U. S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[ x ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
--------------------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from to
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Commission file number 0-19499
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Champion Financial Corporation
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(Exact name of small business issuer as
specified in its charter)
Utah 88-0169547
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
9495 E. San Salvador Drive
Scottsdale, Arizona 85258
(Address of principal executive offices)
(602) 451-8575
---------------------
(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date:
Common stock, $0.001 par value, 5,855,802 outstanding as of January 16, 1998
1
<PAGE>
Champion Financial Corporation
Index
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and
March 31, 1997 ............................................3
Consolidated Statements of Operations for the Three
Months and Nine Months ended December 31, 1997 and 1996 ...4
Consolidated Statements of Cash Flows for the Nine Months
ended December 31, 1997 and 1996 .........................5
Notes to Unaudited Consolidated Financial Statements ......6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................10
Part II: Other Information
Exhibits - None
Signatures ...............................................13
2
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1997 March 31,
(UNAUDITED) 1997
----------- -----------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 206,561 $ 896,096
Trade accounts receivable, less allowance for doubtful accounts of $15,000 239,469 250,795
Other current assets 26,130 14,415
----------- -----------
Total current assets 472,160 1,161,306
----------- -----------
Property and equipment, net 168,361 158,109
Investment in healthcare technology company (note 2) 309,626 --
Purchase cost not yet allocated (note 1) 9,184,405 --
Capitalized financing cost (note 1) 509,444 --
Other assets, at cost 84,092 89,795
----------- -----------
$10,728,088 $ 1,409,210
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 162,815 $ 267,351
Accrued expenses (note 1) 785,203 89,972
Current portion of long term debt (note 1) 300,000 --
Note payable (note 1) 130,486 24,340
Deferred revenue -- 58,909
----------- -----------
Total current liabilities 1,378,504 440,572
Long term liabilities:
Term loam (note 1) 2,200,000 --
Convertible debt (note 1) 4,000,000 --
----------- -----------
Total long term liabilities 6,200,000 --
----------- -----------
Total liabilities 7,578,504 440,572
Shareholders' equity:
Common stock, $.001 par value 100,000,000 shares authorized, 5,855,802 shares
issued and outstanding at December 31, 1997 and 5,473,302 at March 31, 1997 5,856 5,473
Additional paid -in- capital 3,093,015 874,897
Retained earnings (accumulated deficit) 50,713 88,268
----------- -----------
Total shareholders' equity 3,149,584 968,638
=========== ===========
Total liabilities and shareholders' equity $10,728,088 $ 1,409,210
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Repricing fees $ 588,258 $ 459,988 $ 1,732,549 $ 1,273,756
Member fees 109,735 34,060 347,805 176,803
Other fees 1,600 -- 12,185 --
----------- ----------- ----------- -----------
699,593 494,048 2,092,539 1,450,559
----------- ----------- ----------- -----------
Cost of services:
PPO network fees 164,134 149,040 496,766 504,695
Commissions 90,987 60,323 273,602 145,393
Billing refunds 10,541 (461) 17,893 16,880
Contact lens purchases 2,803 3,562 8,378 8,391
Other -- -- (112) --
----------- ----------- ----------- -----------
268,465 212,464 796,527 675,359
----------- ----------- ----------- -----------
Gross profit from operations 431,128 281,584 1,296,012 775,200
----------- ----------- ----------- -----------
General and administrative expenses:
Wages and related 277,204 176,861 745,446 421,606
Other operating 230,488 125,534 532,430 345,487
Depreciation 14,995 10,000 39,432 19,000
Amortization 12,457 922 16,259 1,522
----------- ----------- ----------- -----------
535,144 313,317 1,333,567 787,615
----------- ----------- ----------- -----------
Loss before income taxes (104,016) (31,733) (37,555) (12,415)
Income taxes (note 3) (10,000) -- -- --
----------- ----------- ----------- -----------
Net Loss $ (94,016) $ (31,733) $ (37,555) $ (12,415)
Retained earnings at beginning of period 144,729 104,219 88,268 84,901
----------- ----------- ----------- -----------
Retained earnings (accumulated deficit) at end of period 50,713 72,486 50,713 72,486
=========== =========== =========== ===========
Earnings(loss) per share: Basic $ (0.02) $ (0.03) $ (0.01) $ 0.01
=========== =========== =========== ===========
Diluted $ (0.02) $ (0.03) $ (0.01) $ 0.01
=========== =========== =========== ===========
Weighted average shares outstanding: Basic 5,539,823 2,200,000 5,495,556 2,200,000
=========== =========== =========== ===========
Diluted 5,539,823 2,200,000 5,495,556 2,200,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
Champion Financial Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended December 31,
1997 1996
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $ (37,555) $ (12,415)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 39,432 19,000
Amortization 16,259 1,522
Increase(decrease) in cash resulting from changes
in operating assets and liabilities:
Trade accounts receivable 11,326 (40,896)
Other current assets (11,715) (6,275)
Accounts payable (104,536) (22,496)
Accrued expenses 695,231 56,818
Deferred revenue (58,909) 58,909
----------- -----------
Net cash provided by operating activities 549,533 54,167
----------- -----------
Investing activities:
Purchases of equipment (49,684) (34,580)
Cash purchase cost not yet allocated (6,965,904) --
Investment in healthcare technology company (309,626) --
----------- -----------
Net cash used in investing activities (7,325,214) (34,580)
----------- -----------
Financing activities:
Proceeds from note payable and term loan 2,606,146 --
Issuance of convertible debt 4,000,000 --
Payment of financing cost (520,000) --
Distribution to Shareholders -- (100,000)
Increase in line of credit -- 50,000
----------- -----------
Net cash provided by (used in) financing activities 6,086,146 (50,000)
----------- -----------
Net decrease in cash and cash equivalents (689,535) (30,413)
Cash and cash equivalents at beginning of year $ 896,096 $ 34,577
----------- -----------
Cash and cash equivalents at end of period $ 206,561 $ 4,164
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
CHAMPION FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Description of Business
Champion Financial Corporation is a healthcare management company dedicated
to controlling the costs, improving the quality and enhancing the delivery
of healthcare services. The Company also provides related products and
services designed to reduce healthcare costs. The Company markets and
provides programs and services to insurance companies, self-insured
businesses for their medical plans and third parties that administer
employee medical plans. These programs and services assist its clients in
reducing healthcare costs for group health plans and for workers'
compensation coverage and automobile accident injury claims.
Business Combination
On December 15, 1997, the Company acquired all of the outstanding stock of
HealthStar, Inc.. The acquisition price is subject to certain contractual
adjustments, which are expected to be resolved by March 31, 1998. Through
December 31, 1997, the purchase price has been measured at $9,184,405. The
acquisition will be recorded using the purchase method and accordingly, the
purchase price will be allocated to the assets purchased and the
liabilities assumed based upon fair values at the date of acquisition. Any
excess of purchase price over the fair value of net assets acquired will be
recorded as goodwill.
Management of the company is in the process of determining the fair value
of the assets acquired and liabilities assumed which will be completed by
March 31, 1998. Accordingly, $9,184,405 has been recorded as Purchase Cost
Not Yet Allocated for interim financial statement reporting purposes.
The cash portion of the purchase was obtained through the following:
* $4,000,000 Series A 8% Senior Subordinated Convertible Redeemable
Debentures due December 3, 1999.
* $2,500,000 Term Loan at 8.5% secured by substantially all of the
assets of the company due March 31, 2001.
* $1,500,000 Revolving Line of Credit secured by substantially all of
the assets of the company due March 31, 2001.
At December 31, 1997, the Company did not have any borrowings under the
Revolving Line of Credit. The entire balance of the convertible debentures
is
6
<PAGE>
long-term. $300,000 of the term loan is due by December 31, 1998.
Champion incurred $520,000 of financing costs in placing the convertible
debt and term loan. This cost has been capitalized and will be amortized
over the term of the related debt.
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. Results of
operations during interim periods are not necessarily indications of annual
operating results.
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. The excess of purchase price over fair value of assets
acquired is amortized on a straight-line basis over a 15-year period.
Cash Equivalents
Cash equivalents of $16,904 at December 31, 1997 consist of money market
accounts with the Company's primary financial institution. The Company
considers all highly liquid instruments with original maturities of three
months or less to be cash equivalents.
Earnings (loss) per Share
Earnings (loss) per share are based upon the weighted average number of
shares of common stock. The effect of common stock equivalents is
antidilutive.
7
<PAGE>
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.
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. The Company's
customers are located throughout the United States. Four customers
accounted for the majority of the company's revenues.
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 healthcare provider
of their required billing reduction. PPO network fees are paid to regional
providers, who are not contracted directly with the company for access to
their networks. Commissions are paid to external and internal brokers based
upon a percentage of fees generated.
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.
8
<PAGE>
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 exceeds the fair value of the assets.
(2) Investment in Healthcare Technology Company
In May 1997, the company paid $309,626 to purchase a 12.4% interest in
Hayes, Inc., that is a nationally recognized leader in medical technology
assessment. Hayes is a full-service company providing products and services
in the areas of medical technology assessment, legal precedent reporting
and analysis, custom reporting, individual case review and consulting. The
investment in the common stock of Hayes is accounted for by the cost method
which is believed to approximate fair value.
(3) Income Taxes
At December 31, 1997, the Company has available net operating loss
carryforwards of approximately $500,000 and capital loss carryforwards of
approximately $1,000,000. There are certain limitations and restrictions on
the use of these losses; however, management expects to fully offset
federal income taxes in the current fiscal year. State and local taxes are
recognized as incurred.
The acquisition of HealthStar did not result in any book-tax basis
differences. Management believes that the state net operating loss
carry-forwards recorded by HealthStar will not be available to the
consolidated entity.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the financial statements and
footnotes for the quarter ended December 31, 1997 and the year ended March 31,
1997 contained in the Company's Form 10-K filed with the Securities and Exchange
Commission on June 27, 1997.
The managed healthcare cost containment industry is highly fragmented, with a
large number of competitors. The Company does not believe that any single
company commands significant market share. The management of the Company
believes the level of competition will continue to increase in the future. Most
of the Company's competitors are national managed care providers, insurance
companies, HMOs, and third-party administrators that have implemented their own
managed care programs. Several large insurance companies for workers'
compensation, health and automobile have also implemented their own
cost-containment programs through the carrier's own personnel. Many of the
Company's current and potential competitors are significantly larger and have
greater financial, technical, marketing, and management resources than the
Company.
The Company competes on the basis of its specialized knowledge and expertise in
the managed healthcare services industry and on its ability to deliver effective
services to the customer with a high level of customer satisfaction at a very
affordable price. There can be no assurance that the Company will be able to
compete successfully. The managed healthcare industry has experienced
significant changes in recent years, primarily as a result of rising healthcare
costs. The Company will be required to respond to various competitive factors
affecting the healthcare industry, including new medical technologies that may
be introduced; general trends relating to demand for healthcare services;
regulatory, economic, and political factors; changes in patient demographics;
and competitive pricing strategies by HMOs and other healthcare plans.
RESULTS OF OPERATIONS
The company's consolidated revenues for the quarter ended December 31, 1997 were
$699,593 compared to $494,048 for the quarter ended December 31, 1996, an
increase of $205,545 or 42%. Net revenues for the nine months ended December 31,
1997 increased $641,980 or 44% to $2,092,539 compared to $1,450,559 for the nine
months ended December 31, 1996.
10
<PAGE>
The company had a net loss of $94,016 in the quarter ended December 31, 1997
compared to a net loss of $31,733 for the quarter ended December 31, 1996, an
increase of $62,283. Net earnings for the nine months ended December 31, 1997
decreased $25,140 to ($37,555) compared to ($12,415) for the nine months ended
December 31, 1996. The loss for the quarter and nine months was due to a
write-down of $69,739 in receivables, and an increase in amortization and
interest expense.
COST OF SERVICES
The company's cost of services consist 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 26% in the
quarter, to $268,465 compared with $212,464 in the quarter ended December 31,
1996. Cost of services for the nine months ended December 31, 1997 increased 18%
to $796,527 compared with $675,359 in the nine months ended December 31, 1996.
Cost of services as a percentage of revenue for the nine months ended December
31, 1997, decreased to 38% from 47% from the nine months ended December 31,
1996. The improvement is the result of the company's ongoing effort to contract
directly with the healthcare facilities and providers, thereby reducing network
provider access fees as a percentage of revenue.
GENERAL AND ADMINISTATIVE EXPENSES
For the quarter ended December 31, 1997, general and administrative expenses
were $535,144 compared to $313,317 for the quarter ended December 31, 1996.
General and administrative expenses for the nine months ended December 31, 1997
were $1,333,567 compared with $787,615 for the nine months ended December 31,
1996. This increase was due primarily to expenses for additional management and
administrative personnel to accommodate the increase in business and expected
growth. The company expects general and administrative expenses to increase in
future periods.
LIQUIDITY & 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.
On December 15, 1997, the company acquired HealthStar, Inc. based in Chicago,
Illinois. HealthStar is a diversified healthcare and financial services company
with over 17 years experience in the formulation and management of PPO networks.
HealthStar
11
<PAGE>
employs over 220 people and operates managed care networks in the Midwest,
Southeast and Southwest regions, covering 23 states and 1.5 million lives. The
HealthStar PPO network includes approximately 1,500 hospitals and 65,000
physicians.
In connection with this acquisition, the Company issued $4,000,000 Series A 8%
Senior Subordinated Convertible Redeemable debentures. The entire proceeds of
the issuance and the debentures were utilized in the acquisition. Beginning on
January 17, 1998, the debentures are convertible into common shares of the
Company's stock based upon a formula related to the market price of the stock.
In the event that the entire amount of the debentures have not been converted
prior to the maturity date of December 3, 1999, the debentures will
automatically convert to common shares of the company on the said maturity date.
In addition, the company secured a $1,500,000 line of credit with Harris Trust
and Savings Bank. The line of credit is secured by substantially all of the
assets of Champion and its subsidiaries, including HealthStar. The company
anticipates the line of credit will be sufficient to meet its cash flow needs
for the next year of operations.
Although there can be no assurances, management of the Company anticipates
growth and expansion to continue 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
may be required in conjunction with any such acquisition activity. There can be
no assurance that the Company may be able to obtain such funds on terms
acceptable to the Company, in which case there would be no cash utilized in the
acquisition. Management currently believes that cash on hand, available sources,
and anticipated operating results will produce sufficient cash flow for the next
year of operations.
12
<PAGE>
CHAMPION FINANCIAL CORPORATION
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Champion Financial Corporation
DATE: January 29, 1998 BY: /S/ STEPHEN J. CARDER
STEPHEN J. CARDER
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
AND TREASURER
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1997, AND STATEMENT OF INCOME FOR THE NINE MONTHS
ENDING DECEMBER 31, 1997, OF CHAMPION FINANCIAL CORPORATION AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 206,561
<SECURITIES> 0
<RECEIVABLES> 239,469
<ALLOWANCES> 15,000
<INVENTORY> 0
<CURRENT-ASSETS> 472,160
<PP&E> 248,952
<DEPRECIATION> (80,591)
<TOTAL-ASSETS> 10,728,088
<CURRENT-LIABILITIES> 1,378,504
<BONDS> 0
0
0
<COMMON> 5,856
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 2,092,539
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,130,094
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (37,555)
<INCOME-TAX> 0
<INCOME-CONTINUING> (37,555)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,555)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
