SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-KSB
(Mark One)
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________
Commission file number 0-11372
CHURCHILL TECHNOLOGY INC.
(Name of Small Business Issuer in Its Charter)
Colorado
84-0904172
(State or other jurisdiction
(I.R.S. Employer
incorporation or organization)
Identification No.)
181 Cooper Avenue, Tonawanda, New York
14150
(Address of Principal Executive Offices) (Zip
Code)
Registrant's telephone number, including area code: (716) 874-
8696
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.02 Par
Value
(Title of Class)
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 preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days. Yes X No __
Check if 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. [
]
Stated issuer's revenues for its most recent fiscal year.
$878,842
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which such stock
was sold, or the average bid and asked prices of such stock, as
of a specified date within 60 days prior to the date of filing.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of outstanding shares of Common Stock of the
Registrant as of December 11, 1995 was 99,930,311.
Transitional Small Business Disclosure Format (Check One):
Yes___ No X
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's definitive Proxy Statement to be filed within 120
days of the close of Registrant's fiscal year. Incorporated by
Reference in Items 9, 10, 11 and 12 of Part III of this Form 10-
KSB.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 2
Item 2. Description of Property 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of
Security Holders 5
PART II
Item 5. Market for Common Equity and
Related Stockholder Matters 5
Item 6. Management's Discussion and Analysis
or Plan of Operation 6
Item 7. Financial Statements 10
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 10
PART III
Item 9. Directors, Executive Officers, Promoters and
Control
Persons; Compliance with Section 16(a) of the
Exchange Act 10
Item 10. Executive Compensation 12
Item 11. Security Ownership of Certain Beneficial
Owners and Management 13
Item 12. Certain Relationships and Related
Transactions 14
Item 13. Exhibits and Reports on Form 8-K 14
PART I
ITEM 1. BUSINESS
The Company was organized under the laws of the State
of Colorado on March 16, 1983. From its incorporation until mid-
1987, the Company was primarily engaged in the business of
providing management and consulting services to affiliates,
subsidiaries, and new and existing companies. From 1987 through
1989, the Company essentially limited its activities to the
review and reorganization of companies involved in Chapter 11
bankruptcy proceedings. Such activity resulted in the Company
acquiring, through plans of reorganization, the assets of three
oil and gas companies and their affiliates and an equity position
in a fourth. During fiscal 1990, the Company acquired equity
positions in two oil and gas companies. In order to facilitate
these transactions, the Company incorporated Trans Energy, Inc.,
a wholly-owned subsidiary. In fiscal 1991, the Company
concentrated its efforts in providing to other companies, through
synergy of size, cost-effective and efficient comprehensive
management services in the areas of engineering, administration,
facilities and records management, and oil and gas accounting.
In fiscal 1993, the Company merged its wholly-owned subsidiary,
Churchill Italy, Inc., into Traiana, Inc., a Florida corporation
("Traiana"). Subsequently, Traiana distributed sixty percent
(60%) of the Company's ownership in Traiana to the Company's
shareholders.
On December 8, 1993, the Company exchanged 2.5 million
shares of its Common Stock for ten percent of the issued share
capital of Churchill Technology (Isle of Man) Limited ("CTI-
IOM"), an Isle of Man company which owned certain intellectual
property rights related to a process of manufacturing composite
polymeric articles referred to as "biodegradable" plastic. On
February 22, 1994, the Company exchanged 28,750,000 shares of its
Common Stock to acquire the remaining 90 percent of CTI-IOM. The
Company accounted for the transaction as a recapitalization of
the Company with CTI-IOM as the accounting acquirer (reverse
acquisition). On February 22, 1995, the Company assigned and
transferred all of the issued and outstanding capital stock of
CTI-IOM to a former officer of CTI-IOM. In exchange, Novon
International, Inc., a Delaware corporation, ("Novon") a recently
acquired merged company in the business of biodegradable
additives and compounds, was assigned all of the intellectual
property rights relating to biodegradable plastics.
As a condition precedent to the acquisition of CTI-IOM, a
separation of the assets of the Company was effected for the
benefit of the Churchill shareholders of record as of February
22, 1994 (the "Churchill Record Shareholders"). The Company
transferred all of the assets, property, subsidiaries,
investments, equity interests, cash, contract rights, royalty
rights and other rights owned or held by the Company immediately
prior to the closing date (the "Churchill Properties"), excluding
the ten percent (10%) of CTI-IOM acquired in December 1993, to
Churchill USA, Inc., a wholly-owned subsidiary of Churchill
("CUSA"). CUSA also assumed all liabilities associated with the
Churchill Properties. Concurrent with the acquisition of CTI-
IOM, the Company assigned 100% of the CUSA Common Stock to a
trust (the "CUSA Trust"). Wendy Cribari, former executive
officer of the Company, is the trustee under the CUSA Trust (the
"Trustee"). The CUSA Trust will hold the CUSA shares until
February 2001. The recipients of the total of 31,250,000 shares
of the Company's Common Stock issued in the CTI-IOM transaction
and any subsequent recipients of newly issued shares have
relinquished certain rights to the CUSA shares in favor of
Churchill Record Shareholders until February 2001.
On December 30, 1994, the Company, CUSA and the Trustee,
amended the CUSA Trust Agreement to clarify certain provisions
related to the shares and assets of CUSA and contingent
consideration to be paid to Churchill Record Shareholders. The
Amendment provided for the issuance of Series A Convertible
Preferred Stock (the "Convertible Preferred Stock") of the
Company to the Trustee to be held in trust until February 2001,
at which time the shares of Convertible Preferred Stock will be
converted, if possible pursuant to the designated terms of the
Convertible Preferred Stock, into shares of the Company's Common
Stock and distributed to the Churchill Record Shareholders. The
shares of Convertible Preferred Stock are convertible into shares
of Common Stock at the end of seven years based upon the fair
market value of the net assets of the Company, excluding CUSA,
divided by the Average Daily Common Share Value, as defined. See
"Description of Capital Stock -- Series A Convertible Preferred
Stock."
The Company's principal executive offices are located at 181
Cooper Avenue, Tonawanda, New York 14150 and its telephone number
is (716) 874-8696.
Recent Developments
Acquisition and disposition of Stark Industries, Inc./CHC.
On December 1, 1994, the Company entered into an agreement to
renegotiate and acquire all of the issued and outstanding shares
of Stark Industries, Inc., a Michigan corporation ("Stark") whose
sole asset is a 54% equity interest in Consolidated Health
Corporation of Mississippi, Inc. ("CHC"), a Mississippi
corporation for 4.0 million newly issued shares of common stock
of the Company and $300,000 cash. On July 13, 1995, the Company
sold its 54% interest in CHC for $825,000 cash and preferred
convertible stock of the purchaser.
Acquisition of Novon. Novon was incorporated in February
1994. In December 1994, Novon acquired biodegradable technology
from Warner-Lambert Company for $1,950,000 in cash. This
technology included patents, trademarks, copyrights and contract
rights. In January 1995, Ecostar International L.P. ("Ecostar
L.P."), a limited partnership in the business of biodegradable
additives and compounds, merged into Novon, with each of the
limited partners receiving a proportionate number of shares of
Novon for their interest in Ecostar L.P. On February 10, 1995,
the Company completed the acquisition of 100% of the issued and
outstanding stock of Novon. The former shareholders of Novon
received 11 million restricted shares of the Company's Common
Stock. Pursuant to the Agreement and Plan of Merger dated
February 10, 1995 among the Company, Novon and Novon Acquisition
Corp. (the "Acquisition Agreement"), the Company has agreed to
adjust the purchase price in the event that the sixty (60) day
average closing bid price of the Company's Common Stock as
reported by Nasdaq for the 60-day period preceding the one-year
anniversary of the closing is less than $1.00 per share. If such
event should occur, the Company has agreed to issue, within 30
days of the one-year anniversary, that number of additional
shares of the Company's Common Stock as is necessary so that the
aggregate value of all shares of Common Stock issued pursuant to
the Acquisition Agreement is equal to $11,000,000, but not to
exceed 11,000,000 additional shares.
At the time of the Novon acquisition, Robert Downie, the
Chairman, Chief Executive Officer, President and Director of the
Company was the beneficial owner of 5,432,000 shares of Common
Stock of Novon and the President and Director of Novon. Brian
Aldous, the Vice President -- Operations of the Company, Graham
M. Chapman, the Vice-President -- Technology of the Company, and
Richard
Meyers, the Vice-President -- Sales of the Company held similar
positions with Novon. At the time of the transaction, Mr.
Chapman was the beneficial owner of 72,000 shares of Common Stock
of Novon See "Business -- Recent Developments."
Products
Ecostar Technologies. The technologies developed by Ecostar
L.P. consist of an array of additive packages whose addition in
processing polyethylene, polypropylene and polystyrene degrades
such materials to a proven ultimate fate of CO2, water, and
biomass. This composition of polymers, starch, chemicals and
catalyst systems are specially formulated to provide accelerated
bio and photodegradation of plastic products. Such additives
provide a complete breakdown of polymers into biodegradable
residues.
Novon Technologies. The "Novon" technologies, developed by
the polymer product division of Warner Lambert consist of a
sophisticated grouping of compounds of proven biodegradability.
This entirely new polymeric range of materials is designed with
the prime objective of being completely biodegradable yet with
exceptional performance as plastic. Not only will the Novon
specialty polymers extrude and mold like orthodox plastics, they
will decompose like paper, leaves, and wood chips, leaving no
synthetic or toxic residues. The Novon specialty polymers are an
entirely new materials technology for packaging, food service,
waste bags and a host of other applications in a variety of
industries. Some grades of the Novon polymer disintegrate in
water and can be turned into products that are most suited to
flushing down the sewer or disposed of at sea. "Novon" is a name
established by Warner Lambert and recognized as a product of
quality and performance. Management of the Company believes its
availability will provide Churchill with commercial growth by
continuing the supply of product to the existing market and by
meeting the increasing international demand for a host of the
Company's degradable products.
Vertix Technologies. The Vertix technologies, the original
component of the Company, consist of a preferentially soluble
family of polymers which radically extends the production
possibilities of polyvinyl alcohol (P.V.A). Vertix and its line
of products is manufactured using technology based on the co-
processing of different grades of polyvinyl alcohols (P.V.A.)
from hydrolyzed Polyvinyl acetates, "raw" materials long
established in the polymer industry. Vertix combines useful and
environmentally beneficial properties of P.V.A. in a proprietary
process to produce a laminated film, each layer of which is
selected to meet the overall needs in terms of physical and
biodegradation properties and is thus "tailored" to a particular
product.
Major Customers
For the year ended September 30, 1995, two customers
accounted for 32 percent and 22 percent of total revenues,
respectively. As of September 30, 1995, two customers accounted
for 48 percent and 10 percent, respectively, of total trade
accounts receivable. The loss of any such customers may have a
material adverse effect on the Company.
Employees
At December 11, 1995, the Company had 30 full-time
employees.
Patents and Patent Applications
The Company through Novon, owns the rights to over 350
patents and patent applications worldwide.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases its administrative and
manufacturing facilities, located at 181 Cooper Avenue,
Tonawanda, New York. The lease provides for approximately 25,000
square feet at a base annual rent of $105,468. The lease expires
in October 1996 and has a five year renewal option.
ITEM 3. LEGAL PROCEEDINGS
The Division of Enforcement of the Securities and Exchange
Commission ("SEC") commenced a private investigation of the
Company and others in August 1995 (File No. H-3071), to determine
whether, since September 1993, any persons have engaged, are
engaged, or are about to engage in violations of the Federal
Securities laws.
The current management of the Company, which is cooperating
with the SEC in the private investigation, cannot at this early
stage determine whether any enforcement proceeding may be
instituted by the SEC against the Company or others or, if so,
whether any such enforcement proceeding would have a material and
adverse effect upon the Company, its business or its financial
position and condition.
The Company's subsidiary Novon, is a defendant in actions
involving the interpretation of license agreements relating to
its Ecostar technologies. Management and legal counsel for the
Company are of the opinion the Plaintiffs do not have the legal
capacity to commence the action, and filed a motion for the
dismissal of the action in 1993. The actions commenced by two of
the three plaintiffs were dismissed. The remaining plaintiff
must file an amended claim to continue the actions. To date,
there has not been an amended claim filed. Accordingly, based
upon the facts known to date, management and legal counsel
believe Novon has a meritorious defense to the actions asserted
against it and should prevail.
Except as set forth above, the Company is not a party to any
material litigation and is not aware of any pending or threatened
litigation that could have a material adverse effect on it or its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of security
holders during the fiscal year ended September 30, 1995.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of December 7, 1995, the Common Stock is traded on the
over-the-counter market. Previously, the Common Stock was traded
on The Nasdaq SmallCap Market, trading symbol "CHUR." On
December 6, 1995, the Nasdaq Listing Qualifications Committee
decided to remove the Company's Common Stock from listing on the
Nasdaq SmallCap Market.
The following table presents, on a quarterly basis, the
high and low bid quotations for the Common Stock as reported by
The Nasdaq SmallCap Market for the period from October 1, 1993
through September 30, 1995. Such quotations reflect inter-dealer
prices, without retail markup, markdown or commission and do not
necessarily represent actual transactions.
Period High Low
1993:
October 1 to December 31 7/8
9/32
1994
January 1 to March 31 2 23/32 1/2
April 1 to June 30 2 5/16
31/32
July 1 to September 30 1 5/16 5/8
October 1 to December 31 1 1/2
27/32
1995
January 1 to March 31 1 1/8 6/32
April 1 to June 30 23/32
1/4
July 1 to September 30 21/32 13/32
The number of record holders of the Common Stock as of the
close of business on December 11, 1995 was 1,185.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Liquidity and Capital Resources
The Company's acquisition strategy resulted in the
acquisition of CTI-IOM in February 1994, Stark in December 1994
and Novon in February 1995. The Company has issued a total of
46,250,000 of Common Stock to complete these acquisitions. (In
conjunction with the acquisition of Novon, the Company has agreed
to provide financing to Novon not to exceed $6.0 million.) This
financing will enable Novon to acquire additional manufacturing
equipment and capacity. A portion of the financing will be used
to satisfy working capital requirements. As of September 30,
1995, an amount of $3,755,923 has been advanced to Novon.
On March 28, 1995, the Company entered into a letter of
intent to sell its 54% interest in Consolidated Health
Corporation of Mississippi, Inc. ("CHC"). The transaction closed
on July 13, 1995 and the Company received $825,000 cash and
preferred convertible stock of the purchaser. This transaction
reflects management intent to exit the health care management
industry. The Company has no influence in the management of the
issuer of the preferred stock or its subsidiary entity.
In October 1994, the Company completed the sale of 1,000,000
shares of common stock which generated net proceeds of
approximately $577,000. The proceeds of these sales of Common
Stock were used for working capital.
In January 1995, the Company completed the offering of $2.25
million in convertible debentures. The net proceeds of
$2,025,000 were used to purchase patents, technology and
equipment relating to the polymer products division of Warner
Lambert. The convertible debentures bear interest at 6% and were
due on December 31, 1995. The debentures were convertible at the
option of the holder into common shares of the Company at a
discount of 25% to the closing bid price on the date of
conversion. In the year ended September 30, 1995, holders of the
$2.25 million of convertible debentures gave notice to the
Company of their demand to convert the debentures. The Company
issued 10,487,408 shares upon conversion of the debentures.
In May 1995, the Company entered into a private placement
agreement with an investment banking firm whereby the Company
raised net proceeds of approximately $1.6 million through the
issuance of 9,170,140 shares of restricted stock. Additionally,
the Company issued 2,100,000 shares valued at $687,500 to the
same investment banking firm as payment of investment banking
services rendered.
During the year ended September 30, 1995, the Company was
loaned $3,513,980 from two shareholders. During the year ended
September 30, 1995, the Company made payments of $2,913,980 on
these shareholder loans. In May 1995, one shareholder agreed to
convert loans in the amount of $1,030,000 into 5,493,000 common
shares of the Company. The loan was converted at a discount of
25% to the market price of the Company's common stock on the date
of conversion. Additionally, the Chief Executive Officer had
made loans to Novon prior to its acquisition by the Company. The
loans are due on demand and total $175,092 at September 30, 1995.
Also, the Chief Executive Officer has personal assets
collateralizing loans totalling $450,000 and personal guarantees
on loans totalling $2,446,816.
In May 1995, the Company settled a ten year consulting
contract through the issuance of 1,607,000 shares valued at
$450,000. The consulting contract was with a shareholder of the
Company whose services would no longer be necessary due to the
relocation of activities related to the biodegradable products
and patents to Novon.
In May 1995, the Company issued 1,000,000 shares valued at
$250,000 as severance pay to the former president of the Company.
In April 1994, the Board of Directors approved the issuance
of 4,350,000 shares of common stock as bonus compensation to the
former Chairman of the Board and Chief Executive Officer, all of
which have since been issued.
The Company entered into an agreement with a financial
consulting group to act as its financial advisor with respect to
identifying and evaluating various financing opportunities. The
financial consulting group will assist the Company in order to
raise working capital up to a minimum aggregate value of $10
million, and the Company will pay a fee equal to 10% of the
principal amount of financings. Furthermore, the Company agreed
to issue to the financial consulting group a total of 6,000,000
shares of common stock. The Company has paid cash commissions of
$107,680 through September 30, 1995 pursuant to this agreement.
On July 5, 1995, the Company issued 200,000 shares valued at
$100,000 in conjunction with commissions due. Additionally, on
July 5, 1995, the Company issued 6,000,000 shares valued at
$2,389,500 pursuant to this agreement. The Company has recorded
$479,334 in stock issuance costs which have been offset against
proceeds from sale of Common Stock in private offerings pursuant
to this agreement and it has recorded $1,910,166 as unearned
consulting fees.
In October 1995, the Company entered into an agreement with
Discovery Capital, Inc. ("Discovery Capital") for a $1,000,000
private placement of up to 4,000,000 shares of restricted Common
Stock of the Company. Each share of stock purchased through this
placement includes an option for a period of three years from the
date of the agreement to purchase one additional share of Common
Stock of the Company at an exercise price of $1.00 per share. To
date, the Company has sold 2,180,000 shares for net proceeds of
$517,750. Additionally, the Company is committed to pay
Discovery Capital a placement fee of ten percent of all capital
raised. Fifty percent of the placement fee is to be paid in
shares of the Company's restricted Common Stock. The private
placement terminates on December 26, 1995, or earlier if
determined by Discovery Capital. On December 20, 1995 the
Company entered into a modification agreement of the Discovery
Capital private placement which extends the option term to four
years and revises the exercise price to $0.72 per share.
Additionally, the Company has agreed to adjust the total number
of shares issued in the private placement if, at the one-year
anniversary of the placement, the bid price of the Company's
shares is below the original purchase price, up to an aggregate
maximum of shares equal to the original number of shares issued.
As of December 8, 1995 the Company has sold 2,740,000 shares for
net proceeds of $685,000.
The Company anticipates that it will satisfy its working
capital requirements from a combination of medium term
financings, working capital and trade lines of credit and, if
necessary, from proceeds of sales of Common Stock. The Company
also expects to establish license agreements and joint
development partnerships for its technologies in certain
geographical and product specific areas. The Company expects
these activities will generate additional working capital.
However, there can be no assurances that the operations of the
Company's subsidiaries will achieve profitability or that
additional financing will be available to the Company on terms
that will be acceptable to it.
Results of Operations
The consolidated statement of operations for the year ended
September 30, 1995 include the historical results of CTI-IOM
using the accounting treatment consistent with a reverse
acquisition. Accordingly, the historical statement of operations
for CUSA has not been included in the consolidated statement of
operations due, in part, to the CUSA investment being recorded on
the cost basis. The results of operations of Novon are included
from the acquisition date. Additionally, the results of
operating for Stark are included as discontinued operations due
to the sale of CHC.
Year Ended September 30, 1995 and 1994
Revenues
During the year ended September 30, 1995, the Company
recorded revenues of $878,842 related to sales of its
biodegradable and related products. These revenues represent
eight months of results of Novon subsequent to the acquisition on
February 10, 1995.
Expenses
During the year ended September 30, 1995, the Company
incurred cost of sales of $841,275. The costs of sales relates
entirely to raw materials, labor, direct and indirect
manufacturing cost, excluding depreciation, associated with the
production of Novon's biodegradable additives and compounds and
related products.
During the year ended September 30, 1995, the Company
incurred selling, general and administrative expenses of
$3,790,863. Of this total, approximately $2,415,516 related to
the operations of the parent company's executive offices which
are now integrated into Novon. Included in the year ended
September 30, 1995 were several non-recurring items such as
$250,000 severance to the former president of the Company, a
settlement of a long term consulting contract for $450,000 and
payment of investment banking fees of $687,500. All non-
recurring items noted above were paid in Common Stock of the
Company and did not require cash expenditures. An additional
$408,646 was incurred by CTI-IOM in conjunction with its office
and activities. In February 1995, the Company closed the offices
of CTI-IOM and the operations relating to it will now be operated
at the facilities of Novon. The remaining selling, general and
administrative expense of $966,701 was incurred by Novon.
In conjunction with the sale of CHC, the Company has
recorded the results of operations of CHC as discontinued
operations. Accordingly, the net loss of CHC for the seven
months from acquisition date of December 1, 1994 through July 13,
1995 of $58,770 is recorded as loss from discontinued operations.
This net loss was generated on revenues of $2,079,441 and
expenses of $2,187,772. Additionally, the Company recorded a
loss on disposal of discontinued operations of $2,665,484 to
reflect a write-down of its investment in and advances to CHC to
its estimated net realizable value.
Period Ended September 30, 1994 Compared With the Year Ended
September 30, 1993
In the year ended September 30, 1994, the Company recorded a
$1,000,000 write-down on its investment in CUSA.
The consolidated statement of operations for the period
ended September 30, 1994 includes the historical results of CTI-
IOM using the accounting treatment consistent with a reverse
acquisition. Accordingly, the historical statement of operations
for CUSA have not been included in the consolidated statement of
operations due, in part, to the CUSA investment being recorded on
the cost basis. Additionally, CTI-IOM had no results from
operations for the year ended September 30, 1993 and therefore,
comparisons between periods are not included.
Revenues
As of September 30, 1994, no material revenues have been
generated by CTI-IOM from the commercialization of the "bio-
degradable" plastic patents.
Expenses
General and administrative expenses were approximately
$687,000 for the period ended September 30, 1994. Of this total,
approximately $527,000 related to parent company activities such
as travel expenses and office expenses. The current fiscal
period experienced an increase over normal operating expenses due
to the relocation of the corporate offices from Lakewood,
Colorado to Delray Beach, Florida. Additionally, travel expense
was unusually high due to the activity related to the various
acquisitions and the different locations of the officers of the
Company. Additionally, CTI-IOM recorded approximately $160,000
in general and administrative expenses related to the operation
of its office in the Isle of Man.
Salaries and bonus expense was approximately $8,949,000 for
the period ended September 30, 1994. Included in this total was
a bonus expense of approximately $8,564,000 paid to the Chief
Executive Officer in recognition of his role in the recent
acquisitions and reorganization of the Company. This bonus was
payable in total through the issuance of 4,350,000 newly-issued
common shares of the Company.
Professional and consulting fees were approximately
$1,283,565 for the period ended September 30, 1994. Included in
this total was $462,520 for shareholder relations and mergers and
acquisitions consulting paid by the issuance of 400,000 common
shares in April 1994. Legal and accounting fees, management
consulting fees and shareholder relations fees were approximately
$312,045 and were incurred in relation to the acquisitions and
corporate reorganization. Also included was approximately
$509,000 of consulting fees related to consultants involved in
the commercialization, production and licensing of the Company's
bio-degradable plastics patents.
The Company recorded an allowance for notes receivable of
approximately $490,000 in the period ended September 30, 1994.
In conjunction with the Stark acquisition in April 1994, which
was amended in December 1994, the Company made loans of
approximately $879,000 to Stark and its subsidiaries and
affiliates. A reserve of approximately $340,000 was recorded on
these notes receivable.
The remaining reserve of $150,000 recorded in the period ended
September 30, 1994 relates to loans of approximately $301,000
made to an entity in which the Company owns certain distribution
rights.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of Churchill Technology
Inc. and its subsidiaries are filed as a part of this Annual
Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements between the Company and its
independent accountants on any matter of accounting principles or
practices or financial statement disclosure since the Company's
inception.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
The current executive officers and directors of the Company
are as follows:
Name Age
Position _
Robert H. Downie 71 Chairman, Chief Executive Officer,
President and Director
Gamal Marwan 27 Director
Graham M. Chapman 54 Vice President -- Technology
Brian Aldous 57 Vice President -- Operations
Bertha Mitchell 54 Vice President, Treasurer,
Secretary, Chief Financial Officer of
Churchill and Director
Richard Meyers 44 Vice President -- Sales
John J. Stanulonis 49 Vice President -- Marketing
Each director is elected to hold office until the next
annual meeting of stockholders and until his successor is elected
and qualified. All officers serve at the discretion of the Board
of Directors.
The following sets forth certain biographical information
with respect to the directors and executive officers of the
Company.
Robert H. Downie is Chairman, Chief Executive Officer,
President and Director. Mr. Downie joined the Company in
February 1995. Mr. Downie had been President and a Director of
Ecostar International, Inc. since its formation in 1989. In
1984, Mr. Downie founded and served as President of International
Imaging Materials, Inc. ("IIMAK"), a manufacturer of thermal heat
transfer ribbons whose stock is currently traded on the Nasdaq
National Market. Mr. Downie is a member of the Board of Trustees
of the Rochester Institute of Technology. Member Executive
Committee of Board at Webcraft Technologies.
Gamal Marwan is a Director of the Company. He is also
currently Vice President and a Director of Fima Capital
Corporation and the Chairman and Director of Fima Resources
Limited, an institutional investment group with offices in
Geneva, Switzerland and London, England. Mr. Marwan was
previously employed as a Financial Consultant with Merrill Lynch
International Bank. He is also a Director of Alpha International
Investments Limited, Taz Investment Corporation Limited and
Excess Investments Corporation, Ltd.
Dr. Graham Chapman has been the Vice President - Technology
since September 1995. He also serves as the Chairman of the
Technical Committee of the Society of the Plastics Industry's
Degradable Plastic Council. Dr. Chapman was previously employed
by Ecostar International, Inc. and its predecessor, from 1985
until 1993, where he served in various positions in the research
and marketing aspects of the business. Dr. Chapman received his
Ph.D. in Organic Chemistry from Cambridge University.
Brian Aldous has been the Vice President - Operations of
Novon since December 1994 and of the Company since September
1995. Prior to joining the Company, Mr. Aldous was one of the
founding officers of IIMAK. From 1983 to 1993, he held Vice
President positions in Manufacturing, Engineering and Development
at IIMAK. He was responsible for the technology transfer from
the licensor in Japan, all manufacturing equipment purchasing and
installation, and the design of the initial facility and three
expansions.
Bertha H. Mitchell is Vice President, Treasurer, Secretary,
Chief Financial Officer and a Director. She was previously with
Buffalo Ventures Inc., a venture capital firm and with Royal
Trust of Toronto, a financial services company. Ms. Mitchell
spent over 20 years with Citibank in the corporate finance field
with postings in Latin America, the U.S. and Canada.
Richard Meyers has been Vice President - Sales of Novon
since December 1994 and of the Company since September 1995. He
is responsible for international sales as well as the design of
totally biodegradable end products. Prior to joining Novon, Mr.
Meyers was employed by Ecostar International, Inc. where he
served in various positions in sales beginning in 1991. Prior to
then, Mr. Meyers worked for Sony Corporation Standard Electronics
in marketing and sales of new products.
John Stanulosis joined the Company in November 1995 as Vice
President -- Marketing and is responsible for business
development. He has more than 2.0 years experience in the oil,
chemical and environmental services business. Most recently he
was employed for six years with Chemical Waste Management as
general manager of one of its treatment, storage and disposal
facilities. Mr. Stanulosis received his Ph.D. in physical
organic chemistry from the University of Delaware.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following summary compensation table sets forth certain
information regarding compensation paid during each of the
Company's last three fiscal years to the persons serving as the
Company's Chief Executive Officer during the last year. Except
as set forth below, no executive officer's salary and bonus
exceeded $100,000 during any of the Company's last three fiscal
years:
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual
Compensation Awards
Other Restricted
All
Name and Principal Fiscal Annual
Stock Stock Other
Position Year Salary Bonus
Compensation<F1> Award(s) Options(#) Compensation
Robert Downie<F2> 1995 $98,077 0
$59,198 0 2,000,000
0
Chairman, Chief 1994 0 0
0 0 0 0
Executive Officer 1993 0 0
0 0 0 0
President & Director
Alexander Hamilton<F3> 1995 0
0 0 0 2,000,000
0
1994 $ 3,000 $8,564,003<F4>
0 0 0 0
1993 0 0 0
0 0 0
[FN]
_______________
(1) Does not include perquisites and other personal benefits
where the aggregate value of such compensation to the executive
officer is less than 10% of annual salary and bonus.
(2) Mr. Downie was elected Chief Executive Officer in May 1995.
(3) Mr. Hamilton resigned as Chief Executive Officer in May
1995.
(4) Represents the fair market value of an aggregate of 4,350,000
shares of restricted and unrestricted shares of the Company's
Common Stock issued to Mr. Hamilton as bonus compensation.
Option Grants in Last Fiscal Year
The following table sets forth information covering the
grant of options to acquire Common Stock in the last year to the
persons named in the Summary Compensation Table.
Options % of Total Options Granted
Exercise or Expiration
Name Granted to Employees in Fiscal Year
Base Price/Share Date
Robert Downie 2,000,000 50% $ .35
April 18, 1997
Alexander Hamilton 2,000,000 50% $ .35
April 18, 1997
Value of Options at September 30, 1995
Value of Unexercised
Shares Number of UnexercisedIn-the-Money O
ptions
Acquired on Value Options at FY-End(#) FY-End(1)
Name Exercise(#)RealizedExercisableUnexercisable Exercisable
Unexercisable
Robert Downie -0- -0- 2,000,000
- -0- -0- -0-
Alexander Hamilton -0- -0- 2,000,000
- -0- -0- -0-
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of September 30, 1995,
the beneficial ownership of Common Stock of all directors of the
Company, each of the executive officers of the Company named in
the Summary Compensation Table, all directors and officers of the
Company as a group, and each person who is known to the Company
to own beneficially more than 5% of the Company's Common Stock.
Amount of Percent
Name and Address of Beneficial Owner Nature of
Ownership of Class
Robert H. Downie 7,432,000<F1>
7.3%
181 Cooper Avenue
Tonawanda, New York 14150
Alexander Hamilton 5,450,000<F1>
5.3%
Riverside One, Heater Road
London SW11 4AN England
Bertha H. Mitchell -0- -
0-
181 Cooper Avenue
Tonawanda, New York 14150
Gamal Marwan 6,363,686<F2>
6.2%
181 Cooper Avenue
Tonawanda, New York 14150
All executive officers and directors as a group<F3>
13,867,686 13.6%
[FN]
_____________
(1) Includes stock options which are exercisable to acquire
2,000,000 shares.
(2) Such shares are indirectly owned through Fima Capital
Corporation Ltd.
(3) Includes all shares currently outstanding and those which
are not outstanding as of September 30, 1995, but which are
subject to issuance upon exercise of stock options. See
footnote (1).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has two demand notes totalling $175,092 payable
at September 30, 1995 to Robert Downie. Of that amount, $113,481
bears interest at 8 percent and $61,611 bears interest at 12
percent. Neither notes have payments due in fiscal 1996.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) The exhibits required to be filed by this report are
listed in the Exhibit Index which commences on page 15 hereof.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the last
quarter of the fiscal year ended September 30, 1995.
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
CHURCHILL TECHNOLOGY INC.
Dated: December 28, 1995
Robert H. Downie, Chairman
In accordance with the requirements of the Exchange Act, this
report is signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Name and Capacity Date
December 28, 1995
Name: Robert H. Downie
Title: Chief Executive Officer and
Director
December
28, 1995
Name: Bertha H. Mitchell
Title: Chief Financial Officer and Accounting
Officer and Director
December 28, 1995
Name: Gamal Marwan
Title: Director
EXHIBIT INDEX
Exhibit
Page
Number Document
Number
3.1 Restated Certificate of Incorporation
(1)
3.11 Designation of Series A Convertible Preferred
(3)
3.2 Bylaws (1)
10.1 Stock Purchase Agreement dated December 1,
1994 (2)
between and among the Company, Stark
Industries,
Inc. and the shareholders of Stark.
10.2 Amendment to CUSA Trust Agreement dated
(3)
February 16, 1994 between and among the
Company, Churchill U.S.A., Inc. and Wendy A.
Cribari.
10.3 Agreement and Plan of Merger by and among the
(4)
Company and Novon Acquisition Corp. and
Novon International, Inc.
10.4 Plan and Agreement of Merger by and among
Rx Medical Service Corporation and
Consolidated
Health Corporation of Mississippi, Inc.
21.1 Various Oil and Gas Disclosures of Churchill
U.S.A., Inc.
27.1 Financial Data Schedule
____________________________
(1) Filed as exhibit to the Current Report on Form 8-K dated
February 27, 1994, which is
incorporated by reference herein.
(2) Filed as exhibit to the Current Report on Form 8-K dated
December 23, 1994, which
is incorporated by reference herein.
(3) Filed as exhibit to the Annual Report on Form 10-KSB for the
year ended September 30,
1994 dated January 13, 1995.
(4) Filed as exhibit to the Current Report on Form 8-K dated
February 10, 1995, which is
incorporated by reference herein.
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Independent Auditor's Report F-1 - F-2
Consolidated Balance Sheet F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Shareholders' Equity F-6 - F-7
Consolidated Statements of Cash Flows F-8 - F-9
Notes to Consolidated Financial Statements F-10 - F-25
Index to Unconsolidated Financial Statements of Wholly Owned
Subsidiary
Independent Auditor's Report F-27
Consolidated Balance Sheet F-28 - F-29
Consolidated Statements of Operations F-30
Consolidated Statements of Shareholders' Equity F-31
Consolidated Statements of Cash Flows F-32 - F-33
Notes to Consolidated Financial Statements F-34 - F-46
INDEPENDENT AUDITOR'S REPORT
Shareholders and Board of Directors
Churchill Technology Inc.
Tonawanda, New York
We have audited the accompanying consolidated balance sheet of
Churchill Technology Inc. and subsidiaries (the "Company") as of
September 30, 1995 and the related consolidated statements of
operations, shareholders' equity and cash flows for the year
ended September 30, 1995 and for the period from December 8, 1993
(inception) to September 30, 1994. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based upon our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits 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 consolidated
financial position of the Company as of September 30, 1995 and
the consolidated results of their operations and their cash flows
for the year ended September 30, 1995 and for the period from
December 8, 1993 (inception) to September 30, 1994 in conformity
with generally accepted accounting principles.
Shareholders and Board of Directors
Page 2
The accompanying consolidated financial statements have been
prepared assuming the Company will continued as a going concern.
As discussed in Note B to the consolidated financial statements,
the Company has had recurring losses since its inception and has
a working capital deficit of $2,529,558 as of September 30, 1995.
As a result, the Company requires additional capital and cash
flow from operations to meet their obligations when due. These
conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to
these matters are discussed in Note B. The financial statements
do not include any adjustments that might result from the outcome
of these uncertainties.
Mitchell Finley and Company, P.C.
Certified Public Accountants
December 1, 1995
Denver, Colorado
Consolidated Balance Sheet
September 30, 1995
ASSETS
CURRENT ASSETS
Cash
$ 138,293
Accounts receivable - trade, less allowance for doubtful
accounts of $27,745 171,146
Interest receivable 4,533
Inventories 222,855
Prepaid expenses 22,531
559,358
PROPERTY AND EQUIPMENT, AT COST
Machinery and equipment 1,924,447
Furniture, fixtures and leasehold improvements 101,940
2,026,387
Accumulated depreciation and amortization (182,026)
1,844,361
Equipment under construction 550,758
2,395,119
OTHER ASSETS
Investments 6,458,010
Note receivable 150,000
Patents and related technology,
net of accumulated amortization of $709,022 10,206,633
Prepaid royalties 104,494
Other assets 60,972
16,980,109
TOTAL ASSETS $19,934,5
86
Consolidated Balance Sheet (Continued)
September 30, 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $1,015,788
Accrued liabilities 177,334
Notes payable - banks and other 1,022,927
Current portion - long-term debt 697,775
Notes payable - related party 175,092
3,088,916
LONG-TERM DEBT, LESS CURRENT MATURITIES 889,014
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock $1.00 par value; 5,000,000 shares authorized;
1,000,000 Series A shares issued and outstanding;
$6,000,000 liquidation preference 1,000,000
Common stock $.02 par value; 200,000,000 shares authorized;
99,830,306 shares issued and 99,348,306 shares outstanding
1,996,607
Additional paid-in capital 35,798,195
Unearned consulting fees (1,910,16
6)
Accumulated deficit (20,571,4
46)
Cumulative translation adjustment 4,966
16,318,156
Treasury stock, 482,000 shares, at cost (361,500)
15,956,656
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $19,934,5
86
Consolidated Statements of Operations
For the Year Ended September 30, 1995 and for the Period from
December 8, 1993 (inception) to September 30, 1994
1995
1994
REVENUES
Product sales $ 878,842
$
OPERATING EXPENSES
Manufacturing 841,275
General and administrative 3,445,014 10,919,439
Research and development 108,599
Marketing and selling 345,849
Depreciation and amortization 919,984 20,138
5,660,721 10,939,577
LOSS FROM OPERATIONS (4,781,879) (10,939,5
77)
OTHER EXPENSE (INCOME)
Interest expense 223,592
Interest and other income (31,599) (30,849)
Impairment of assets 120,958 1,000,000
Bad debt expense 353,937 489,697
666,888 1,458,848
LOSS FROM CONTINUING OPERATIONS (5,448,767) (12,398,4
25)
LOSS FROM DISCOUNTED OPERATIONS
Loss from discontinued operations 58,770
Loss on disposal of discontinued operations 2,665,484
2,724,254
NET LOSS $ (8,173,021)$ (12
,398,425)
LOSS PER SHARE OF COMMON STOCK
Loss from continuing operations $ (.08)
$(.35)
Net loss $ (.11)
$(.35)
WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING DURING
THE PERIOD 72,049,156
35,606,661
Consolidated Statements of Shareholders' Equity
For the Year Ended September 30, 1995 and for the Period from December 8, 1993
(inception) to September 30, 1994
Additional
Unearned Cumulative
Preferred Stock Common
Stock Paid-In Consulting Treasury
Accumulated Translation
Shares Amount ` Shares Amount Capital Fees
Stock Deficit Adjustment
ISSUANCE OF COMMON STOCK
FOR CASH $ 20,002 $ 2,810 $ $ $
$
RECAPITALIZATION UPON
REVERSE ACQUISITION 40,531,544 808,221 6,149,196
ISSUANCE OF SERIES A
PREFERRED STOCK 1,000,000 1,000,000
(1,000,000)
ISSUANCE OF COMMON STOCK
FOR CASH
Private offerings, net of stock
issuance costs of $262,626 2,371,212 47,424 2,930,364
ISSUANCE OF COMMON STOCK
FOR SERVICES
Bonus award 2,350,000 47,000 4,579,562
Consulting services 400,000 8,000 454,520
FOREIGN CURRENCY TRANSLATION $ 6,9
93
NET LOSS (12,398,425)
BALANCES, SEPTEMBER 30, 1994 1,000,000 $1,000,000 45,672,758 $ 913,455 $13,113,642
(12,398,425) $ 6,993
"See accompanying notes to consolidated financial statements."
Consolidated Statements of Shareholders' Equity
For the Year Ended September 30, 1995 and for the Period from December 8, 1993
(inception) to September 30, 1994
Additional
Unearned Cumulative
Preferred Stock Common Stock Paid-In Consulti
ng Treasury Accumulated Translation
Shares Amount Shares Amount Capital
Fees Stock Deficit Adjustment
ISSUANCE OF COMMON STOCK
FOR CASH
Private offerings, net of stock
issuance costs of $994,089 10,320,140 206,403 1,455,974
ISSUANCE OF COMMON STOCK
FOR SERVICES
Bonus Award 2,000,000 40,000 3,897,500
Severance payment 1,000,000 20,000 230,000
Compensation 50,000 1,000
9,828
Investment banking fees 8,000,000 160,000 2,917,000 (1,910,166)
ISSUANCE OF COMMON STOCK
FOR ACQUISITION
Stark Industries, Inc. 4,000,000 80,000 2,895,000
Novon International, Inc. 11,000,000 220,000 8,030,000 (361,500)
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR
Convertible debt, net of issuance
costs of $225,000 10,487,408 209,749 1,815,251
Shareholder loans 5,493,000 109,860 920,140
Accounts payable 200,000 4,000
96,000
ISSUANCE OF COMMON STOCK
IN SETTLEMENT OF CONSULTING
CONTRACT 1,607,000 32,140 417,860
FOREIGN CURRENCY
TRANSLATION (2,027)
NET LOSS (8,173,021)
BALANCES, SEPTEMBER 30, 19951,000,000 $ 1,000,000 99,830,306
$ 1,996,607 $ 35,798,195 $ (1,910,166)
$ (361,500) $ (20,571,446) $ 4,966
Consolidated Statements of Cash Flows
For the Year Ended September 30, 1995 and for the Period from December 8,
1993 (inception) to September 30, 1994
1995 1994
OPERATING ACTIVITIES
Net loss $ (8,173,021)
$(12,398,425)
Adjustments to reconcile net loss to net cash used
in continuing operations
Loss from discontinued operations 58,770
Loss on disposal of discontinued operations 2,665,484
Depreciation and amortization 919,984 20,138
Bad debt expense 353,937 489,697
Common stock issued for compensation and services 1,398,328
9,026,582
Common stock issued for interest expense 30,000
Write off of equipment 34,748
Impairment of assets 120,958 1,000,000
Other 14,985 6,851
Changes in operating assets and liabilities, net effect of
business combination:
(Increase) in accounts receivable (62,749)
(Increase) in interest receivable (4,360) (24,276)
(Increase) decrease in advances to related parties 24,772
(24,772)
Decrease in prepaid expenses 12,766
(Increase) in inventories (2,013)
Increase (decrease) in accounts payable (364,617)
188,346
Increase in accounts payable, related party 27,460
Increase in accrued liabilities 24,037 44,052
NET CASH USED IN OPERATING ACTIVITIES (2,947,991) (1,644,347)
"See accompanying notes to consolidated financial statements."
Consolidated Statements of Cash Flows (Continued)
For the Year Ended September 30, 1995 and for the Period from December 8,
1993 (inception) to September 30, 1994
INVESTING ACTIVITIES
Additions to property and equipment (102,819) (197,066)
Payments on notes receivable (136,000) (1,167,008)
Acquisition of subsidiary (315,000)
Proceeds from sale of subsidiary 825,000
Net cash of acquired company 287,905
Advances to affiliates (2,100,000)
Contributions to unconsolidated subsidiary
(200,000)
Increase in other assets (118,158)
NET CASH USED IN INVESTING ACTIVITIES (1,540,914) (1,682,232)
FINANCING ACTIVITIES
Proceeds from sale of common stock, net of offering costs
2,257,259 2,980,597
Proceeds from notes payable - related parties 3,523,980
400,000
Repayment of notes payable - related parties (3,062,369)
Proceeds from convertible debentures, net of debt
issue costs 2,025,000
Net proceeds from notes payable (60,620)
Repayment on long-term debt (65,955)
Repayment on capital lease obligations (44,115)
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,573,180 3,380,597
NET INCREASE IN CASH 84,275 54,018
CASH, BEGINNING OF PERIOD 54,018 -0-
CASH, END OF PERIOD $ 138,293 $ 54,018
"See accompanying notes to consolidated financial statements."
Notes to Consolidated Financial Statements
NOTE A - ORGANIZATION
Churchill Technology Inc. (the "Company") was organized under the laws
of the state of Colorado on March 16, 1983. From its inception until
fiscal 1994, the Company was involved in a variety of business
activities. In February 1994, the Company acquired a company which
had developed a proprietary technology in respect of biodegradable
plastics. In February, 1995, the Company acquired a recently merged
company, Novon International, Inc. ("Novon") and its wholly-owned
subsidiary, Ecostar AG, which is in the business of biodegradable
additives and compounds and accordingly, the Company is no longer a
development stage company as defined by SFASB No. 7. See Note C. The
Company is principally engaged in the development, manufacturing and
marketing of additives, compounds and resins which enhance the
degradation of plastic products.
NOTE B - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation The Company had a working capital deficit of
$2,529,558 as of September 30, 1995 and has recurring losses since its
inception. As a result, the Company's continued existence is dependent
upon obtaining additional capital and cash flow from operations to meet
its obligations when due. The accompanying financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
Management's plans with regard to the Company's ability to continue as
a going concern include on going negotiations to raise a mix of medium-
term mezzanine debt and equity financing, as well as working capital
and trade finance lines of credit to support revenue growth. The
Company is also negotiating to establish license agreements and joint
development partnerships for its technologies in certain geographical
and product specific areas.
Principles of Consolidation The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Translation of Foreign Currencies and Foreign Currency Transactions
Assets and liabilities of the Company's foreign subsidiary, Ecostar AG,
are translated at the rate of exchange in effect on the balance sheet
date; income and expenses, in general, are translated at the average
rates of exchange prevailing during the year. Transaction gains and
losses as a result of exchange rate changes on transactions denominated
in currencies other than the functional currency are included in
determining net income for the period incurred.
Notes to Consolidated Financial Statements (Continued)
NOTE B - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Statements of Cash Flows For purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Reclassifications Certain reclassifications have been made to the
1994 financial statements in order for them to conform with the 1995
presentation. Such reclassifications have no impact on the statement
of operations.
Inventories Inventories primarily consist of raw materials which are
stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
Property and Equipment Depreciation is calculated on the straight-
line method over the estimated useful lives of the assets which range
from five to ten years. Leasehold improvements are amortized on the
straight-line method over the shorter of the lease term or estimated
useful life of the asset. Maintenance and repair are expensed as
incurred. Major repairs and improvements are capitalized and assets
replaced are retired. When property and equipment are retired or
otherwise disposed of, the asset and accumulated depreciation or
amortization are removed from the accounts and the resulting profit or
loss is reflected in the statement of operations.
Patents and Related Technology Patents and related technology are
amortized on the straight-line method over the estimated economic life
of the patents of ten years. These capitalized costs are carried at
the lower of amortized cost or net realizable value. Permanent
impairments are evaluated periodically based upon expected future
discounted cash flows.
Unearned Consulting Fees The Company's policy is to recognize
unearned consulting fees in the period that the services are provided.
Advertising The Company expenses the production costs of advertising
the first time the advertising takes place.
Research and Development Research and development costs are expensed
as incurred. Research and development costs for the periods ended
September 30, 1995 and 1994 was $108,599 and $-0-, respectively.
Notes to Consolidated Financial Statements (Continued)
NOTE B - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Investments Investments are accounted for under the cost method of
accounting. The investments are evaluted periodically and carried at
the lower of cost or estimated net realizable value.
Net Income (Loss) Per Share of Common Stock The net income (loss) per
common share is computed based on the weighted-average number of shares
outstanding during each period. Common stock equivalents, such as
common stock options, are not considered in the earnings per share
calculation to the extent their inclusion would be antidilutive.
NOTE C - ACQUISITIONS AND DISPOSITIONS
Churchill Technology (Isle of Man) Limited On December 8, 1993, the
Company exchanged 2.5 million shares of its common stock for ten
percent of the issued share capital of Churchill Technology (Isle of
Man) Limited ("CTI-IOM"), an Isle of Man company which owns certain
intellectual property rights related to a process of manufacturing
composite polymeric articles referred to as "biodegradable" plastic.
On February 22, 1994, the Company exchanged 28,750,000 shares of its
common stock to acquire the remaining 90 percent of CTI-IOM. The
Company accounted for the transaction as a recapitalization of CTI-IOM
with CTI-IOM as the accounting acquiror (reverse acquisition).
Accordingly, the financial statements reflect the net assets and
shareholders' equity of CTI-IOM at their historical cost.
Additionally, upon application of the appropriate accounting treatment
for a reverse acquisition, the historical financial statements prior to
the acquisition date of February 22, 1994 are those of CTI-IOM.
CTI-IOM was incorporated subsequent to September 30, 1993 and therefore
there are no historical comparative financial statements of CTI-IOM
prior to its inception. Similarly, as there are no historical
comparative financial statements to be presented, no pro forma
information for this acquisition is presented.
Notes to Consolidated Financial Statements (Continued)
NOTE C - ACQUISITIONS AND DISPOSITIONS (Continued)
On February 22, 1995, the Company assigned and transferred all of the
issued and outstanding capital stock of CTI-IOM to a former officer of
CTI-IOM. In exchange, Novon was assigned all of the intellectual
property rights relating to "biodegradable" plastics. This transaction
reflects management's intent to consolidate and streamline its
biodegradable business. CTI-IOM was a development stage company as
defined by SFASB No. 7. The Company recorded a $2,958 loss from the
sale of CTI-IOM.
As a condition precedent to the acquisition of CTI-IOM, the Company
transferred all of the assets, property, subsidiaries, investments,
equity interests, cash, contract right, royalty rights, and other
rights owned or held by the Company immediately prior to the closing
date (the "Churchill Properties"), excluding the ten percent of CTI-IOM
acquired in December 1993, to a wholly-owned subsidiary of the Company,
Churchill USA, Inc., a newly-formed Colorado corporation ("CUSA").
CUSA also assumed all liabilities associated with the Churchill
Properties. Concurrent with the acquisition of CTI-IOM, the Company
assigned 100 percent of the CUSA common stock to a trust (the "CUSA
Trust"). The CUSA Trust will hold the CUSA shares until February,
2001. A former president of the Company is the trustee of the CUSA
Trust.
Additionally, the Company issued, assigned and deposited with the CUSA
Trust 1,000,000 Series A Convertible Preferred Shares for the benefit
of the Churchill shareholders of record as of February 22, 1994.
As a result of the provisions of the CUSA Trust Agreement, the Company
presently lacks significant influence or control over CUSA and,
accordingly, its investment in CUSA is accounted for using the cost
method. The original cost investment of CUSA was recorded as
$7,158,010, representing the historical basis net book value of CUSA.
Subsequently, a portion of CUSA's assets were impaired, and the Company
reduced the carrying value of its investment in CUSA by $1 million
during the period ended September 30, 1994 to reflect management's
estimate of net realizable value
Stark Industries, Inc. On December 1, 1994, the Company entered into
an agreement to negotiate and acquire all of the issued and outstanding
shares of Stark Industries, Inc. ("Stark"), a Michigan corporation,
whose sole asset is a 54 percent equity interest in Consolidated Health
Corporation of Mississippi, Inc. ("CHC"), a Mississippi corporation
that operates and manages three hospitals located in Mississippi, in
exchange for four million newly issued shares of common stock of the
Company and $300,000 in cash. The acquisition was accounted for using
the purchase method. Accordingly, the purchase price was allocated to
assets acquired based on their estimated fair values. This treatment
resulted in $4,110,310 of cost in excess of net assets acquired as of
December 1, 1994. Such excess will be amortized on a straight-line
basis over an estimated life of seven years.
Notes to Consolidated Financial Statements (Continued)
NOTE C - ACQUISITIONS AND DISPOSITIONS (Continued)
Stark Industries, Inc. (Continued) On July 13, 1995, the Company sold
its 54 percent ownership interest in CHC for $825,000 cash and 600,270
shares of preferred convertible stock of the purchaser with a carrying
value of $300,000 (Note I).
Novon International, Inc. In December 1994, Novon acquired
biodegradable technology from Warner-Lambert Company for $1,950,000 in
cash. This technology included patents, trademarks, copyrights and
contract rights. In January 1995, Ecostar International L.P. ("Ecostar
L.P"), a limited partnership in the business of biodegradable additives
and compounds, merged into Novon, with each of the limited partners
receiving a proportionate number of shares of Novon for their interest
in Ecostar, L.P. On February 10, 1995, the Company completed the
acquisition of 100 percent of the outstanding capital stock of Novon
International, Inc., a privately-held Delaware corporation incorporated
in February 1994. The shareholders of Novon received 10,518,000
restricted shares of the Company's common stock. Additionally, the
Company contributed 482,000 restricted shares to Novon. Pursuant to
the Agreement and Plan of Merger dated February 10, 1995 among the
Company, Novon and Novon Acquisition Corp. (the "Acquisition
Agreement"), the Company has agreed to adjust the purchase price in the
event that the sixty (60) day average closing bid price of the
Company's common stock as reported by Nasdaq for the 60-day period
preceding the one-year anniversary of the closing is less than $1.00
per share. If such event should occur, the Company has agreed to
issue, within 30 days of the one-year anniversary, that number of
additional shares of the Company's common stock as is necessary so that
the aggregate value of all shares of common stock issued pursuant to
the Acquisition Agreement is equal to $11,000,000 up to an aggregate
maximum of 11,000,000 additional shares of common stock. Novon
manufacturers and markets biodegradable additives and compounds and
related products. The acquisition was accounted for as a purchase and,
accordingly, the acquired assets and liabilities have been recorded and
consolidated at their estimated fair market values at the date of the
acquisition as follows:
Current assets and current liabilities, net $ (1,924,296)
Property and equipment 2,458,131
Patents and related technology10,751,898
Other assets 467,944
Long-term debt, less current maturities (1,197,437)
Notes payable, related party (2,306,240)
$8,250,000
Notes to Consolidated Financial Statements (Continued)
NOTE C - ACQUISITIONS AND DISPOSITIONS (Continued)
The results of operations of Novon have been included in the
consolidated statement of operations from the date of acquisition.
The following table presents the unaudited pro forma results of
operations as if the acquisition of Novon had occurred at the beginning
of fiscal 1995 and 1994. The pro forma results of Stark are not
included due to the sale of CHC. These pro forma results have been
prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisition been made as
of those dates or of results which may occur in the future.
1995 1994
Operating revenues $ 1,127,195 $
902,279
Net loss $ (8,944,394) $(14,905,208)
Net loss per share $ (.12) $
(.32)
NOTE D - NOTES RECEIVABLE
The note receivable of $150,000 is collateralized by a building and
represents consideration for the sale of a building, furniture and
equipment of the former offices of Churchill. This note bears interest
at 8 percent per annum with interest payable quarterly. The note is
due and payable in May, 1997.
NOTE E - INVESTMENTS
Investments at September 30, 1995 consist of the following:
Investment in unconsolidated subsidiary (Note C) $ 6,158,010
Investment in preferred convertible stock (Note C) 300,000
$6,458,010
For the periods ended September 30, 1995 and 1994, there are no
unrealized holding gains or losses related to the above investments.
Notes to Consolidated Financial Statements (Continued)
NOTE F - NOTES PAYABLE, BANKS AND OTHER
The Company's notes payable to banks and other at September 30, 1995
consist of the following:
Secured note payable (a) $397,100
Unsecured revolving loan account (b) 462,927
Note payable - Warner Lambert (c) 162,900
$1,022,927
(a) This note is under an agreement which provides for a maximum
borrowing amount of $450,000. As of September 30, 1995, borrowings
are restricted to $397,100. Borrowings bear interest at the prime
rate plus 1-1/2 percent (10.25 percent) at September 30, 1995.
Borrowings are collateralized by accounts receivable and a
subordinated interest in machinery and equipment. The note is due
on demand.
(b) The revolving loan account represents funds drawn on a demand
basis (limit of approximately $463,000 at September 30, 1995), with
interest at 8.5 percent at September 30, 1995. The loan is
reviewed annually by the Lender and the Company for renewal. The
next renewal date is on October 20, 1996.
(c) This note is under an agreement which provides for quarterly
installments of $54,300 through December 31, 1995. As of September
30, 1995, $108,600 is past due. This note is collateralized by
machinery and equipment.
NOTE G - LONG-TERM DEBT
Long-term debt at September 30, 1995 consists of the following:
1995
New York State Job Development Authority (a) $
1,024,650
Regional Development Corporation (b) 489,485
Capital lease obligations (Note H) 72,654
Total long-term debt 1,586,789
Less current installments 697,775
Long-term debt, excluding
current installments $ 889,014
Notes to Consolidated Financial Statements (Continued)
NOTE G - LONG-TERM DEBT (Continued)
(a) On December 1, 1995, the Company entered into a loan modification
agreement with the lender. The lender deferred the accrued
interest due under the loan until November 1999, the maturity of
the loan. Monthly principal payments of $17,985 plus interest
commence January 1, 1996. Interest is at the prime rate (8.75
percent at September 30, 1995).
(b) The loan bears interest at 8 percent and is payable in monthly
installments of $10,416, plus interest through June 1996. The
Company's loan obligation requires that the Company pay principal
and interest as due. The Company is required, among other things,
to comply with certain reporting requirements. At September 30,
1995, the Company was either in compliance with these provisions or
obtained applicable waivers. As of September 30, 1995, the Company
is not current with $145,824 of principal and, therefore, the
Company has classified the loan as current. Currently, the Company
is in the process of renegotiating the terms of this loan.
Substantially, all of the Company's assets are pledged as collateral
for borrowings. In addition, the President of the Company has personal
assets collateralizing loans totalling $450,000 and personal guarantees
on loans totalling $2,446,816.
The aggregate maturities of long-term debt for each of the five years
subsequent to September 30, 1995 are as follows: 1996 $697,775, 1997
$232,708, 1998 $225,158, 1999 $431,148, 2000 $-0-, and thereafter $-0-.
NOTE H - LEASED ASSETS AND LEASE COMMITMENTS
A summary of the Company's assets under capital leases follows:
1995
Equipment $ 205,999
Less accumulated amortization 17,914
Net assets under capital leases $ 188,085
Amortization expense was $17,914 for 1995.
Notes to Consolidated Financial Statements (Continued)
NOTE H - LEASED ASSETS AND LEASE COMMITMENTS (Continued)
At September 30, 1995, minimum payments dues under the Company's
noncancellable capital and operating leases are as follows:
Capital
Operating
Year Leases
Lease
1996 $ 52,311 $ 105,468
1997 19,245
1998 9,885
Total minimum lease payments 81,441 $ 105,468
Less interest inputed from 6% to 21% 8,787
Present value of net minimum lease payments $ 72,654
Interest expense related to capital leases amounted to $8,124 in 1995.
The Company has the option to renew the noncancellable operating lease
for an additional five-year term. Rent expense under all operating
leases was $74,567 and $20,151 in 1995 and 1994, respectively.
NOTE I - DISCONTINUED OPERATIONS
As discussed in Note C, the Company sold its 54 percent interest in
CHC. This transaction reflects management's intent to exit the health
care management industry. The Company has recorded a loss on disposal
of the segment of $2,665, 484. The following is a summary of the
operations of the discontinued business segment for the period from
December 1, 1994 (acquisition date) to July 13, 1995 (disposal date).
Revenues $2,079,441
Operating expenses 2,058,461
Other expenses 129,311
Loss from operations (108,331)
Minority interest 49,561
Net loss $(58,770)
Notes to Consolidated Financial Statements (Continued)
NOTE J - SUPPLEMENTAL DATA TO CONSOLIDATED STATEMENTS OF CASH FLOW
Excluded from the consolidated statements of cash flows for 1995 and
1994 were the effects of certain noncash investing and financing
activities as follows:
1995 1994
Issuance of common stock for acquisition
of Stark Industries, Inc. $2,975,000
Issuance of common stock for acquisition
of Novon International, Inc $8,250,000
Conversion of convertible debentures to
equity $2,250,000
Conversion of shareholders' loan to equity $ 1,000,000
Conversion of accounts payable to equity $ 100,000
Issuance of common stock for accrued
bonus $3,937,500
Issuance of common stock for unearned
consulting fees $1,910,166
Issuance of common stock for offering costs $ 479,334
Sale of office building, related furniture
and equipment for note receivable $150,000
Increase in accounts payable in connection with
additions to patents $
163,757
Equipment acquired through a capital lease obligation $ 16,890
Issuance of common stock for investment
in unconsolidated subsidiary $6,957,417
Cash paid for interest in the periods ended September 30, 1995 and 1994
was $112,380 and
$-0-, respectively.
Notes to Consolidated Financial Statements (Continued)
NOTE K - INCOME TAXES
The Company had no income tax provision and no income taxes were paid
for the period ending September 30, 1995 and 1994. Net deferred tax
assets applicable to temporary differences, net operating loss and
capital loss carryforwards are:
1995
1994
Investment in CTI-IOM $ $100,000
Investments and notes receivable 200,000 300,000
Basis in common stock issued for services 800,000 800,000
Capital loss carryforwards 100,000
Net operating loss carryforwards 2,500,000 1,100,000
Basis in patents and technology (1,560,000)
Total deferred tax assets 2,040,000 2,300,000
Valuation allowance (2,040,000)
(2,300,000)
Net deferred tax assets $ -0- $ -0-
During the year ended September 30, 1995, the Company's valuation
allowance for net deferred tax assets decreased by $260,000.
As of September 30, 1995, the Company had net operating loss
carryforwards and capital loss carryforward of approximately
$12,400,000 and $400,000, respectively. These loss carryforwards are
available for deduction from future taxable income, subject to rules
and regulations of the Internal Revenue Service that may reduce or
eliminate their utilization. If not used, the net operating loss
carryforwards will expire in 2010, and the capital loss carryforward
will expire in 2000.
Notes to Consolidated Financial Statements (Continued)
NOTE L - PREFERRED STOCK, COMMON STOCK, COMMON STOCK OPTIONS
Preferred Stock During fiscal 1994, the Company issued 1,000,000
Series A Convertible Preferred Shares ("Series A Shares"). The Series
A Shares were issued to the CUSA Trustee in accordance with the Amended
CUSA Trust Agreement dated December 30, 1994. The Series A Shares are
non-voting shares, are redeemable at the option of the Company up to
$5.00 per share and have a liquidation preference of $6.0 million. The
Trustee shall hold the Series A Shares in trust for a period of seven
calendar years until the expiration of the term of the CUSA Trust
Agreement, at which time the Series A Shares are entitled to conversion
into common stock of the Company.
The conversion of the Series A Shares will be based on a formula that
divides the Series A Designated Value, as defined, by the Average Daily
Common Share Value, as defined. The Series A Designated Value is
computed as the difference between $25,000,000 and the fair market
value of the Company's assets less the cost basis of such assets at the
expiration of the term of the CUSA Trust. However, the Series A
Designated Value cannot be less than $2,823,000. The Average Daily
Common Share Value is the average closing bid price of the Company's
common stock for a period of one year prior to the expiration of the
term of the CUSA Trust. In no event shall the conversion shares as
computed exceed 20 percent of the issued and outstanding common shares
of the Company on the date of conversion.
Common Stock Issued for Services During fiscal 1994, 400,000 shares
of the Company's common stock were issued in exchange for services
valued at $462,520. During fiscal 1995, the Company settled a ten-year
consulting contract through the issuance of 1,607,000 shares valued at
$450,000. During fiscal 1995, the Company issued 1,000,000 shares
valued at $250,000 as severance pay to the former president of the
Company and 50,000 shares valued at $10,828 as compensation to a former
employee of the Company. In April 1994, the Board of Directors
approved the issuance of 4,350,000 shares of common stock, of which
2,350,000 shares were issued as of April 30, 1994, as bonus
compensation to the former Chairman of the Board and Chief Executive
Officer. The remaining 2 million shares were issued in October 1994.
During fiscal 1995, the Company issued 2,000,000 shares valued at
$687,500 to an investment banking firm as payment of services rendered.
In addition, on July 5, 1995, the Company issued 6,200,000 shares
valued at $2,489,500 pursuant to an agreement with a financial
consulting group to act as its financial advisor. As of September 30,
1995, the Company has recorded $479,334 in stock issuance costs which
have been offset against proceeds from sale of common stock in private
offerings in the accompanying statement of shareholders' equity
pursuant to this agreement, and it has recorded $1,910,166 as unearned
consulting fees.
Notes to Consolidated Financial Statements (Continued)
NOTE L - PREFERRED STOCK, COMMON STOCK, COMMON STOCK OPTIONS (Continued)
Common Stock for Convertible Debt In January 1995, the Company
completed the offering of $2.25 million in convertible debentures. The
convertible debentures bore interest at six percent and were due on
December 31, 1995. The debentures were convertible at the option of
the holder into common shares of the Company at a discount of 25
percent to the closing bid price on the date of conversion. In the
twelve months ended September 30, 1995 holders of the $2.25 million of
convertible debentures gave notice to the Company of their demand to
convert the debentures. The Company issued 10,487,408 shares upon
conversion of the debentures.
Common Stock for Shareholder Loans In May 1995, one shareholder
agreed to convert loans including accrued interest, in the amount of
$1,030,000 into 5,493,000 common shares of the Company. The loan was
converted at a discount of 25 percent to the market price of the
Company's common stock on the date of conversion.
Common Stock for Accounts Payable In July 1995, the Company converted
$100,000 in accounts payable into 200,000 common shares of the Company.
Common Stock Options During fiscal 1988, the Company's Board of
Directors and shareholders approved an Incentive Stock Option Plan and
a Nonstatutory Stock Option Plan. The stock subject to the options
granted under both plans shall be either shares of the Company's
authorized but unissued shares of common stock, $.02 par value, or
shares of common stock reacquired by the Company. The Company has
reserved 1,600,000 and 200,000 shares for the Nonstatutory and
Incentive Stock Option Plans, respectively, the maximum number of
shares, subject to any provisions for stock splits or dividends, or any
other provisions outlined in each plan.
Notes to Consolidated Financial Statements (Continued)
NOTE L - PREFERRED STOCK, COMMON STOCK, COMMON STOCK OPTIONS (Continued)
Information with respect to stock options under these two plans are as
follows:
Incentive
Nonstatutory
Exercise Stock Exercise
Stock
Price Option Plan Price
Option Plan
Balances, September 30, 1993 $.40-$.94 140,000 $.89-$.94
120,000
Granted, 1994 $.3125 50,000$.3125-$1.00 620,000
Expired, 1994
Exercised, 1994 $.34 (50,000) $.59
(212,500)
Balances, September 30, 1994$40-$.94 140,000 $ .89-$1.00
527,500
Expired $.94
(17,500)
Balanced, September 30, 1995$40-$.94 140,000 $ .89-$1.00
510,000
Nonstatutory Stock Option Plan During fiscal 1994, options to
purchase 120,000 and 500,000 shares were granted under the Nonstatutory
Stock Option Plan, at exercise prices of $.3125 and $1.00 per share,
respectively. The option to purchase 120,000 shares at $.3125 was
converted to a stock award resulting in compensation expense of
$97,500. The option to purchase 500,000 shares expires in January
2004. Also, during fiscal 1994, options to purchase 92,500 shares were
converted to stock awards resulting in compensation expense of $75,156.
Of the options granted prior to fiscal 1994, options to purchase 17,500
shares expired in May 1995 and options to purchase 10,000 shares expire
in January 1998.
Incentive Stock Option Plan During fiscal 1994, options to purchase
50,000 shares under the Incentive Stock Option Plan were granted at
exercise prices of $.3125 per share. These options were converted to
stock award resulting in compensation expense of $40,625. The
remaining options expire between May 1998 and May 2000.
Notes to Consolidated Financial Statements (Continued)
Other Stock Options During fiscal 1995, the Company granted options
to its president and a shareholder each to purchase 2,000,000 shares of
the Company's common stock at an exercise price of $.35 per share.
These options expire April, 1997.
NOTE M - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Employment Agreements In previous years, the Company had entered into
employment agreements with its former presidents. The agreements
provided, among other things, that upon termination of their
employment, the Company would repurchase all of the Company's common
stock owned by the employee at a per share cost of the preceding 90-day
average bid price. As of September 30, 1995, the Company would be
obligated to purchase approximately 187,500 shares of common stock held
by its former presidents under the terms of their employment
agreements.
Commitment to CUSA The Company, pursuant to the terms of an agreement
between the Company and CUSA, is committed to pay to CUSA $325,000 of
proceeds received by the Company from options exercised under an
Employee Option Program registered pursuant to Form S-8 Registration
Statement. As of the date of this filing, no such options have been
exercised.
Licensing Agreements The Company has entered into certain patent and
technology licensing agreements which provide for the payment of
royalty fees. The Company will pay royalty fees ranging from two
percent to five percent on certain net sales through the later of the
life of the related patents or December 31, 2000.
Contingencies The Company's subsidiary Novon, is a defendant in
actions involving the interpretation of license agreements. Management
and legal counsel for the Company are of the opinion the Plaintiffs do
not have the legal capacity to commence the action, and filed a motion
for the dismissal of the action in 1993. The actions commenced by two
of the three plaintiffs were dismissed. The remaining plaintiff must
file an amended claim to continue the actions. To date, there has not
been an amended claim filed. Accordingly, based upon the facts known
to date, management and legal counsel believe Novon has a meritorious
defense to the actions asserted against it and should prevail. No
provision for any liability that may result from the actions has been
recognized in the accompanying financial statements.
The Securities and Exchange Commission ("SEC") commenced a private
investigation of the Company and others in August 1995 to determine
whether, since September 1993, there has been any violations of the
provisions of the Federal Securities law. The current management
Notes to Consolidated Financial Statements (Continued)
of the Company is cooperating fully with the SEC and cannot at this
stage form any opinion with respect to the effect of such an
investigation.
Notes Payables - Related Party The Company has two demand notes
payable at September 30, 1995 totaling $175,092. Of that amount,
$113,481 bears interest at 8 percent and $61,611 bears interest at 12
percent. Neither notes have payments due in fiscal 1996.
Consulting Fees and Reimbursable Expenses Consulting fees and
reimbursable expenses of $130,608 and $92,657 and $180,234 and
$261,532, respectively were paid by the Company to a stockholder of the
Company for the periods ended September 30, 1995 and 1994,
respectively. In May, 1995 the Company settled this consulting
contract through issuance of 1,607,000 shares of its common stock
valued at $450,000. The consulting agreement was with a shareholder of
the Company whose services would no longer be necessary due to the
relocation of activities related to the biodegradable products and
patents of Novon.
NOTE N - SIGNIFICANT CUSTOMERS
For the year ended September 30, 1995, two customers accounted for 32
percent and 22 percent of total revenues, respectively. As of
September 30, 1995 two customers accounted for 48 percent and 10
percent, respectively of total trade accounts receivable. The Company
performs ongoing credit evaluations of its customers' financial
conditions but does not require collateral to support customer
receivables.
NOTE O - FOURTH QUARTER DATA
During the fourth quarter of fiscal 1995, the Company made the
following adjustments which are considered material to the financial
statements taken as whole:
Under valuation of unearned consulting fees $1,910,166
Over valuation of stock issued for services $1,000,516
NOTE P - SUBSEQUENT EVENTS
Subsequent to September 30, 1995, the Company entered into an agreement
with an investment banking firm for a $1,000,000 private placement of
equity of up to 4,000,000 shares of restricted stock. Each share of
stock purchased through this placement includes an option for a period
of three years from the date of the agreement to purchase one
additional share of common stock of the Company at an exercise price of
$1.00 per share. To date, the
Company has sold 2,180,000 shares for net proceeds of $517,750.
Additionally, the Company is committed to pay the investment banking
firm a placement fee of ten percent of all capital raised. Fifty
percent of the placement fee is to be paid in shares of the Company's
restricted common stock. This private placement terminates on December
26, 1995, or earlier if determined by the investment banking firm.
Effective December 7, 1995, the Company's common stock was delisted
from The Nasdaq Smallcap Market and began trading in the Over the
Counter Market.
AUDITED FINANCIAL STATEMENTS
CHURCHILL U.S.A., INC.
YEAR ENDED SEPTEMBER 30, 1995
INDEPENDENT AUDITOR'S REPORT
Shareholder, Board of Directors and Trustee
Churchill U.S.A., Inc.
Lakewood, Colorado
We have audited the accompanying consolidated balance sheet of Churchill
U.S.A., Inc., a wholly-owned subsidiary of Churchill Technology Inc., and
subsidiaries as of September 30, 1995 and the related consolidated
statements of operations, shareholders' equity and cash flows for the
years ended September 30, 1995 and 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based upon 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
Churchill U.S.A., Inc. and subsidiaries as of September 30, 1995 and the
results of their operations and their cash flows for the years ended
September 30, 1995 and 1994 in conformity with generally accepted
accounting principles.
Mitchell Finley and Company, P.C.
Certified Public Accountants
November 16, 1995
Denver, Colorado
Consolidated Balance Sheet
September 30, 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $621,515
Accounts receivable:
Oil and gas sales 51,848
Joint interest owners, net of allowance for doubtful
accounts of $76,195 4,140
Limited partners 15,193
Related parties 48,458
741,154
PROPERTY AND EQUIPMENT, AT COST
Oil and gas properties (full cost method used for
oil and gas properties) 4,836,954
Office furniture and equipment 25,684
4,862,638
Less accumulated depletion and depreciation (2,131,386)
2,731,252
OTHER ASSETS
Investments 318,376
Note receivable, related party 24,465
Deposits and other 7,473
350,314
TOTAL ASSETS $3,822,720
"See accompanying notes to consolidated financial statements."
Consolidated Balance Sheet (Continued)
September 30, 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $124,873
Accounts payable, joint interest owners 154,675
Accrued vacation payable 20,973
Accrued expenses 28,025
Accounts payable to bankruptcy creditors 28,125
356,671
LONG-TERM DEBT 10,286
ACCOUNTS PAYABLE TO BANKRUPTCY
CREDITORS, NONCURRENT 36,458
MINORITY INTEREST 18,079
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock _ $.02 par value; 10,000,000 shares
authorized; no shares issued or outstanding _
Common stock _ $.001 par value; 20,000,000 shares
authorized; 9,301,546 shares issued and outstanding 9,302
Non-voting common stock _ $.001 par value; 10,000,000
shares authorized; no shares issued or outstanding _
Additional paid-in capital 10,009,673
Accumulated deficit (6,617,749)
3,401,226
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,822,720
Consolidated Statements of Operations
For the Years Ended September 30, 1995 and 1994
1995 1994
REVENUE
Oil and gas sales $ 317,915 $450,081
Management fee income from related party 382,945 483,997
Overhead income 67,265 113,717
Gain on extinguishment of debt _ 60,038
Gain on sale of trading securities _ 52,500
Unrealized holding gain on trading securities _ 28,050
Interest income 22,918 24,513
Other 10,293 23,391
801,336 1,236,287
COSTS AND EXPENSES
Lease operating expenses 194,361 315,167
Depletion, depreciation and amortization 117,663 130,284
General and administrative 638,397 750,928
Direct cost of mergers and acquisitions _ 371,115
Loss on investments 42,046 3,629,230
Bad debt expense, related party _ 105,868
992,467 5,302,592
NET LOSS BEFORE MINORITY INTERESTS (191,131) (4,066,305)
MINORITY INTERESTS IN LOSS OF SUBSIDIARIES 66,360 57,615
NET LOSS $ (124,771)
$(4,008,690)
PER SHARE DATA
Net loss per common share $ (.01) $
(.43)
WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE YEAR 9,301,546 9,225,536
Consolidated Statements of Shareholders' Equity
For the Years Ended September 30, 1995 and 1994
Additional
Common Stock Paid-
In Accumulated Valuation
Shares Amount Capital Deficit
Allowance
BALANCES, SEPTEMBER 30, 1993 8,980,999 $ 8,981 $9,545,595 $(2,484,288) $ (7,911)
CAPITAL CONTRIBUTION _ _ 200,000 _ _
ISSUANCE OF COMMON STOCK
For cash 25,000 25 17,975 _ _
For services 315,488 315 246,084 _ _
COMMON SHARES CANCELLED AND
RETIRED AT NO COST (19,941) (19) 19 _ _
REDUCTION OF VALUATION ALLOWANCE _ _ _ _ 7,911
NET LOSS _ _ _ (4,008,690)
_
BALANCES, SEPTEMBER 30, 1994 9,301,546 9,302 10,009,673 (6,492,978) _
NET LOSS _ _ _ (124,771)
_
BALANCES, SEPTEMBER 30, 1995 9,301,546 $ 9,302 $10,009,673 $(6,617,749) $_
Consolidated Statements of Cash Flows
For the Years Ended September 30, 1995 and 1994
1995 1994
OPERATING ACTIVITIES
Net loss $ (124,771)
$(4,008,690)
Adjustments to reconcile net loss to
net cash used in operating activities
Gain on extinguishment of debt _ (60,038)
(Gain) loss on sale of trading securities 42,046 (52,500)
Unrealized holding gain on trading securities _ (28,050)
Depreciation, depletion and amortization 117,636 130,284
Issuance of common stock for services _ 246,399
Minority interests in net loss of subsidiaries (66,360) (57,615)
Loss on investments _ 3,621,319
Reduction of valuation allowance,
investment in available-for-sale securities _ 7,911
Changes in operating assets and liabilities
Decrease in accounts receivable 23,745 58,665
Decrease in note receivable, related party _ 185,343
Decrease in other current assets _ 4,726
Decrease in accounts payable (19,843) (207,145)
Increase (decrease) in deferred revenue (40,000) 40,000
Increase (decrease) in accrued liabilities (8,760) 5,010
NET CASH USED IN
OPERATING ACTIVITIES (76,307) (114,381)
INVESTING ACTIVITIES
Additions to property and equipment (35,555) (29,522)
Proceeds from the sale of property and equipment 7,177 1,404
Advance to related party (24,465) _
Decrease in restricted cash _ 25,000
Proceeds from sale of trading securities 107,683 155,821
Acquisition of investment in affiliate _ (207,694)
Dispositions of investments _ 1,286
Decrease in deposits _ 10,154
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES $ 54,840 $ (43,551)
"See accompanying notes to consolidated financial statements."
For the Years Ended September 30, 1995 and 1994
Consolidated Statements of Cash Flows (Continued)
1995 1994
FINANCING ACTIVITIES
Capital contribution _ 200,000
Repayments of debenture obligations _ (25,833)
Repayments of accounts payable to bankruptcy
creditors (22,500) (41,087)
Proceeds from issuance of common stock _ 18,000
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (22,500) 151,080
DECREASE IN CASH AND
CASH EQUIVALENTS (43,967) (6,852)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 665,482 672,334
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 621,515 $665,482
"See accompanying notes to consolidated financial statements."
Notes to Consolidated Financial Statements
NOTE A _ ORGANIZATION
Churchill U.S.A., Inc. was incorporated on January 18, 1994 under the laws of
the State of Colorado. Churchill U.S.A., Inc. and subsidiaries (the Company)
is a wholly-owned subsidiary of Churchill Technology Inc. (the Parent). On
February 16, 1994, the Parent transferred all its assets, liabilities, and
operations to the Company. As a result, the Company assumed the prior
activities of the Parent, which was principally engaged in the acquisition and
operation of oil and gas properties. The transfer was accounted for in a
manner similar to a pooling of interests and, accordingly, the Company's
financial statements are presented using the Parent's historical costs and
historical results of operations for periods prior to February 16, 1994. All
references to the Company prior to February 16, 1994 relate to activities of
the Parent.
NOTE B _ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation _ The consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries, KTP Energy,
Inc., Churchill Energy, Inc. and Trans Energy, Inc. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The equity method of accounting is used for investments in affiliates over
which the Company exercises significant influence that are 20 percent to 50
percent owned. Significant intercompany transactions with affiliates
accounted for under the equity method, if any, have been eliminated and the
Company's share of net earning (or losses) included as a separate item in the
consolidated statement of operations.
Cash and Cash Equivalents _ The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Oil and Gas Properties and Depletion _ The Company accounts for oil and gas
properties using the "full cost" method. Under this method, all costs
associated with property acquisition, exploration and development activities
are capitalized. Oil and gas properties are depleted using the units-of-
production method based on the ratio of current period production to estimated
proved oil and gas reserves expressed in physical units, with oil and gas
converted to a common unit of measurement based upon their approximate
relative energy content. Gains or losses from the sale or abandonment of oil
and gas properties are charged or credited to the full cost pool, unless such
adjustments from the sale of oil and gas properties would significantly alter
the relationship between capitalized costs and proved oil and gas reserves.
Notes to Consolidated Financial Statements (Continued)
Capitalized costs less related accumulated depletion and deferred income taxes
may not exceed the sum of (1) the present value of future net revenue from
estimated production of
proved oil and gas reserves; (2) the cost of properties not being amortized,
if any; (3) the lower of cost or estimated fair value of unproved properties
included in the costs being amortized, if any; and (4) any income tax effects
related to differences in the book and tax basis of oil and gas properties.
Investments _ The Company uses the specific identification method to identify
the cost of its investments for purposes of computing realized gains or
losses.
Office Furniture and Equipment _ The Company depreciates office furniture and
equipment over their estimated useful lives (five years) using accelerated
methods.
Net Income (Loss) Per Share of Common Stock _ The net income (loss) per common
share is computed based on the weighted-average number of shares outstanding
during each year. Common stock equivalents, such as convertible subordinated
debentures, common stock options and warrants, are not considered in the
earnings per share calculation to the extent their inclusion would be
antidilutive.
NOTE C _ SUPPLEMENTAL DATA TO CONSOLIDATED STATEMENTS OF CASH
FLOWS
During the years ended September 30, 1995 and 1994, the Company paid interest
of $2,626 and $5,824, respectively.
Excluded from the consolidated statements of cash flows for the years ended
September 30, 1995 and 1994 were the effects of certain noncash investing and
financing activities as follows:
During the year ended September 30, 1995, the Company transferred $104,516
in certain oil and gas properties from its recorded basis in the full cost
pool to Investment in CSV Holdings, Inc. (Note I).
NOTE D _ OIL AND GAS PROPERTIES (UNAUDITED)
Aggregate Capitalized Costs _ The following presents the Company's aggregate
capitalized costs and the aggregate corresponding accumulated depletion
relating to oil and gas properties as of September 30, 1995:
Notes to Consolidated Financial Statements (Continued)
Unproved oil and gas properties$ -0-
Proved oil and gas properties 4,836,954
4,836,954
Accumulated depletion (2,106,410)
Net capitalized costs $2,730,544
NOTE D _ OIL AND GAS PROPERTIES (UNAUDITED)(Continued)
The Company's share of equity method
investees' net capitalized costs $ 1,492,377
Costs Incurred _ The Company's costs incurred in oil and gas property
acquisition, exploration and development activities, whether capitalized or
expensed, for the years ended September 30, 1995 and 1994 are as follows:
1995 1994
Acquisition of properties
Unproved $ -0- $ -0-
Proved -0- 10,000
Exploration costs -0- -0-
Development costs 53,472 52,647
$ 53,472 $ 62,647
Depletion, depreciation and amortization
of oil and gas properties $ 116,562 $ 124,728
Depletion, depreciation and amortization
of oil and gas properties per equivalent
mcf of production $ .53 $ .46
The Company's share of equity method
investees' costs incurred in oil and
gas property development $ 39,800 $ 185,358
Notes to Consolidated Financial Statements (Continued)
Oil and Gas Reserve Data _ The reserve information presented below is based
upon reports prepared by independent petroleum engineers. The Company
emphasizes that reserve estimates are inherently imprecise and that estimates
of new discoveries are more imprecise than those of producing oil and gas
properties. Accordingly, these estimates are expected to change as future
information becomes available.
Proved oil and gas reserves are the estimated quantities of crude oil, natural
gas and natural gas liquids, which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved developed
oil and gas reserves are those expected to be recovered through existing wells
with existing equipment and operating methods.
Presented below is a summary of the changes in estimated net proved, developed
and undeveloped oil and gas reserves of the Company, all of which are located
in the United States, for the years ended September 30, 1995 and 1994.
NOTE D _ OIL AND GAS PROPERTIES (UNAUDITED)(Continued)
1995 1994
Oil (bbl) Gas (mcf) Oil (bbl) Gas(mcf)
Proved reserves, beginning of year 829,631 4,594,601 562,839 5,642,727
Purchase of minerals in place -0- -0- -0-
- -0-
Extensions, discoveries and
other additions 2,681 177,225 170,131
545,596
Revisions of previous estimates 5,069 237,706 110,545
(1,374,297)
Production (8,536) (169,545) (13,270) (
194,134)
Sale of minerals in place (463,602) -0- (614)
( 25,291)
Proved reserves, end of year 365,243 4,839,987 829,631 4,594,601
Proved undeveloped reserves,
end of year 134,391 92,233 134,391 279,900
Proved developed reserves,
end of year 230,852 4,747,754 695,240 4,314,701
Total proved reserves 365,243 4,839,987 829,631 4,594,601
The Company's proportional interest
in reserves of investees accounted
for by the equity method, end of
year 569,826 1,732,500 310,607 1,733,970
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves _ Statement of Financial Accounting
Standards No. 69, "Disclosures About Oil and Gas Producing Activities,"
prescribes guidelines for computing a standardized measure of future net cash
flows and changes therein relating to estimated proved reserves. The Company
has followed these guidelines, which are briefly discussed herein.
Future cash inflows and future production are determined by applying year end
prices and costs to the estimated quantities of proved oil and gas reserves in
which the Company has a mineral interest. Estimated future income taxes are
computed using year-end statutory income tax rates, adjusted for permanent
differences. The resulting future net cash flows are reduced to present value
amounts by applying an annual discount factor.
The assumptions used to compute the standardized measure are those prescribed by
the Financial Accounting Standards Board and, as such, do not necessarily
reflect the Company's expectations of actual revenues to be derived from those
reserves nor their present worth.
NOTE D _ OIL AND GAS PROPERTIES (UNAUDITED)(Continued)
The limitations inherent in the reserve quantity estimation process, as
discussed previously, are equally applicable to the standardized measure
computations, since these estimates are the basis for the valuation process.
Standardized Measure of Discounted Future Net Cash Flows for the years ended
September 30, 1995 and 1994 are as follows:
1995 1994
Future cash inflows $12,326,837 $ 18,275,554
Future production and development costs (4,606,024)
(7,059,402)
Future net cash flows 7,720,813 11,216,152
Annual discount for estimated timing
of cash flows (3,310,622) (4,542,542)
Standardized measure of discounted
future net cash flows $4,410,191 $6,673,610
The Company's share of equity method investees'
standardized measure of discounted future
net cash flows $2,193,639 $2,452,713
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves (Continued) _ The principal sources of
change in the standardized measure of discounted future net cash flows for the
years ended September 30, 1995 and 1994 are as follows:
1995 1994
Balances, beginning of year $6,673,610 $6,029,311
Purchase of minerals in place -0- -0-
Sales of oil and gas produced, net of
production costs (164,417) (134,914)
Net changes in prices and production costs (3,699,367) 1,237,613
Extensions and discoveries, net of production costs 266,838
1,479,970
Sale of minerals in place (1,855,284) (32,270)
Revisions of previous quantity estimates 3,246,260
(1,674,755)
Accretion of discount (261,110) (76,588)
Net changes in future development costs 203,661 (154,757)
Net change in income taxes _ _
Notes to Consolidated Financial Statements (Continued)
NOTE D _ OIL AND GAS PROPERTIES (UNAUDITED) (Continued)
Balances, end of year $4,410,191 $6,673,610
NOTE E _ INCOME TAXES
At September 30, 1995, the Company had available net operating loss
carryforwards of approximately $2,200,000, depletion carryforwards of
approximately $976,000, and investment tax credit carryforwards of
approximately $70,000. The net operating loss and investment tax credit
carryforwards expire in various amounts through 2010 and 2002,
respectively. The depletion carryforwards may be carried forward
indefinitely. These carryforwards are subject to various limitations imposed
by the rules and regulations of the Internal Revenue Service.
As of September 30, 1995 and 1994, the components of deferred taxes are as
follows:
1995 1994
Oil and gas and other properties, net $ (419,946) $ (460,901)
Net operating loss carryforwards 440,559 348,877
Percentage depletion carryforward 195,266 183,725
Investment tax credit carryforward 68,972 68,972
Charitable contributions carryforward 631 631
285,482 141,304
Valuation allowance (285,482) (141,304)
Net deferred taxes $ -0- $ -0-
NOTE F _ ACCOUNTS PAYABLE TO BANKRUPTCY CREDITORS
Accounts payable, bankruptcy creditors as of September 30, 1995 is summarized
as follows:
Payable to taxing authorities in quarterly installments of
$5,625, noninterest-bearing $64,583
Less current portion 28,125
Accounts payable, bankruptcy creditors noncurrent $ 36,458
Notes to Consolidated Financial Statements (Continued)
NOTE G _ COMMON STOCK
During fiscal 1994, 52,988 shares of the Company's common stock were issued in
exchange for services valued at $33,118. Also during fiscal 1994, options to
purchase 262,500 shares of common stock, granted under stock option plans of
the Parent, were converted to stock awards resulting in compensation expense
of $213,281.
During fiscal 1994, the Company issued 25,000 shares of its common stock at
$.72 per share, under the terms of the Form S-8 Registration Statement filed
by the Company dated March 3, 1993, as amended June 15, 1993.
NOTE H _ COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Operating Leases _ The Company currently leases its office space under a five-
year noncancellable lease, which includes monthly rent escalating to a maximum
of $5,413 prior to its December 31, 1996 termination. Future minimum rental
payments required under operating leases, which have initial or remaining
noncancellable lease terms in excess of one year as of September 30, 1995, are
as follows:
1996 $ 64,191
1997 16,239
$ 80,430
Rent expense for the years ended September 30, 1995 and 1994 was $78,929 and
$52,793, respectively.
Service and Operations Agreement _ Caspen Oil, Inc. (Caspen), an entity in
which the Company has a 25 percent equity interest, entered into a Management
and Operations Agreement (the Agreement) with the Parent which was terminated
on March 31, 1994 and replaced by a Service and Operations Agreement (the
Service Agreement) between Summit Overseas Exploration, Inc., a wholly-owned
subsidiary of Caspen, and the Company, in effect through July 31, 1997. Under
the terms of the terminated Agreement, the Company provided financial and
operational management to Caspen, general corporate legal services, personnel
and office space necessary for the operations of Caspen for $45,000 per month.
Under the Service Agreement, the Company provides the same services,
management, personnel and office space for actual costs plus ten percent,
revised to five percent effective June, 1995, (the Costs), up to the computed
average of the preceding three months amount.
Notes to Consolidated Financial Statements (Continued)
Any costs in excess of the computed average of the preceding three months
amount are borne by the Company. Amounts charged under the agreements for
fiscal 1995 and 1994 were $382,945 and $483,997, respectively.
NOTE H _ COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (Continued)
Note receivable, related party _ In connection with the investment in CSV
Holdings, Inc. (CSV) (Note I), the Company advanced $24,465 to CSV under a
promissory note dated December 1, 1994, with principal and interest, at six
percent, due in full December 1, 1998.
NOTE I _ INVESTMENTS
CSV Holdings, Inc. _ Pursuant to an agreement dated September 20, 1994, and
finalized on December 1, 1994, between the Company, Summit Overseas
Exploration, Inc., a related party, and the Villiers Group plc, a public
limited company organized under the laws of Northern Ireland, each party
agreed to capitalize a newly formed company, CSV, a Colorado corporation, for
the purpose of administering certain oil and gas lease holdings (the Nukern
lease) of each to maximize the value of the lease. To this end, each party
transferred its respective working interest in the Nukern lease to CSV as its
share of the capitalization, along with a pari-passu working capital loan to
cover the estimated projected maintenance costs of the Nukern lease through
fiscal 1995. Of this, the Company transferred its 24.47% working interest for
which it received 28.3% of the common stock of CSV and a production loan of
$1,116,477. Principal and interest, at six percent per annum, on the
production note are payable beginning January 1, 1997, in quarterly
installments equal to 25 percent of the net production revenue from the
Company's working interest in the Nukern lease during each calendar quarter.
Due to the contingent nature of the production note, the Company has not
recorded this amount and will recognize principal and interest payments as
received. Accordingly, the Company transferred $104,516 from oil and gas
property to investment status, and recorded a note receivable in the amount of
$24,465. CSV has had minimal operations subsequent to acquiring the
properties, accordingly, the Company has no equity adjustment to its
investment through September 30, 1995.
Villiers Group plc _ At September 30, 1993, the Company owned 1,600,000 shares
of Villiers Group plc (Villiers), valued at $225,000 and classified as
available-for-sale securities under SFAS No. 115. Villiers is a public
limited company organized under the laws of Northern Ireland and traded on the
London Stock Exchange. During 1994, the Company sold 750,000 of its Villiers
shares for $155,821, recognizing a gain on the sale of $52,500. As a result
of the sale, the classification of the Company's investment in Villiers
changed to that of trading securities, a current asset. During fiscal 1994,
there was no gain
Notes to Consolidated Financial Statements (Contined)
NOTE I _ INVESTMENTS (Continued)
or loss included in earnings as a result of the transfer of securities from
the available-for-sale category into the trading category. Included in fiscal
1994 earnings is an unrealized holding gain of $28,050 on the Company's
investment in Villiers. During fiscal 1995, the Company sold the remainder of
its Villiers shares for $107,683, recognizing a loss on the sale of $42,046.
Caspen Oil, Inc. _ The Company owns 25 percent of the common stock of Caspen
Oil, Inc., through its wholly-owned subsidiary, Trans Energy, Inc., as well as
300,000 shares of Caspen Oil, Inc. Series C preferred stock and rights to a
royalty agreement between Caspen Oil, Inc. and a third party. As a result of
recording its proportional share of Caspen Oil, Inc. losses, the Company has a
zero basis in Caspen Oil, Inc. and has suspended recording their proportional
shares of earnings or losses under the equity method.
The Series C Preferred Shares are senior only to Caspen Oil, Inc.'s common
stock; earn dividends equal to those paid to Caspen Oil, Inc.'s common
shareholders; are convertible to common stock at the option of the holder at
the rate of one Series C Preferred Share to one common share between August 1,
1997 and August 1, 2002; and, on August 1, 2002, any outstanding Series C
Preferred shares are terminated and converted to one common share. Under the
royalty agreement, the Company is entitled to 10 percent of net revenues, as
defined by the royalty agreement, generated by certain assets owned by Caspen
Oil, Inc. As of September 30, 1995, no revenues have been generated under the
royalty agreement. During 1994, the Company, through its wholly-owned
subsidiary, Trans Energy, Inc., acquired a 35 percent interest (207,694
shares) in the Series A preferred stock of Caspen Oil, Inc., for $207,694.
The Series A preferred stock earns cumulative dividends at the rate of $1.80
per share; is convertible into Caspen Oil, Inc. common stock at the rate of
1.132 shares of common stock for each share of preferred stock; and is
redeemable at any time at the option of Caspen Oil, Inc. for $20 per share.
Traiana, Inc. _ During January 1993, Churchill Italy, Inc., a wholly-owned
subsidiary of the Company, was merged into Traiana, Inc. (Traiana), a
corporation incorporated on January 19, 1993, with Traiana being the surviving
corporation. Traiana issued 2,936,330 shares of its $.0001 par value common
stock in exchange for all of the issued and outstanding shares of common stock
of Churchill Italy, Inc. As part of a corporate spin-off of Traiana, Traiana
distributed 1,761,798 of the Company's shares of Traiana on a pro rata basis
to its shareholders. The Company retained a 40 percent interest in Traiana.
During July 1993, Photees, Inc., a public company, issued 5,872,460 shares of
its $.0001 par value common stock to acquire all of the issued and outstanding
common shares of Traiana. Thereafter, the separate corporate existence of
Traiana ceased. As a result, the Company had a 36 percent investment in
Photees, Inc. (Photees) at September 30, 1993.
Notes to Consolidated Financial Statements (Continued)
NOTE I _ INVESTMENTS (Continued)
Under the terms of a voting trust agreement, the Company vested the voting
power of its common shares of Traiana through December 31, 2000 in a voting
trustee, thereby relinquishing its ability to exercise significant influence
over Traiana. The voting trust provisions carried over to the Photees common
shares which replaced the Traiana common shares. As such, the Company's
investment in Photees was accounted for under the cost method of accounting at
September 30, 1993.
On June 2, 1994, the merger between Photees and Traiana was declared null and
void. As a result, the Company's investment reverted to the common stock of
Traiana with voting power vested in the voting trustee. The common stock of
Traiana does not presently trade on a listed exchange and due to the
uncertainty of the time frame in which the Italian assets can be developed
into income producing properties, the costs involved therewith, and disputed
encumbrances, the Company fully impaired its investment in Traiana during
fiscal 1994. Accordingly, the Company's investment in Traiana, recorded at
zero, was reduced to net vrealizable value by the recording during fiscal 1994
of a loss on investment of $3,621,319.
NOTE J _ EMPLOYEE BENEFIT PLAN
During fiscal 1994, the Company adopted a profit sharing plan (the Plan),
which is a defined contribution plan available for all employees who work over
1,000 hours during any fiscal year ending September 30.
Within the terms of the Plan, the Company has the option to contribute up to
15 percent of qualified individuals' annual earned compensation. An employee
vests according to the Plan's vesting schedule and is fully vested upon
completing five years of service. The Company's management determines the
Plan contribution by year end and funds the contribution after the fiscal year
end. Management contributed $13,800 and $15,000 for the years ended September
30, 1995 and 1994, respectively.