporation owned by RRG
with respect to all matters, subject to the exceptions in the following
sentence, submitted to the shareholders at all meetings of the shareholders, or
any adjournments thereof, and in all consents to any actions taken without a
meeting. Notwithstanding the foregoing, this irrevocable proxy shall not be
granted to the Proxy Agents with respect to any transactions between either
Proxy Agent and the Corporation in which either Proxy Agent, any member of
either Proxy Agent's immediate families, or entity controlled by or under common
control with either Proxy Agent, any such family member or any such other
entity. This appointment with respect to any portion of the shares shall
continue from this date until the date on which RRG no longer owns such portion
o the Shares. Subject to the exceptions set forth herein, the Proxy Agents shall
have all of the power that RRG would possess with respect to voting the Shares
and granting RRG's consent. RRG hereby ratifies and confirms all acts that the
Proxy Agents shall do or cause to be done by virtue of and within the
limitations set forth in this proxy.
RRG hereby revokes all proxies previously given with respect to the
shares.
RRG hereby waives its right to cancel this Irrevocable proxy at any
time during the time period described herein. RRG hereby acknowledges that this
Irrevocable Proxy is coupled with an interest described as follows: an absolute
ownership interest in the Corporation.
IN WITNESS WHREOF, RRG has executed this proxy on this 8th day of
January, 1997.
Risk Resolution Group
By /s/ Zirk Engelbrecht
-------------------------------------
EXHIBIT 10.2
SETTLEMENT, RELEASE AND SUBSCRIPTION AGREEMENT
THIS SETTLEMENT, RELEASE AND SUBSCRIPTION AGREEMENT is entered into as
of this 29th day of April, 1997, by and among CHAMPION FINANCIAL CORPORATION, a
Utah corporation ("Champion"), MPLC, INC., a Maryland corporation ("MPLC"),
INFOPLAN, INC., a Delaware corporation ("InfoPlan"), RISK RESOLUTION GROUP
("RRG"), MARCY M. ENGLEBRECHT ("M. Englebrecht"), ZIRK ENGLEBRECHT ("Z.
Englebrecht"), WINIFRED S. HAYES, INCORPORATED, a Pennsylvania corporation d/b/a
HAYES, Incorporated ("HAYES"), DR. WINIFRED S. HAYES ("W. Hayes"), and ROBERT E.
HAYES, JR. ("R. Hayes"). (Champion, MPLC, InfoPlan, RRG, M. Englebrecht and Z.
Englebrecht shall be collectively referred to herein as the "Champion Parties",
and HAYES, W. Hayes and R. Hayes shall be collectively referred to herein as the
"Hayes Parties".)
BACKGROUND
Certain of the parties hereto entered into a certain Stock Acquisition
Agreement, dated as of August 30, 1996 (the "Stock Acquisition Agreement"),
which amended, restated, superseded and replaced a certain Acquisition
Agreement, dated as of December 4, 1995 as the same was previously amended and
restated by an Amended and Restated Acquisition Agreement and a Second Amended
and Restated Acquisition (the Stock Acquisition Agreement, any amendments
thereto and all prior agreements which were amended by the Stock Acquisition
Agreement together shall be referred to herein as the "Prior Agreement").
In the expectation of closing under the Prior Agreement, the Champion
Parties advanced to HAYES an aggregate of $309,625.96 (the "Advance"). The Prior
Agreement was never consummated and MPLC and HAYES subsequently entered into
negotiations for the issuance and sale to MPLC of shares of the common stock, no
par value, of HAYES (the "Common Stock").
Certain disputes have arisen between and among the parties hereto
regarding the Advance and the proposed issuance of shares of Common Stock of
HAYES. At this time, the parties hereto wish to compromise and settle all claims
which have been made or could have been made with respect to the foregoing and
all other claims relating thereto.
NOW, THEREFORE, intending to be legally bound hereby, the parties
hereto agree as follows:
1. SUBSCRIPTION FOR HAYES SHARES. MPLC hereby subscribes for 338,476
shares of the Common Stock of HAYES (the "Shares"), for an aggregate purchase
price equal to the amount of the Advance. Such consideration shall be paid with
the Advance. Following the issuance of the Shares to MPLC, MPLC shall own 12.36`
of the shares of the common stock of HAYES then issued and outstanding. (As used
in this Agreement, the term "Shares" shall mean
<PAGE>
the shares issued to MPLC under this Section 1 plus any Make-Up Shares issued to
MPLC under Section 5 below.)
2. ISSUANCE OF STOCK CERTIFICATE. Upon the execution of this Agreement
by all of the parties hereto, HAYES shall issue to MPLC a stock certificate (the
"Certificate") representing the Shares, such Certificate to be held by Fox,
Rothschild, O'Brien & Frankel, counsel to HAYES (the "Agent"), pursuant to the
terms of Section 4 below. Upon issuance, the Shares shall be deemed fully paid
and non-assessable.
3. REDEMPTION.
(a) Between the date of this Agreement and December 31, 1997,
HAYES shall have the right to redeem the Shares by paying the aggregate sum of
$324,000 (the "Redemption Price") to MPLC. HAYES may redeem the Shares in
installments by paying a pro rata portion of the Redemption Price to redeem a
pro rata portion of the Shares then outstanding.
(b) Because of the Anti-Dilution Rights granted to MPLC under
Section 5 below, a precise per Share Redemption Price cannot be fixed. If HAYES
redeems any of the Shares before MPLC exercises any of its Anti-Dilution Rights
hereunder, then the Redemption Price per Share shall be $0.96. If HAYES redeems
any of the Shares after such time as MPLC exercises its Anti-Dilution Rights
hereunder, then the Redemption Price per Share shall be adjusted on a pro rata
basis, subject to the mutual approval of HAYES and MPLC, such approval not to be
unreasonably withheld or delayed.
(c) Upon the payment of the Redemption Price, or any portion
thereof, to MPLC, all of MPLC's rights in the Shares so redeemed shall terminate
and the Certificate shall be returned to HAYES. If less than all of the Shares
are so redeemed, HAYES shall promptly issue a new Certificate to MPLC. The
Certificate shall bear a legend (as set forth in Section 11 below) evidencing,
among other things, HAYES' redemption right. If all of the Shares have not been
redeemed prior to January 1, 1998, then HAYES shall, upon receipt of a written
request to that effect from MPLC and delivery of the Certificate to HAYES, issue
a new stock certificate for the same number of Shares without such legend.
4. Certificates to be Held by Agent. For a period of 90 days from date
on which this Agreement is executed by all of the parties hereto, the
Certificate shall be held by the Agent. If any portion of the Redemption Price
is paid during such 90-day period or delivered to MPLC by the Agent if the
Redemption Price is not paid during such 90-day period. The Agent shall hold and
retain the Certificate (or any replacement Certificate) until such time as the
entire Purchase Price has been paid to MPLC, at which time the Certificate shall
be returned to HAYES; provided, however, that if HAYES has not redeemed all of
the Shares during such 90-day period, then the Certificate (or any replacement
Certificate) shall be delivered to MPLC by the Agent.
2
<PAGE>
5. RIGHT TO RECEIVE ADDITIONAL SHARES.
(a) Notwithstanding any other provision of this Agreement to
the contrary, HAYES agrees that if it: (i) issues any shares of its capital
stock (an "Issuance"); and (ii) such Issuance would result in the ratio of the
Shares to the "Outstanding Shares" (as hereinafter defined) prior to such
Issuance (the "Old Percentage") being greater than the ratio of the Shares to
the Outstanding Shares after such Issuance (the "New Percentage"); then (iii)
MPLC shall have the right to purchase from HAYES, at a price of $.01 per share,
such number of shares of the Common Stock of HAYES as is determined by the
following formula (the "Make-Up Shares"):
MS = (OS + IS)0% - ES
----------------
1-0`
in which:
MS = The number of Make-Up Shares of HAYES that MPLC
would be entitled to purchase under this provision;
0S = The aggregate number of shares of Common Stock of
HAYES outstanding immediately prior to the issuance
of shares in the Issuance (the "Outstanding Shares");
IS = The number of shares of Common Stock of HAYES
proposed to be issued in such Issuance;
0% = The Old Percentage;
ES = The number of Shares held by MPLC immediately prior
to such Issuance; and
1-0% = 0ne minus the Old Percentage.
For example, if there were 2,738,476 Outstanding Shares, MPLC held 338,476
Shares (or 12.36 of the Outstanding Shares), and HAYES were to propose to issue
100,000 additional shares of Common Stock in connection with an Issuance, then
MPLC would be entitled to purchase and additional 14,103 shares of Common Stock.
In this example:
0S = 2,738,476;
IS = 100,000;
0 = .1236;
ES = 338,476; and
1-0% = 1-.1236
= .8764
3
<PAGE>
and, therefore:
MS = (2,738,476 + 100,000).1236 - 338,476
-----------------------------------------
.8764
and the number of the Make-Up Shares (or MS) would equal 14,103. If, in the
foregoing example, MPLC were to exercise its right to purchase an additional
14,103 shares of Common Stock, then MPLC would own 352,579 Shares.
In that event:
New Percentage = 352,579/2,852,579 = 12.36%.
(b) If HAYES proposes to issue shares of its Common Stock in
connection with an Issuance, it shall notify MPLC of the Issuance in writing and
MPLC shall have 30 days from the date of such notice in which to notify HAYES in
writing whether it desires to participate in such Issuance under the terms of
this Section. No Make-Up Shares shall be issued if MPLC declines to participate
in any particular Issuance or fails to respond to HAYES' notice within the
required time period. In no event shall HAYES be required to issue any
fractional shares.
(c) The rights set forth in this Section 5 (the "Anti-Dilution
Rights"): (i) shall apply only to the Shares issued under Section 1 above (and
to any shares issued in connection with any subsequent stock splits, reverse
stock splits, stock dividends or similar transactions as and to the extent such
transactions affect the Shares); (ii) shall expire and terminate immediately
following the closing of a public offering of HAYES's capital stock and shall
not apply to any shares sold in such public offering; and (iii) shall apply only
with respect to, and only until, HAYES has issued an additional 1,105,600 shares
of its Common Stock to one or more third parties (in one or more transactions),
at which time such Anti-Dilution Rights shall expire and terminate. If MPLC were
to exercise its Anti-Dilution Rights with respect to all such 1,105,600 shares
of Common Stock, MPLC would own an aggregate of 494,400 shares of the common
stock of HAYES.
6. MUTUAL RELEASES. Subject to and conditioned on the delivery of the
Certificate representing the Shares to the Agent in accordance with Section 4
above, and to the accuracy and correctness of the representations, warranties
and covenants set forth in this Agreement, and in consideration thereof, and
subject to the provisions of Sections 7 and 8 below
(a) RELEASE OF HAYES. Each of the Champion Parties,
voluntarily and knowingly, for itself as well as their respective officers,
directors, employees, agents, affiliates, successors and assigns (collectively,
the "Champion Releasors"), do hereby remise, release and forever discharge each
of the Hayes Parties as well as their respective officers, directors, employees,
agents, affiliates, successors and assigns (collectively, the "Hayes
Releasees"), from any and all manner of actions and causes of action, suits,
debts, dues, accounts, sums of money, bonds, bills, covenants, contracts,
controversies, agreements, promises, damages, liabilities, judgments,
executions, claims and demands whatsoever (collectively, the "Claims"), known
and unknown, foreseen and unforeseen, which any of the Champion
4
<PAGE>
Parties or any of the Champion Releasors, or anyone claiming through any of
them, ever had, now has or might ever have, for, upon, relating to, by reason of
or arising in any way from the Prior Agreement, the Advance, any of the events
referenced in Sections 17, 18 and/or 20 below that occurred prior to the date
hereof, and any of the events giving rise to and all claims that could be or
could have been asserted in connection with any of the foregoing. Each of the
Champion Parties intends that the foregoing release shall be complete and shall
not be subject to any claim of mistake of fact, and that it expresses a FULL AND
COMPLETE SETTLEMENT, and, regardless of the adequacy or inadequacy in the
consideration paid, the foregoing release is intended to avoid litigation and
settle a disputed claim, and to be final and complete. Each of the Champion
Parties further agrees that there is absolutely no agreement or reservation not
clearly expressed herein, that the consideration stated herein (if any) is all
that is ever to be paid by any of the Hayes Parties or any of the Hayes
Releasees, that the consideration referred to herein is in compromise and full
settlement of disputed claims and that, subject to Sections 7 and 8 below, the
execution hereof is with full knowledge that this release covers all possible
claims.
(b) RELEASE OF THE CHAMPION PARTIES. Each of the Hayes
Parties, voluntarily and knowingly, for itself as well as their respective
officers, directors, employees, agents, affiliates, successors and assigns
(collectively, the "Hayes Releasors"), does hereby remise, release and forever
discharge each of the Champion Parties as well as their respective officers,
directors, employees, agents, affiliates, successors and assigns (collectively,
the "Champion Releasees"), from any and all manner of actions and causes of
action, suits, debts, dues, accounts, sums of money, bonds, bills, covenants,
contracts, controversies, agreements, promises, damages, liabilities, judgments,
executions, claims and demands whatsoever (collectively, the "Claims"), known
and unknown, foreseen and unforeseen, which any of the Hayes Parties or any of
the Hayes Releasors, or anyone claiming through any of them, ever had, now has
or might ever have, for, upon, relating to, by reason of or arising in any way
from the Prior Agreement, the Advance, any of the transactions described in
Sections 17, 18 and/or 20 below, and any of the events giving rise to and all
claims that could be or could have been asserted in connection with any of the
foregoing. Each of the Hayes Parties intends that the foregoing release shall be
complete and shall not be subject to any claim of mistake of fact, and that it
expresses a FULL AND COMPLETE SETTLEMENT, and, regardless of the adequacy or
inadequacy in the consideration paid, the foregoing release is intended to avoid
arbitration and litigation and settle a disputed claim, and to be final and
complete. Each of the Hayes Parties further agrees that there is absolutely no
agreement or reservation not clearly expressed herein, that the consideration
stated herein is all that is ever to be paid by any of the Champion Parties or
any of the Champion Releasees, that the consideration referred to herein is in
compromise and full settlement of disputed claims and that, subject to Sections
7 and 8 below, the execution hereof is with full knowledge that this release
covers all possible claims.
7. CLAIMS NOT RELEASED. Notwithstanding any other provision of this
Agreement to the contrary, the parties acknowledge and agree that the foregoing
releases are not intended to cover or include, and do not cover or include any
claim for breach or violation of any representation, warranty or covenant
contained in or made in this Agreement.
5
<PAGE>
8. COVENANT NOT TO SUE. Subject to and conditioned on the delivery of a
Certificate representing the Shares to the Agent in accordance with Section 4
above, and to the accuracy and correctness of the representations, warranties
and covenants set forth in this Agreement, and in consideration thereof, each of
the parties hereto, for itself and its officers, directors, employees, agents,
affiliates, successors and assigns, hereby covenants not to sue or institute any
action of any kind in or before any court or judicial, quasi-judicial or
governmental body of any kind whatsoever with respect to, or otherwise assert,
directly or indirectly, any Claim released by it herein.
9. RATIFICATION BY HAYES. The Board of Directors and the Shareholders
of HAYES have adopted appropriate resolutions authorizing HAYES to enter into
this Agreement and to consummate the transactions contemplated hereby, as
evidenced by the duly executed Action by Unanimous Consent in Writing of the
Board of Directors of HAYES, a copy of which has been provided to the Champion
Parties.
10. RATIFICATION BY THE CHAMPION PARTIES. The Boards of Directors of
each of Champion, InfoPlan and MPLC has adopted appropriate resolutions
authorizing each such party to enter into this Agreement and to consummate the
transactions contemplated hereby, as evidenced by duly executed Actions by
Unanimous Consent in Writing of the Board of Directors of each of the Champion
Parties, copies of which have been provided to the Hayes Parties.
11. LEGEND ON STOCK CERTIFICATES. All certificates representing shares
of Common Stock now or hereafter issued by HAYES to MPLC or to any of its
permitted assignees or designees shall be subject to the terms of this Agreement
and shall bear the following legends:
"The shares evidenced by this certificate are subject to the
terms of a Settlement, Release and Subscription Agreement,
dated April 29, 1997, entered into by and among the Company,
MPLC, Inc. and certain other parties (the "Settlement
Agreement"). The Settlement Agreement imposes certain
restrictions on the transferability of the shares evidenced
hereby, including a redemption right, a right of first refusal
and certain other restrictive covenants. In addition, the
shares evidenced by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Act"), or
the securities laws of any state and may be offered, sold and
transferred only if so registered or if the Company has been
furnished with an opinion of counsel, reasonably satisfactory
to the Company, to the effect that registration is not
required under the Act or such state securities laws and all
requirements of the Act and all such state securities laws
applicable to the sale or transfer have been complied with."
12. REPRESENTATIONS AND WARRANTIES OF THE CHAMPION PARTIES. Each of the
Champion Parties hereby represents and warrants, jointly and severally, to each
of the Hayes Parties as follows:
6
<PAGE>
(a) It has not sold, hypothecated, mortgaged, assigned,
encumbered, transferred or otherwise disposed of any claim that it has or had
against any of the Hayes Parties, or any Claim that is being released by it
pursuant to the terms of this Agreement.
(b) In deciding to acquire the Shares, MPLC has relied
exclusively upon its own investigation and has not relied upon any offering
memoranda or other similar instruments prepared by HAYES, any officer, director
or stockholder of HAYES, or any third party. Each of the Champion Parties
acknowledges that, except as set forth in this Agreement, no representations or
warranties have been made to any of them, or to their respective advisors or
representatives, by HAYES or others with respect to the business of HAYES, its
financial condition or otherwise.
(c) The Shares are being acquired by MPLC solely for MPLC's
own account, for investment, with no intention of selling or making a
distribution thereof within the meaning of the Securities Act of 1933, as
amended (the "Act"). The Shares shall not be sold or transferred by MPLC in
violation of the Act or any state or other jurisdiction's securities laws, and
the financial condition of MPLC is such that this investment can be made on a
long-term basis. MPLC is aware that the Shares have not been registered under
the Act or any state or other jurisdiction's securities laws, that the Shares
must be held indefinitely unless subsequently registered or an exemption from
such registration is available and that HAYES is under no obligation to register
such Shares under the Act or any state or other jurisdiction's securities laws.
MPLC is aware that an exemption from the registration requirements of the Act
pursuant to Rule 144 promulgated thereunder is not currently available, and that
HAYES has not undertaken to take or refrain from taking any action in order to
make available an exemption from the registration requirements pursuant to Rule
144 or any successor rule for resale of the Shares. MPLC further acknowledges
that there is currently no market for the purchase and sale of such Shares and
there is no assurance that such market shall develop or, if developed, that it
shall be sustained.
(d) MPLC confirms that HAYES has made available to MPLC, or to
the representatives of MPLC, the opportunity to ask questions and to acquire
such additional information about the business and financial condition of HAYES
as MPLC has requested. MPLC acknowledges that it is familiar with the operations
of HAYES, with its products and services and with its financial condition and
prospects.
(e) MPLC understands and has taken cognizance of all risk
factors related to the purchase of the Common Stock, and its knowledge and
experience, and/or that of its authorized representatives, in financial and
business matters is such that it is, and/or its authorized representatives are,
capable of evaluating the business condition, financial or otherwise, of HAYES.
(f) Each of Champion, InfoPlan and MPLC is a corporation duly
organized, validly existing and in good standing under the laws of its state of
incorporation. The principal place of business of MPLC is located in the State
of Maryland.
7
<PAGE>
(g) Each of Champion, InfoPlan and MPLC has all necessary
corporate power to make, execute, deliver and perform this Agreement and all
other instruments and documents required or contemplated hereunder, and to take
all steps and to do all things necessary and appropriate to consummate the
transactions contemplated herein. This Agreement has been duly authorized,
executed and delivered by each of Champion, InfoPlan and MPLC and is a valid and
binding obligation of each of Champion, InfoPlan and MPLC, enforceable against
each of them in accordance with its terms.
(h) RRG has all necessary partnership power to enter into this
Agreement and to make, execute, deliver and perform this Agreement and all other
instruments and documents required or contemplated hereunder, and to take all
steps and to do all things necessary and appropriate to consummate the
transactions contemplated herein. This Agreement has been duly authorized,
executed and delivered by RRG and is a valid and binding obligation of RRG,
enforceable against it in accordance with its terms.
(i) M. Englebrecht and Z. Englebrecht (together, the
"Englebrecht Principals") have the full personal power, right and authority to
make, execute, deliver and perform this Agreement and all other instruments and
documents required or contemplated hereunder, and to take all steps and to do
all things necessary and appropriate to consummate the transactions contemplated
herein. This Agreement has been duly authorized, executed and delivered by each
of the Englebrecht Principals and is a valid and binding obligation of each of
the Englebrecht Principals, enforceable against each of them in accordance with
its terms.
(j) The execution, delivery and performance of this Agreement
shall not result in (i) the breach of or default under, with or without the
giving of notice or passage of time, or both, any mortgage, indenture, contract,
agreement or other arrangement to which any of the Champion Parties is a party
or by which any of them or their respective properties may be bound, (ii) the
violation of any law, statute, rule, decree, order, judgment or regulation
binding upon any of the Champion Parties, or (iii) (except as contemplated by
this Agreement) the creation or imposition of any lien or encumbrance on any of
the properties or assets of any of the Champion Parties.
(k) There is no claim, action, suit, proceeding, arbitration
or investigation pending or, to the knowledge of any of the Champion Parties,
threatened against any of the Champion Parties or any affiliate of any of the
Champion Parties, by or before any federal, state, municipal, foreign or other
court or governmental or regulatory body, that: (i) seeks to restrain or enjoin
the consummation of the transactions contemplated by this Agreement; or (ii)
could reasonably be expected to have a material adverse effect on the ability of
any of the Champion Parties to consummate the transactions contemplated by this
Agreement. None of the Champion Parties and none of their affiliates is bound by
or subject to any existing order, judgment, injunction, award or decree of any
governmental or regulatory body which (1) restrains or enjoins the consummation
of the transactions contemplated by this Agreement; or (2) could reasonably be
expected to have a material adverse effect on the ability of any of the Champion
Parties to consummate the transactions contemplated by this Agreement.
8
<PAGE>
(1) MPLC can bear the economic risks of this investment and
can afford a complete loss of its investment in the Shares. MPLC has no present
or anticipated need for liquidity of its investment in HAYES.
(m) MPLC understands and acknowledges that HAYES has not made
and cannot make any representation or warranty as to the future operation or
financial forecast of HAYES, that any such discussion that any of the Champion
Parties may have had WITH HAYES OR its representative or agents may be incorrect
and may not be realized, that any such estimates or forecasts are based on
assumptions which may or may not occur, that no assurance can be given that the
actual results of operations or financial condition of HAYES shall conform to
any such estimates or forecasts, and that therefore no reliance can be placed
thereon
(n) Each of the Champion Parties understands the meaning and
legal consequences of the representations and warranties set forth in this
Agreement. Each of the Champion Parties certifies that each of the
representations and warranties set forth in this Section 12 is true and correct
as of the date hereof and shall survive the execution of this Agreement.
(o) No broker or finder has acted directly or indirectly for
any of the Champion Parties, nor has any of the Champion Parties incurred any
obligation to pay any brokerage fee, finder's fee or other commission in
connection with the transactions contemplated by this Agreement.
13. REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE HAYES PARTIES.
Each of the Hayes Parties hereby represents and warrants, jointly and severally,
to each of the Champion Parties as follows:
(a) It has not sold, hypothecated, mortgaged, assigned,
encumbered, transferred or otherwise disposed of any claim that it has or had
against any of the Champion Parties, or any Claim that is being released by it
pursuant to the terms of this Agreement.
(b) HAYES is a corporation duly organized, validly existing
and in good standing under the laws of the Commonwealth of Pennsylvania with
full corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. As of the date hereof, HAYES's
authorized capital stock consists of Four Million (4,000,000) shares of Common
Stock, of which Two Million Four Hundred Thousand (2,400,000) shares are issued
and outstanding.
(c) HAYES has full corporate power and authority to execute,
deliver and perform this Agreement and all other instruments and documents
required or contemplated hereunder, and to take all steps and to do all things
necessary and appropriate to consummate the transactions contemplated herein.
This Agreement has been duly authorized, executed and delivered by HAYES and is
a valid and binding obligation of HAYES, enforceable against it in accordance
with its terms.
9
<PAGE>
(d) W. Hayes and R. Hayes (together, the "Hayes Principals")
have the full personal power, right and authority to make, execute, deliver and
perform this Agreement and all other instruments and documents required or
contemplated hereunder, and to take all steps and to do all things necessary and
appropriate to consummate the transactions contemplated herein. This Agreement
has been duly authorized, executed and delivered by each of the Hayes Principals
and is a valid and binding obligation of each of the Hayes Principals,
enforceable against each of them in accordance with its terms.
(e) The execution, delivery and performance of this Agreement
shall not result in (i) the breach of or default under, with or without the
giving of notice or passage of time, or both, any mortgage, indenture, contract,
agreement or other arrangement to which any of the Hayes Parties is a party or
by which any of them or their respective properties may be bound, (ii) the
violation of any law, statute, rule, decree, order, judgment or regulation
binding upon any of the Hayes Parties, or (iii) (except as contemplated by this
Agreement) the creation or imposition of any lien or encumbrance on any of the
properties or assets of any of the Hayes Parties.
(f) This Agreement and all transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of HAYES
and constitute a legal, valid and binding obligation of HAYES enforceable
against it in accordance with its terms.
(g) The Shares, when paid for by and issued to MPLC in
accordance with the terms of this Agreement, shall be duly authorized, issued
and fully paid and non-assessable.
14. ISSUANCE OF STOCK.
(a) HAYES agrees that, between the date hereof and the
Expiration Date (the hereinafter defined), HAYES shall not issue any shares of
its capital stock: (i) to W. Hayes, any member of W. Hayes' immediate family or
an entity controlled by or under common control with W. Hayes, any such family
member or other such entity issued at a price less than $0.625 per share for
anything other than cash; and (ii) to anyone else at a price less than $0.625
per share, with the consideration therefor taking such form as the Board of
Directors of HAYES may deem appropriate.
(b) As used herein, the term "Expiration Date" shall mean the
earlier of: (i) the date on which HAYES closes on a public offering of its
Common Stock, with the foregoing restrictions not applying to the shares sold in
such public offering; or (ii) the date on which HAYES redeems the Shares in
accordance with Section 3 above.
15. RIGHT OF FIRST REFUSAL.
(a) MPLC agrees that it shall not sell, assign, transfer,
give, donate or otherwise dispose of, or pledge, deposit or otherwise encumber,
in any way or manner whatsoever, whether voluntarily or involuntarily, any of
the Shares now or hereafter owned (of record or beneficially) by it except as
expressly provided in this Agreement.
10
<PAGE>
(b) In no event shall MPLC sell, assign, transfer, give,
donate or otherwise dispose of, or pledge, deposit or otherwise encumber, in any
way or manner whatsoever, whether voluntarily or involuntarily, any or all of
the Shares to any other party prior to December 31, 1997. If, after such date,
MPLC desires to sell or otherwise dispose of any or all of the Shares that it
may own, then MPLC shall first obtain a bona fide written offer which it desires
to accept (the "Offer") to purchase any or all of such Shares. The Offer shall
set forth its date, the proposed price per Share, and the other terms and
conditions upon which the purchase is proposed to be made, as well as the name
and address of the prospective purchaser or purchasers. MPLC shall transmit
copies of the Offer to HAYES and to the Hayes Principals within seven business
days after its receipt of the Offer.
(c) Transmittal of the Offer to HAYES and the Hayes Principals
by MPLC shall constitute an offer by MPLC to sell any or all of the Shares
proposed to be purchased therein to HAYES and/or the Hayes Principals, in such
percentages as they may agree between themselves, at the price per share and
upon the other terms set forth in the Offer. For a period of 30 days after the
delivery of the Offer to HAYES and the Hayes Principals (the "Offer Period"),
HAYES and/or the Hayes Principals shall have the option, exercisable by written
notice to MPLC, to accept MPLC's offer to purchase any or all of the Shares
proposed to be sold therein.
(d) If, at the end of such 30-day Offer Period, HAYES and/or
the Hayes Principals have agreed to purchase any of the Shares so offered, then
MPLC shall sell such Shares to HAYES and/or the Hayes Principals at the price
per Share and upon the terms set forth in the Offer, settlement on such sale to
be made on a mutually agreeable date within 60 days thereafter.
(e) If, at the end of the 30-day Offer Period, HAYES and/or
the Hayes Principals have not agreed to purchase any of the Shares so offered,
then MPLC shall have the right, for a period of 90 days thereafter to sell the
balance of the Shares proposed to be sold in the Offer to the prospective
purchaser at the price per Share and upon the other terms and conditions set
forth in the Offer. If such Shares are not so sold within such 90 day period,
then MPLC shall not be permitted to sell such Shares without again complying
with this Section 15.
16. RESTRICTIONS ON RESALE. Notwithstanding any other term of this
Agreement, MPLC agrees that, for a period of at least five years from the date
hereof, it shall not, directly or indirectly, sell any of the Shares to any
developer, manufacturer or distributor of pharmaceuticals or medical devices,
and that, following the expiration of the foregoing restriction, the right of
first refusal set forth in Section 15 above shall apply to any such sale.
17. REAL ESTATE LEASE. HAYES and Champion shall cooperate to remove
Champion from the lease for the property located at 157 South Broad Street,
Lansdale, Pennsylvania (the "Premises"), as promptly as reasonably practicable
after the date hereof, including without limitation by signing such additional
documents as the landlord may request.
11
<PAGE>
18. FURNITURE AND EQUIPMENT. Following the execution of this Agreement,
HAYES may sell or otherwise dispose of the furniture and equipment currently
being stored for Champion (or any of the other Champion Parties) at the
Premises, including without limitation the Merlin telephone system stored at
that location. HAYES shall have no obligation whatsoever to account to any of
the Champion Parties with respect thereto.
19. FINANCIAL INFORMATION. Until the earlier of: (a) the date on which
HAYES redeems the Shares in accordance with Section 3 above; (b) the date on
which MPLC ceases to own any of the Shares; or (c) the date on which HAYES
closes on a public offering of its Common Stock; HAYES shall provide the
Champion Parties with a quarterly unaudited report, on a summary basis, setting
forth sales made by HAYES during the preceding quarter and HAYES' accounts
payable and accounts receivable outstanding as of the end of such quarter.
20. LEGAL FEES. The parties acknowledge that, in connection with
certain services rendered on behalf of HAYES by Robert J. Poulson, Jr., Esquire
("Poulson"), Poulson rendered an invoice dated February 4, 1997 in the aggregate
amount of $2,774.10. HAYES believes that it has been overbilled by Poulson for
services rendered. HAYES agrees that, upon the execution of this Agreement by
all of the parties hereto, HAYES shall attempt to settle its obligation to
Poulson for a sum less than that billed. InfoPlan agrees that it shall promptly
pay one-half of the settlement figure negotiated by HAYES.
21. CONFIDENTIAL INFORMATION. Promptly following the execution of this
Agreement, the Champion Parties shall, at their own expense, return to HAYES all
confidential and proprietary materials of or relating to HAYES in their
possession or under their control, including without limitation all copies of
"The HAYES Directory of New Medical Technologies' Status" and "The HAYES
Directory of Legal Precedent Reports".
22. ACTIONS BY THE AGENT.
(a) The Agent shall not be liable for any act taken or omitted
by it under this Agreement except for its gross negligence or willful
misconduct. The Agent shall be fully protected in relying upon any instruction,
notice, demand, certificate or document which it in good faith believes to be
genuine. The Agent may consult with legal counsel of its choosing at the expense
of the parties hereto as to the construction to any of the provisions of this
Agreement, and the Agent shall be fully protected in acting in good faith in
accordance with any such advice. The Agent shall not incur any liability if by
reason of any act or provision of any present future law or regulation or
governmental authority, or by reason of any act of God or war or other
circumstances beyond its control, the Agent shall be prevented or delayed in
performing any act required of it under this Agreement.
(b) The Agent's duties and responsibilities shall be limited
to those expressly set forth herein. This Agreement is for the exclusive benefit
of the parties hereto and their respective successors hereunder, and shall not
be deemed to give any legal or equitable right, remedy or claim to any other
entity or person whatsoever. If the Certificate that is subject to this
Agreement is at any time attached or levied upon, or in case the transfer or
delivery of such
12
<PAGE>
Certificate shall be stayed or enjoined, or in the case of any other legal
process or judicial order affecting such Certificate, then the Agent is
authorized to comply with any such order in any manner as it or legal counsel of
its own choosing deems appropriate. If the Agent complies with any such process,
order, writ, judgment or decree, it shall not be liable to any of the parties
hereto or to any other person or entity even though such order or process may be
subsequently modified or vacated or otherwise determined to have been without
legal force or effect.
(c) If a dispute or conflicting claim arises by or among the
parties hereto and/or any other person or entity with respect to the
Certificate, then the Agent may: (i) attempt to mediate a resolution of such
dispute between the parties, but need not do so; (ii) commence an interpleader
action or seek other judicial relief or orders as it may deem necessary;
provided, however, that, in order to provide the parties with an opportunity to
resolve such dispute among themselves, the Agent shall not institute any legal
action to resolve any such dispute for at least 30 days after the date on which
the Agent has been notified in writing of the existence of such dispute (unless
the parties otherwise agree); and/or (iii) refuse to act until either the
conflicting or adverse claims or demands shall have been finally determined by a
court of competent jurisdiction or settled by agreement between the parties as
evidenced in a writing satisfactory to the Agent or the Agent shall have
received security or an indemnity satisfactory to the Agent sufficient to hold
it harmless from and against any and all loss, liability or expense which it
might incur by reason of its acting. The Agent shall not be or become liable in
any way to the other parties hereto for its failure or refusal to comply with
any conflicting claims, demands or instructions.
23. NO DISQUALIFICATION. The parties agree that neither this Agreement,
nor any provision contained herein, nor any action taken by the Agent hereunder
shall disqualify Fox, Rothschild, O'Brien & Frankel or any lawyer who is a
partner or associate of such firm, including without limitation Tristram R.
Fall, III, Esquire, from representing HAYES or any of its officers, directors,
employees, shareholders or affiliates in connection with the making or
performance of this Agreement or any other agreement that may be entered into
between the parties, or in connection with any dispute that may arise under or
result from this Agreement or any other agreement that may be entered into
between the parties
24. PRESS RELEASES. Before any party hereto issues or releases,
directly or indirectly, any press release, marketing material or other
communication to or for the media, and before any party hereto files any
disclosure with the Securities and Exchange Commission, any state securities
commission and/or any other federal, state or local agency or authority, which,
in any such case, concerns or relates to the subject matter of this Agreement,
such party shall be required to provide a copy of such materials to all of the
other parties hereto at least ten days in advance of the proposed date of issue,
release or filing. No such material shall be issued, released or filed without
the prior written consent of all of the other parties hereto, such consent not
to be unreasonably withheld.
25. NO ADDITIONAL REPRESENTATIONS. Each party acknowledges that, except
as expressly set forth in this Agreement, neither party is making any
representation or warranty to the other concerning the subject matter hereof.
13
<PAGE>
26. MISCELLANEOUS.
(a) ASSIGNMENT; SUCCESSORS AND ASSIGNS. No party hereto may
assign or transfer this Agreement or any of its rights or obligations set forth
herein without the prior written consent of the other parties hereto. This
Agreement, and all rights and powers granted hereby, shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
(b) WAIVERS; AMENDMENTS. Any delay of forbearance by any party
in exercising any right hereunder shall not be deemed a waiver of that right. No
modification or amendment of this Agreement or waiver of any provision of this
Agreement shall be valid unless in writing and signed by all of the parties
hereto. No such modification or amendment shall, without the prior written
consent of the Agent, alter the provisions of this Agreement relating to the
rights, duties or obligations of the Agent.
(c) SEVERABILITY. The provisions of this Agreement are
independent of and severable from each other. No provision shall be affected or
rendered invalid or unenforceable by virtue of the fact that for any reason any
one or more of the other provisions hereof may be invalid or unenforceable in
whole or in part.
(d) HEADINGS. The titles of the Sections and subsections of
this Agreement are for convenience only and are not in any way intended to limit
or amplify the terms or conditions of this Agreement.
(e) COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and all of which when taken together shall constitute one Agreement.
This Agreement shall become binding when one or more counterparts hereof,
individually or taken together, shall bear the signatures of all of the parties
reflected hereon as the signatories hereto.
(f) NOTICES. All notices, requests, demands and other
communications required or permitted to be made hereunder shall be in writing
and shall be deemed duly given if hand delivered against a signed receipt
therefor, sent by registered mail, return receipt requested, first class postage
prepaid, or sent by nationally recognized overnight delivery service, in each
case addressed to the party entitled to receive the same at the address
specified below:
(i) If to any of the Champion Parties, then to:
Stephen J. Carder,
Chief Financial Officer
Champion Financial Corporation
9495 East San Salvador Drive
Scottsdale, AZ 85258
14
<PAGE>
With a copy, sent in the manner prescribed
above, to:
Zirk Englebrecht, President
InfoPlan, Inc.
11 Hillsyde Court
Cockeysville, MD 21030
(ii) If to any of the Hayes Parties, then to:
Winifred S. Hayes, President
HAYES, Incorporated
157 S. Broad Street
Lansdale, PA 19446
With a copy, sent in the manner prescribed
above, to:
Tristram R. Fall, III, Esquire
Fox, Rothschild, O'Brien & Frankel
2000 Market Street
10th Floor
Philadelphia, PA 19103
Any party may alter the address to which communications are to be sent by giving
notice of such change of address in conformity with the provisions of this
Section providing for the giving of notice. Notice shall be deemed to be
effective, if personally delivered, when delivered; if mailed, at midnight on
the seventh business day after being sent by registered mail; and if sent by
nationally recognized overnight delivery service, on the next business day
following delivery to such delivery service.
(g) GOVERNING LAW AND CHOICE OF FORUM. This Agreement and the
legal relations among the parties hereto shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, regardless of the
laws that might otherwise govern under applicable principles of the conflicts of
law thereof. The parties hereto hereby consent to the jurisdiction of the state
and federal courts sitting in Philadelphia, Pennsylvania, for the adjudication
of any dispute arising with respect to this Agreement. In the event that any
action should be brought by either party to enforce any of its rights under this
Agreement, the prevailing party in such action shall be entitled to have its
reasonable legal fees and court costs reimbursed by the other party hereto.
(h) EXHIBITS; SCHEDULES. All exhibits and schedules to this
Agreement, if any, are hereby incorporated by reference into, and made a part
of, this Agreement.
(i) ENTIRE AGREEMENT. This Agreement constitute the full and
entire understanding and agreement between the parties with regard to the
subject matter hereof and thereof, and supersede all prior and contemporaneous
agreements, understandings, inducements
15
<PAGE>
or conditions, express or implied, oral or written, except as herein contained.
The express terms hereof control and supersede any course of performance and/or
usage of trade inconsistent with any of the terms hereof.
(j) NO ADMISSION. This Agreement does not constitute an
admission of any kind whatsoever by any party hereto, each of which denies any
error or liability of any kind in connection with the dispute which is the
subject of this Agreement.
(k) BINDING AGREEMENT. Each of the parties hereto acknowledges
that it has read the terms of this Agreement, that it has consulted with legal
counsel concerning its terms and effect, and that it understands and voluntarily
enters into this Agreement, intending to be legally bound by its terms.
IN WITNESS WHEREOF, the parties hereto have caused this Settlement,
Release and Subscription Agreement to be executed by their duly authorized
agents on the day and year first above written.
CHAMPION FINANCIAL CORPORATION
By: /s/ Paul Caliendo
-----------------------------------
Paul Caliendo, President
MPLC, INC.
By: /s/ Marcy M. Engelbrecht
-----------------------------------
Marcy M. Englebrecht,
President
INFOPLAN, INC.
By: /s/ Marcy M. Englebrecht
-----------------------------------
Marcy M. Englebrecht,
President
RISK RESOLUTION GROUP
By: /s/ Marcy M. Englebrecht
-----------------------------------
Marcy M. Englebrecht,
Partner
16
<PAGE>
/s/ Marcy M. Englebrecht
---------------------------------------
Marcy M. Englebrecht
/s/ Zirk Englebrecht
---------------------------------------
Zirk Englebrecht
WINIFRED S. HAYES, INC.
By: /s/ Winifred S. Hayes
-----------------------------------
Winifred S. Hayes, President
Dr. Winifred S. Hayes
---------------------------------------
Dr. Winifred S. Hayes
Robert E. Hayes, Jr.
---------------------------------------
Robert E. Hayes, Jr.
JOINDER
The undersigned, intending to be legally bound hereby, and for other
good and valuable consideration, agrees to be bound by the terms of Sections 4
and 22 of the foregoing Settlement, Release and Subscription Agreement.
FOX, ROTHSCHILD, O'BRIEN & FRANKEL
By: /s/ Fox, Rothschild, O'Brien & Frankel
--------------------------------------
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Name State of Incorporation
- -------------------------------------------------------- ----------------------
National Health Benefits and Casualty Corporation Nevada
Three Rivers Provider Network Nevada
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MARCH 31, 1997, AND STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDING
MARCH 31, 1997, OF CHAMPION FINANCIAL CORPORATION AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 896,096
<SECURITIES> 0
<RECEIVABLES> 265,795
<ALLOWANCES> 15,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,161,306
<PP&E> 199,268
<DEPRECIATION> 41,159
<TOTAL-ASSETS> 1,409,210
<CURRENT-LIABILITIES> 440,572
<BONDS> 0
0
0
<COMMON> 5,473
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 2,286,208
<CGS> 0
<TOTAL-COSTS> 2,167,841
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 118,367
<INCOME-TAX> 15,000
<INCOME-CONTINUING> 103,367
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,367
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
