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