SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-KSB/A-1
(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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<TABLE>
<CAPTION>
Period High Low
<S> <C> <C>
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
</TABLE>
The number of record holders of the Common Stock as of the
close of business on December 11, 1995 was 1,185.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Name Age
Position _
<S> <C> <C>
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
</TABLE>
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
[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.
<PAGE>
<TABLE>
<CAPTION>
Options % of Total Options Granted
Exercise or Expiration
Name Granted to Employees in Fiscal Year
Base Price/Share Date
<S> <C> <C> <C> <C>
Robert Downie 2,000,000 50% $ .35
April 18, 1997
Alexander Hamilton 2,000,000 50% $ .35
April 18, 1997
</TABLE>
Value of Options at September 30, 1995
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
<C> <C>
Robert Downie -0- -0- 2,000,000
- -0- -0- -0-
Alexander Hamilton -0- -0- 2,000,000
- -0- -0- -0-
</TABLE>
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.
<TABLE>
<CAPTION>
Amount of Percent
Name and Address of Beneficial Owner Nature of
Ownership of Class
<S> <C> <C>
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
<PAGE>
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%
</TABLE>
[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.
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Page
Number Document
Number
<S> <C> <C>
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
</TABLE>
____________________________
(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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
Consolidated Balance Sheet
September 30, 1995
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS
<S> <C>
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
</TABLE>
<PAGE>
Consolidated Balance Sheet (Continued)
September 30, 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES
<S> <C>
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
</TABLE>
<PAGE>
Consolidated Statements of Operations
For the Year Ended September 30, 1995 and for the Period from
December 8, 1993 (inception) to September 30, 1994
<TABLE>
<CAPTION>
1995
1994
<S> <C> <C>
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
</TABLE>
<PAGE>
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
<TABLE>
<CAPTION>
Additional
Unearned Cumulative
Preferred Stock Common
Stock Paid-In Consulting Treasury
Accumulated Translation
Shares Amount ` Shares Amount Capital Fees
Stock Deficit Adjustment
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
"See accompanying notes to consolidated financial statements."
<PAGE>
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
<TABLE>
<CAPTION>
Additional
Unearned Cumulative
Preferred Stock Common Stock Paid-In Consulti
ng Treasury Accumulated Translation
Shares Amount Shares Amount Capital
Fees Stock Deficit Adjustment
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
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
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
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)
</TABLE>
"See accompanying notes to consolidated financial statements."
<PAGE>
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
<TABLE>
<CAPTION>
INVESTING ACTIVITIES
<S> <C> <C>
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
</TABLE>
"See accompanying notes to consolidated financial statements."
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<TABLE>
<S> <C>
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
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Operating revenues $ 1,127,195 $
902,279
Net loss $ (8,944,394) $(14,905,208)
Net loss per share $ (.12) $
(.32)
</TABLE>
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.
<PAGE>
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:
<TABLE>
<S> <C>
Secured note payable (a) $397,100
Unsecured revolving loan account (b) 462,927
Note payable - Warner Lambert (c) 162,900
$1,022,927
</TABLE>
(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:
<TABLE>
<CAPTION>
1995
<S> <C>
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
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
1995
<S> <C>
Equipment $ 205,999
Less accumulated amortization 17,914
Net assets under capital leases $ 188,085
Amortization expense was $17,914 for 1995.
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
Capital
Operating
Year Leases
Lease
<S> <C> <C>
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
</TABLE>
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).
<PAGE>
<TABLE>
<S> <C>
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)
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
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
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
1995
1994
<S> <C> <C>
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-
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Incentive
Nonstatutory
Exercise Stock Exercise
Stock
Price Option Plan Price
Option Plan
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
AUDITED FINANCIAL STATEMENTS
CHURCHILL U.S.A., INC.
YEAR ENDED SEPTEMBER 30, 1995
<PAGE>
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
<PAGE>
Consolidated Balance Sheet
September 30, 1995
ASSETS
<TABLE>
<S> <C>
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
</TABLE>
"See accompanying notes to consolidated financial statements."
<PAGE>
Consolidated Balance Sheet (Continued)
September 30, 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C>
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
</TABLE>
<PAGE>
Consolidated Statements of Operations
For the Years Ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
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
</TABLE>
<PAGE>
Consolidated Statements of Shareholders' Equity
For the Years Ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
Additional
Common Stock Paid-
In Accumulated Valuation
Shares Amount Capital Deficit
Allowance
<S> <C> <C> <C> <C> <C>
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) $_
</TABLE>
<PAGE>
Consolidated Statements of Cash Flows
For the Years Ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
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)
</TABLE>
<PAGE>
"See accompanying notes to consolidated financial statements."
For the Years Ended September 30, 1995 and 1994
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
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
</TABLE>
"See accompanying notes to consolidated financial statements."
<PAGE>
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.
<PAGE>
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 $104,516
in certain oil and gas properties from its recorded basis in the full cost
pool to Investment in CSV Holdings, Inc. (Note I).
NOTE D _ OIL AND GAS PROPERTIES (UNAUDITED)
Aggregate Capitalized Costs _ The following presents the Company's aggregate
capitalized costs and the aggregate corresponding accumulated depletion
relating to oil and gas properties as of September 30, 1995:
<PAGE>
Notes to Consolidated Financial Statements (Continued)
<TABLE>
<S> <C>
Unproved oil and gas properties$ -0-
Proved oil and gas properties 4,836,954
4,836,954
Accumulated depletion (2,106,410)
Net capitalized costs $2,730,544
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
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
</TABLE>
<PAGE>
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)
<TABLE>
<CAPTION>
1995 1994
Oil (bbl) Gas (mcf) Oil (bbl) Gas(mcf)
<S> <C> <C> <C> <C>
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
<PAGE>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
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)
<PAGE>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
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 _ _
</TABLE>
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,
<PAGE>
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:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
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-
</TABLE>
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
<PAGE>
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:
<TABLE>
<S> <C>
1996 $ 64,191
1997 16,239
$ 80,430
</TABLE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
Exhibit 10.4
PLAN AND
AGREEMENT OF MERGER
RX MEDICAL SERVICES CORP.
AND
CONSOLIDATED HEALTH CORPORATION OF
MISSISSIPPI, INC.
July 7, 1995
Table of Contents
ARTICLE 1 MERGER 1
1.1 Merger of Acquisition Corp into CHC. 1
1.2 Conversion of Shares into Cash and/or Securities. 2
1.3Rights of CHC's Stockholders Pending and Upon Surrender of
Certificates.
3
1.4 Exchange of Certificates 3
1.5 Transfer Books. 3
1.6 Transfer of Certificates. 3
1.7 Other Transactions at the Closing. 4
1.8 Closing and Effective Date of Merger. 5
1.9 Further Assurances. 5
1.10 Dissenting Stockholders of CHC. 5
1.11 Legend. 5
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF CHC 6
2.1 Organization, Corporate Power and Qualification. 6
2.2 Capitalization of CHC. 6
2.3 Subsidiaries, Affiliates, Affiliated Companies and Joint Venture.
7
2.4 Financial Statements. 7
2.5 Absence of Undisclosed Liabilities. 8
2.6 Letters of Credit. 8
2.7 Absence of Certain Recent Changes. 8
2.8 Assets. 10
2.9 Title to Assets. 10
2.10 Contracts. 11
2.11 Insider Contracts. 11
2.12 Inventory. 11
2.13 Accounts Receivable. 11
2.14 Books and Records. 11
2.15 Defaults. 12
2.16 Patents, Trademarks and Copyrights. 12
2.17 Powers of Attorney. 12
2.18 Guarantees. 12
2.19 Permits and Licenses. 12
2.20 Litigation, etc. 13
2.21 Compliance. 13
2.22. Obligations; Authorizations. 13
2.23 Court Orders, Decrees and Laws. 13
2.24 Taxes. 14
2.25 Insurance; Malpractice. 14
2.26 Labor Matters. 14
2.27 Benefit Plans. 15
2.28 Environmental Matters. 15
2.29 Third-Party Payment Contracts, Cost Reports. 16
2.30 Patients. 17
2.31 Questionable Payments. 17
2.32 Certain Representations With Respect to Smith County Hospital.
17
2.33 No Finders or Brokers. 18
2.34 Minute Books. 18
2.35 Competitive Interests. 18
2.36 Authority; Binding Effect. 18
2.37 Misleading Statements. 18
2.38 Representations and Warranties Deemed to be Repeated at
Effective
Date of Merger. 19
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF RX MEDICAL AND
ACQUISITION CORP 19
3.1 Organization and Standing of Rx Medical and Acquisition Corp.19
3.2 Financial Statements. 19
3.3 Capitalization. 19
3.4 Subsidiaries. 20
3.5 Absence of Certain Changes. 20
3.6 Authority; Binding Effect. 20
3.7 No Finders or Brokers. 20
3.8 Defaults. 20
3.9 Pending Litigation. 21
3.10 Court Orders, Decrees and Laws. 21
3.11 Taxes. 21
3.12 Labor Matters. 22
3.13 Exchange Act Reports. 22
3.14 Potential Liability under Stark Act. 22
3.15 Disclosure. 23
3.16 Representations and Warranties Deemed to be Repeated at Time of
Merger. 23
ARTICLE 4 COVENANTS OF RX MEDICAL 23
4.1 Acquisition Corp. 23
4.2 Listing. 23
4.3 Optional Registration of Rx Medical Common Stock. 24
4.4 Mandatory Registration of Rx Medical Common Stock. 25
4.5 Prospectus Concerning Registration. 25
4.6 Best Efforts to Secure Consents. 25
4.7 Information. 25
4.8 Corporate Action. 25
4.9 Handling of Documents. 25
ARTICLE 5 COVENANTS OF CHC 26
5.1 Access and Information. 26
5.2 Conduct of Business. 26
5.3 Compliance with Agreement. 27
5.4 Best Efforts to Secure Consents. 27
5.5 Unusual Events. 27
5.6 Interim Financial Statements. 27
5.7 Departmental Violations. 27
ARTICLE 6 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF CHC 28
6.1 Representations and Warranties True. 28
6.2 Authority. 28
6.3 No Obstructive Proceeding. 28
6.4 Delivery of Certain Certified Documents. 28
6.5 Approval by Stockholders of CHC. 29
6.6 Proceedings and Documents Satisfactory. 29
6.7 No Agency Proceedings. 29
ARTICLE 7 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF RX
MEDICAL AND ACQUISITION CORP 29
7.1 Representations and Warranties True; Right of Offset. 29
7.2 No Obstructive Proceeding. 30
7.3 Proceedings and Documents Satisfactory. 30
7.4 No Adverse Change. 30
7.5 Approval by Stockholders of CHC. 30
7.6 Delivery of Certain Documents. 30
7.7 Estoppel Certificates. 30
7.8 Required Consents. 31
ARTICLE 8 TERMINATION 31
8.1 Optional Termination. 31
8.2 Notice of Abandonment. 31
8.3 Mandatory Termination. 31
8.4 Termination. 31
ARTICLE 9 INDEMNIFICATION 32
9.1 By CHC. 32
9.2 By Rx Medical and Acquisition Corp. 32
9.3 Survival. 32
9.4 Limitations. 32
9.5 Defense. 33
ARTICLE 10 MISCELLANEOUS 33
10.1 Expenses. 33
10.2 Notices. 33
10.3 Entire Agreement. 34
10.4 Governing Law. 34
10.5 Legal Fees and Costs. 34
10.6 CON Disclaimer. 34
10.7 Time. 35
10.8 Section Headings. 35
10.9 Waiver. 35
10.10 Nature and Survival of Representations. 35
10.11 Exhibits. 35
10.12 Assignment. 35
10.13 Binding on Successors and Assigns. 35
10.14 Parties in Interest. 35
10.15 Amendments. 36
10.16 Drafting Party. 36
10.17 Counterparts. 36
10.18 Press Releases. 36
<PAGE>
PLAN AND AGREEMENT OF MERGER
Plan and Agreement of Merger
("Agreement"), dated as of July 7, 1995, among Rx Medical
Services Corp., a Nevada corporation ("Rx Medical"), CHC
Acquisition Corporation, a Mississippi corporation and a
wholly-owned subsidiary of Rx Medical ("Acquisition Corp") and
Consolidated Health Corporation of Mississippi, Inc., a
Mississippi corporation ("CHC").
The parties hereby agree as
follows:
ARTICLE 1 MERGER
1.1 Merger of Acquisition Corp into CHC. Acquisition Corp
shall be merged with and into CHC on the Effective Date (as
defined in 1.8 hereof) in accordance with the applicable laws
of the State of Mississippi as provided in a Plan of Merger to be
set forth in Articles of Merger, certain provisions of which
shall be as follows:
(a) Surviving Corporation. CHC shall be the surviving
corporation (the "Surviving Corporation") from and
after the Effective Date, and the name of the
Surviving Corporation shall be Consolidated Health
Corporation of Mississippi, Inc. On the Effective
Date, the separate existence of Acquisition Corp shall
cease, and the Surviving Corporation shall, without
other transfer, succeed to all the rights and property,
subject to all debts and liabilities, of CHC and
Acquisition Corp in the same manner as if the Surviving
Corporation itself had incurred them.
(b) Articles of Incorporation. From and after the
Effective Date, the Articles of Incorporation of CHC as amended
to be consistent with the principal provisions of the Articles of
Incorporation of Acquisition Corp shall be the Articles of
Incorporation of the Surviving Corporation until further amended
as provided by law.
(c) By-Laws. From and after the Effective Date, the
by-laws of Acquisition Corp as they exist on the date hereof
shall be the by-laws of the Surviving Corporation until altered
amended or repealed in accordance with the provisions thereof,
the Restated Articles of Incorporation or applicable law.
(d) Directors and Officers. The directors and officers of
Acquisition Corp immediately prior to the Effective Date shall be
the officers and directors, respectively, of the Surviving
Corporation, to serve, in both cases, until their successors
shall have been elected and shall qualify or until otherwise
provided by law and the Articles of Incorporation and by-laws of
the Surviving Corporation.
<PAGE>
1.2 Conversion of Shares into Cash and/or Securities. The
manner and basis of exchanging and converting the shares of
common stock of the Acquisition Corp and CHC on the Effective
Date shall be as follows:
(a) Common Stock of Acquisition Corp. By virtue of the
Merger and without any action of the holder thereof each share of
common stock of Acquisition Corp outstanding on the Effective
Date shall remain outstanding and unchanged as a share of the
common stock of the Surviving Corporation.
(b) Common and Preferred Stock of CHC.<F1> By virtue of
the Merger and without any action of the holder thereof, on the
Effective Date:
(i) Each then outstanding share of common stock of CHC, par
value $ .01 per share ("CHC Common Stock"), excluding any shares
of CHC Common Stock as to which a stockholder of CHC has
perfected his rights as a dissenting stockholder in accordance
with the Mississippi Business Corporations Act, shall, by virtue
of the Merger, and without any action on the part of the holder
thereof, be converted into (A) 158.103 shares of Rx Medical,
$5.00 par value, 8% Convertible Preferred Stock having the
attributes set forth in Appendix 1.2 hereto ("Rx Preferred
Stock") and (B) 98.815 shares of Rx Medical Common Stock, par
value $.002 per share ("Rx Common Stock") and (C) cash in the
amount of $69.1725.
(ii) Each then outstanding share of CHC preferred stock, par
value $100 per share ("CHC Preferred Stock"), excluding any share
of CHC Preferred Stock as to which a stockholder of CHC has
perfected his rights as a dissenting stockholder in accordance
with the Mississippi Business Corporations Act, shall, by virtue
of the Merger, and without any action on the part of the holder
thereof, be converted into 83.794 shares of Rx Preferred Stock
and cash in the amount of $20
<F1>
As a result of 1.2 and 1.7(a), the stockholders will receive
the following:
Rx Extra Rx
Prefer Rx Rx Rx Prefer Rx Rx
red Cash Common Cash red Cash Cash
Stockh Stock for for for Stock for for
older for CHC CHC CHC for CHC CHC
CHC Common Common Common CHC Prefer Notes
Common Prefer red (1.7(
red a))
Lewis 319,36 $139,7 199,60 $0 0 $0 $0
8 28 6
Muse 64,822 28,361 40,514 0 0 0 0
Herrin 15,810 6,917 9,882 0 0 0 0
g
Church 474,30 207,51 - $296,4 125,96 30,000 $291,0
ill 9 8 30 1 47
874,30 $382,5 250,00 $296,4 125,96 30,000 $291,0
Totals 9 24 2 30 1 47
<PAGE>
By virtue of the Merger, on the Effective Date, each
share of the CHC Common Stock and CHC Preferred Stock shall cease
to exist, all certificates for such stock shall be canceled and
no shares of the Surviving Corporation shall be exchanged
therefor. All treasury shares of CHC or shares of CHC Common
Stock and CHC Preferred Stock owned by any of the subsidiaries of
CHC shall also be canceled.
1.3 Rights of CHC's Stockholders Pending and Upon Surrender
of Certificates. From and after the Effective Date, except as
provided in the Mississippi Business Corporation Act with respect
to rights of dissenting stockholders, each holder of a
certificate representing shares of CHC Common Stock shall be
entitled, upon surrender thereof to the Surviving Corporation, to
receive in exchange therefor the consideration to which such
holder would otherwise be entitled on the basis provided for in
1.2(b) of this Agreement.
1.4 Exchange of Certificates On the Effective Date,
the holders of certificates for shares of CHC Stock and/or CHC
Preferred Stock shall cease to have any rights as stockholders of
CHC (except such rights, if any, as they may have as dissenting
stockholders under the Mississippi Business Corporations Act).
Each holder of a stock certificate or certificates representing
outstanding shares of CHC Common Stock or CHC Preferred Stock, as
the case may be, immediately prior to the Effective Date shall,
upon surrender of such certificate or certificates to the
Surviving Corporation after the Effective Date, be entitled to
receive a stock certificate or certificates representing the
number of shares of Rx Preferred Stock into which such shares of
CHC Common Stock or CHC Preferred Stock, as the case may be, have
been converted as provided by 1.2(b), (i) and (ii) above plus
the accompanying cash component with respect thereto as provided
therein. Until so surrendered, each stock certificate which,
prior to the Effective Date, represented shares of CHC Common
Stock or CHC Preferred Stock, as the case may be, shall be deemed
for all purposes to evidence ownership of the number of shares of
Rx Preferred Stock into which those shares of CHC Common Stock
and CHC Preferred Stock have been converted.
1.5 Transfer Books. At the close of business on the
business day immediately preceding the Effective Date, the stock
transfer books for shares of CHC Common Stock and/or CHC
Preferred Stock shall be closed, and no transfer or assignment of
any shares of CHC Common Stock and CHC Preferred Stock shall
thereafter be registered on the transfer books.
1.6 Transfer of Certificates. If any certificate
representing Rx Preferred Stock is to be issued in a name other
than that in which the certificate theretofore representing CHC
Common Stock or CHC Preferred Stock, as the case may be,
surrendered is registered, it shall be a condition of such
issuance that the certificate so surrendered shall be properly
endorsed or otherwise in proper form for transfer and that the
person requesting such issuance shall either pay to the Surviving
Corporation or its transfer agents any transfer or other taxes
required by reason of the issuance of certificates representing
Rx Preferred Stock in a name other than that of the registered
holder of the
<PAGE>
certificate surrendered, or establish to the
satisfaction of the Surviving Corporation or its transfer agents
that such tax has been paid or is not applicable
1.7 Other Transactions at the Closing.
(a) Simultaneously with the Closing, Rx Medical shall
purchase from Churchill Technologies, Inc., a Colorado
corporation ("Churchill") (i) a 9% note of CHC in the principal
amount of $425,000, (ii) a 6% note of CHC in the principal amount
of $100,000, and (iii) a 9% note of Morton Medical Center
(assumed by CHC) in the principal amount of $120,000
(collectively, the "CHC Notes"), (iv) and the Rx Common Stock
issued to Churchill as a result of the Merger, and Churchill
shall sell the CHC Notes and Rx Common Stock to Rx Medical for a
payment of $587,477 payable by wire transfer at the Closing.
(b) In exchange for their options, holders of options to
purchase CHC Common Stock shall receive (i) 155.25 shares of Rx
Preferred Stock for each share of CHC Common Stock purchasable
upon exercise of the option (the "Option Shares") plus (ii) the
number of shares of Rx Common Stock equal to the quotient
obtained by (x) dividing the Market Value of Rx Common Stock into
(y) the difference obtained by (1) subtracting the aggregate
exercise price of the Option Shares from (2) the product of
$308.75 and the Option Shares.<F2> For the purposes of this
clause (b), "Market Value of Rx Common Stock" shall mean the
average closing price of Rx Common Stock on the American Stock
Exchange for the 10 trading days immediately prior to the
Closing.
<F2>
Assuming a Market Value of $1.50 for the Rx Common Stock, the CHC
Optionees will receive the following:
(a) (b) Rx Rx
Exer Prefe Commo
Optionee Opti cise rred n
ons Pric Stock Stock
e *
Sam 100 $50 15,52 17,25
Lewis 5 0
Paul 50 50 7,763
Black 8,625
Paul 42 100 6,521 2,923
Black
Brenda 50 50 7,763
Olters 8,625
Brenda 42 100 6,521 2,923
Olters
Mike 50 50 7,763
Edwards 8,625
Mike 42 100 6,521 2,923
Edwards
Michael 126 100 19,56 17,53
Lindley 2 5
Joe 84 100 13,04 11,69
Herring 1 0
_____________________
* The formula is [155.25 x (a)];
the formula is [[[308.75 x(a)]-[(a)x(b)]]/MV]
<PAGE>
(c) In addition to the foregoing, in the event that
the Surviving Corporation consummates the acquisition
of a hospital subsequent to the Closing, the Surviving
Corporation shall pay Sam J. Lewis a fee in the amount
of $100,000 in connection with services rendered in
connection therewith. Said fee shall become due and
payable within ten (10) days after the closing of the
aforesaid acquisition.
1.8 Closing and Effective Date of Merger. At the closing
(the "Closing"), which shall be held on July 7, 1995 (or at such
later date as shall be agreeable to CHC and Rx Medical but in no
event later than August 7, 1995) (the "Closing Date") at the
offices of Rx Medical in Ft. Lauderdale, Florida. The parties
shall exchange the respective schedules, Exhibits, certificates
and instruments of conveyance, in form and substance reasonably
acceptable to the respective parties, within thirty (30) days of
the Closing. In addition to other actions contemplated
hereunder, CHC and Acquisition Corp shall within thirty (30) days
of the Closing, use their respective best efforts to cause to be
executed in accordance with the Mississippi Business Corporation
Act, and shall cause to be filed and recorded with the
appropriate offices under the laws of the State of Mississippi,
copies of Articles of Merger and such officers' certificates and
other documents as may be necessary or appropriate in the opinion
of counsel to Rx Medical to cause the Merger to become effective
under the laws of the State of Mississippi. The Merger shall
become effective at the time the Secretary of the State of
Mississippi issues a Certificate of Merger in response to the
aforesaid filing of the Articles of Merger (the "Effective
Date").
1.9 Further Assurances. The Surviving Corporation, through
its appropriate officers and directors, is hereby authorized, in
the name of the Rx Medical or Acquisition Corp, CHC or itself,
to execute, acknowledge and deliver all instruments of further
assurance and to do all such acts and things as it may, at any
time, deem necessary or desirable to vest in the Surviving
Corporation any property or rights of CHC or Rx Medical or
Acquisition Corp, or to carry out any of the purposes expressed
in this Agreement.
1.10 Dissenting Stockholders of CHC. Each stockholder of
CHC, if any, who becomes entitled, pursuant to Article 13 of the
Mississippi Business Corporation Act, to payment of the fair
value of his CHC Common Stock or CHC Preferred Stock, as the
case may be, (a "Dissenting Stockholder") shall receive payment
therefor from the Surviving Corporation but only after the value
thereof shall have been agreed upon or finally determined
pursuant to such provisions. CHC shall not, except with the
prior written consent of Rx Medical, voluntarily make any payment
with respect to or settle or offer to settle any demand for such
payment. Shares of CHC Common Stock and CHC Preferred Stock
acquired by CHC or the Surviving Corporation from Dissenting
Stockholders shall be canceled.
1.11 Legend. The certificates representing the Rx Common
and Rx Preferred Stock issued to the former stockholders of CHC
as the result of the merger shall bear the following legend:
<PAGE>
"TRANSFER RESTRICTED: The Shares represented by this
certificate have not been registered under the Securities Act of
1933, as amended. Such shares have been acquired subject to the
restrictions as set forth by the Plan and Agreement of Merger
dated as of July 7, 1995 among the issuer, Consolidated Health
Corporation of Mississippi, Inc., and CHC Acquisition
Corporation. Such shares will be held for investment only and
have not been acquired with a view toward their distribution.
They may not be offered for sale, sold, transferred, pledged,
hypothecated or otherwise disposed of except on the terms set
forth in the aforementioned Plan and Agreement of Merger, a copy
of which is on file in the Office of the Corporate Secretary of
the issuer."
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF CHC
CHC hereby represents and warrants to Rx Medical and
Acquisition Corp as follows:
2.1 Organization, Corporate Power and Qualification. CHC
is a corporation duly organized, validly existing and in good
standing under the laws of the State of Mississippi and has full
corporate power and authority and all authorizations, licenses
and permits necessary to own, lease and operate its properties
and assets and to carry on its business as and where it is now
being conducted, to enter into this Agreement, and to consummate
the transactions contemplated hereby. CHC is duly qualified to
do business and is in good standing in each jurisdiction in which
the character of the properties owned or leased by it or the
nature of the business transacted by it makes such qualification
necessary.
2.2 Capitalization of CHC. The authorized capital stock of
CHC consists of 10,000 shares of $.01 par value common stock, and
1,500 shares of $100 par value preferred stock, of which as of
the date hereof, 5,530 shares of CHC Common Stock and 1,500
shares of CHC Preferred Stock have been duly authorized by all
necessary corporate action on the part of CHC, are validly issued
and outstanding, fully paid and nonassessable. No assessments
have been made with respect to such stock which have not been
fully satisfied. Except as set forth in Exhibit 2.2 of the
Exhibit Volume, there are no other authorized or outstanding or
authorized equity securities of CHC of any class, kind or
character, and there are no outstanding rights, contracts, rights
to subscribe, conversion rights, exchange rights, warrants,
options, calls, puts or other agreements or commitments of any
character relating to the capital stock of CHC or any securities
convertible or exchangeable or exercisable for any shares of
stock of any class of capital stock of CHC. CHC has no treasury
stock that has not been canceled as of the date hereof. Except
for the transactions contemplated by this Agreement, there are
not any agreements or understandings among CHC's stockholders
with respect to the voting of shares of the CHC Stock on any
matter. No shares of the capital stock of CHC are reserved for
any purpose; there are no preemptive or similar rights with
respect to the issuance, sale or other transfer (whether present,
past or future) of the capital stock of CHC and there are no
agreements or other obligations (contingent or otherwise) which
may require
<PAGE>
CHC to issue, repurchase or otherwise acquire any
shares of its capital stock or any other securities. There are
no outstanding or authorized stock appreciation/phantom stock or
similar rights with respect to CHC. There are no voting trusts,
proxies, or any other agreements or understandings with respect
to the voting stock of CHC.
2.3 Subsidiaries, Affiliates, Affiliated Companies and
Joint Venture. CHC has no direct or indirect ownership interest
in, by way of stock ownership or otherwise, any corporation,
association or business enterprise except for the subsidiary
company or companies listed in Exhibit 2.3A of the Exhibit
Volume, all of which are wholly-owned subsidiaries of CHC.
Exhibit 2.3A shall also set forth the authorized capital stock of
each such subsidiary corporation, the number of shares of such
capital stock validly issued and outstanding and the number of
such shares owned by CHC. Each of the organizations listed in
Exhibit 2.3A and identified therein as a consolidated subsidiary
(CHC's "subsidiaries") is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction
of incorporation, as listed in Exhibit 2.3A, has full corporate
power to own, lease and operate its properties and assets and to
carry on its business as and where it is now conducted, is duly
qualified to do business and is in good standing in each
jurisdiction in which the character of the properties owned or
leased by it or the nature of the business transacted by it make
such qualification necessary, and is qualified to do business in
the jurisdictions listed in Exhibit 2.3A. Copies of the Articles
of Incorporation and by-laws of each CHC subsidiary are included
as Exhibit 2.3B of the Exhibit Volume and are true, accurate and
complete as of the date hereof. CHC owns beneficially and of
record all shares of capital stock of any CHC subsidiary which is
set forth as being owned by CHC in Exhibit 2.3A (except for
directors' qualifying shares), free and clear of all claims,
liens, charges and encumbrances of any nature whatsoever, and
none of such shares are subject to any covenant or other
contractual restriction preventing or limiting the right to
transfer such shares. There are not any agreements or understand
ings to which CHC or any CHC subsidiary is a party with respect
to the voting of shares of capital stock of any CHC subsidiary;
and neither CHC nor any of its subsidiaries has outstanding any
options, calls, rights of conversion or other commitments to
purchase or sell any authorized or issued shares of capital stock
of any CHC subsidiary.
2.4 Financial Statements. Exhibit 2.4 of the Exhibit
Volume consists of the following financial statements of CHC:
consolidated balance sheet of CHC and its subsidiaries at
February 28, 1994, and the related consolidated statement of
operations, stockholders' equity and cash flow for the years then
ended, together with the opinion thereon of Overcash, Walker &
Co., certified public accountants; and the unaudited consolidated
balance sheet of CHC and its subsidiaries as of February 28, 1995
and unaudited consolidated statement of operations of CHC and its
subsidiaries for the twelve months then ended (the audited and
unaudited financial statements and the related notes being herein
called "CHC Financial Statements").
<PAGE>
The CHC Financial Statements have been prepared
based upon information contained in the books and records of CHC
and its subsidiaries and present fairly the assets, liabilities
and financial condition of CHC and its subsidiaries as at the
respective dates thereof and the results of their operations for
the periods ended at the respective dates thereof, in each case
prepared in conformity with generally accepted accounting
principles applied on a consisitent basis throughout the periods
involved and with the prior periods, except that in the unaudited
portion of the CHC Financial Statements (i) are subject to cost
report and other year-end audit adjustments, (ii) do not contain
footnotes, (iii) were prepared without physical inventories, and
(iv) do not contain an unaudited statement of cash flow, and (v)
are not restated for subsequent events. The CHC Financial
Statements do not contain any material inaccuracy and do not
suffer from any material omissions.
2.5 Absence of Undisclosed Liabilities. Except as and to
the extent reflected or reserved against in the CHC Financial
Statements and except for commitments and obligations incurred in
the ordinary course of business accruing after February 28, 1995,
to the best knowledge of CHC, CHC and its subsidiaries as of
February 28, 1995, had, or will have at Closing, no material
liabilities, claims or obligations (whether accrued, absolute,
contingent, unliquidated or otherwise, whether due to become
payable and regardless of when or by whom asserted). The
liabilities reflected in the CHC Financial Statements consist
solely of accrued obligations and liabilities incurred by CHC to
persons or entities not affiliated with CHC, except as set forth
in Exhibit 2.5 of the Exhibit Volume.
2.6 Letters of Credit. Except as disclosed in Exhibit 2.6
of the Exhibit Volume, there are no outstanding letters of credit
issued at the request of CHC to any suppliers or obligees of CHC
with respect to the operations of CHC.
2.7 Absence of Certain Recent Changes. Except as expressly
provided in this Agreement or as set forth on Exhibit 2.7 of the
Exhibit Volume in alphabetical order corresponding to the
following subsections since February 28, 1995, and through the
Closing Date, CHC and its subsidiaries have not been and will not
have:
(a) except in the usual and ordinary course of their
businesses, consistent with past practice, and in an amount which
is usual and normal, incurred, both individually or in the
aggregate, any indebtedness or other liabilities (whether
accrued, absolute, contingent or otherwise), guaranteed any
indebtedness or sold any of their assets;
(b) suffered any damage, destruction or loss, whether or
not covered by insurance, in excess of $10,000;
<PAGE>
(c) suffered the resignation or other termination of
any management personnel of CHC, or the loss of or
other termination of a business relationship with any
material customers or suppliers of CHC's business or
been engaged in a material dispute with any material
customer or supplier which could threaten such business
relationship;
(d) increased the regular rate of compensation payable by
them to any employee, stockholder, or any physician other than
normal merit and cost of living increases granted in the ordinary
course of business; or increased such compensation by bonus,
percentage, compensation service award or similar arrangement
theretofore in effect for the benefit of any of their employees,
and no such increase is required;
(e) established or agreed to establish, amended or
terminated any pension, retirement or welfare plan or arrangement
for the benefit of their employees not theretofore in effect;
(f) had any change in the capitalization of the CHC and its
subsidiaries, including, without limitation, the grant or
issuance by the CHC or any of its subsidiaries of any shares of
stock of any class, any subscriptions, options, warrants,
convertible securities, rights, calls, agreements, commitments or
rights affecting or relating in any manner whatsoever to any
equitable interests in CHC or any of its subsidiaries;
(g) declared or paid any dividend or other distribution, in
any form whatsoever, on any class of its capital stock or
purchased or redeemed any of its capital stock;
(h) made any direct or indirect purchase, redemption or
other acquisition by CHC or any of its subsidiaries, or entered
into any commitment, plan or agreement by CHC or any of its
subsidiaries to purchase, redeem or otherwise acquire any shares
of their capital stock or other equitable interests;
(i) experienced any labor organizational efforts, strikes
or complaints, other than grievance procedures in the ordinary
course of business, or entered into any collective bar\gaining
agreements with any union;
(j) made any single capital expenditure which exceeded
$10,000 or made aggregate capital expenditures which exceeded
$25,000;
(k) except with respect to liens or encumbrances arising by
operation of law, permitted or allowed any of their assets (real,
personal or mixed, tangible or intangible) to be subjected to any
mortgage, pledge, lien, security interest, encumbrance,
restriction or charge of any kind;
<PAGE>
(l) paid, discharged or satisfied any claims, liabilities
or obligations (absolute, accrued, contingent or otherwise) other
than in the usual and ordinary course of business;
(m) suffered any extraordinary losses, canceled any debts
or waived any claims or rights of substantial value, whether or
not in the usual and ordinary course of business;
(n) paid, lent or advanced any amount to, or sold,
transferred or leased any properties or assets (real, personal or
mixed, tangible or intangible) to, or entered into any agreement
or arrangement with, any stockholder of CHC or any of the
officers or directors of CHC or any of its subsidiaries or of any
"affiliate" or "associate" of any of their officers or directors
(as such terms are defined in the rules and regulations of the
Securities and Exchange Commission under the Securities Act of
1933, as amended), except for reimbursement of ordinary and
reasonable business expenses related to the business of CHC and
its subsidiaries and compensation to officers at rates not
exceeding the rates of compensation at February 28, 1995;
(o) amended, terminated or otherwise altered (whether by
action or inaction) any contract, agreement or license of
significant value to which CHC or any of its subsidiaries is a
party, except in the ordinary course of business;
(p) entered into a material transaction, contract or
commitment other than in the ordinary course of business or made
any change in any method of accounting or accounting practice;
(q) canceled, or failed to continue, insurance coverages;
(r) agreed, whether in writing or otherwise, to take any
action described in this 2.7;
(s) suffered any material adverse change in its business,
properties, assets, liabilities, net worth, earnings or financial
condition; or
(t) done any act or thing which under the terms and
conditions of this Agreement would be in violation of any of the
covenants, stipulations or agreements of CHC hereunder, or which
would make any representation or warranty of CHC hereunder
inaccurate or untrue as of the Closing Date.
<PAGE>
2.8 Assets To the best knowledge of CHC: (i) all of
the assets owned by, or leased to CHC and used or usable in
connection with its business and operations are in good working
order, ordinary wear and tear excepted, have been maintained in
accordance with good industry practice, are suitable for the
purposes for which they are being used and are sufficient in the
aggregate for the operation and maintenance of its business; and
(ii) CHC has good and marketable title to the assets reflected in
the balance sheet included in the CHC Financial Statements and
will hold good and marketable title to such assets and any assets
acquired prior to the Closing Date, except for assets disposed of
in the ordinary course of business and except for such mortgages,
liens and other charges as are disclosed in the CHC Financial
Statements.
2.9 Title to Assets. CHC does not own any real estate,
and leases only offices in Nashville, TN and Newton, MS. Its
wholly owned subsidiary , CHC Management, Inc. ("CHC
Management"), leases and operates Smith County Hospital in
Raleigh, MS. CHC believes it and CHC Management have valid and
subsisting leaseholds for such properties. Exhibit 2.9 of the
Exhibit Volume is a copy of a Uniform Commercial Code search as
of a recent date duly obtained by CHC showing security interests
of record relating to non real estate assets of CHC and its
subsidiaries.
2.10 Contracts. Exhibit 2.10 of the Exhibit Volume contains
a copy of each contract, lease, agreement and other instrument
to which CHC or any of its subsidiaries is a party or is bound
which involves an unperformed commitment or obligation
(contingent or otherwise) of more than $25,000 in the aggregate
and with which CHC and each of its Subsidiaries are in material
compliance.
2.11 Insider Contracts. There are no contracts, agreements,
purchase orders, commitments, leases, understandings or
arrangements, including loan arrangements, between CHC and its
stockholders or any affiliate thereof not otherwise disclosed
herein or in the Exhibits contained in the Exhibit Volume and
none shall be entered into by CHC from the date hereof through
the Closing Date without the prior written consent of Rx Medical.
2.12 Inventory. To the best knowledge of CHC, the inventory
reflected on CHC's balance sheet at February 28, 1995 was (i) in
good and marketable condition, (ii) in an amount consistent with
the hospital business, (iii) saleable in the normal course of
CHC's business as currently conducted, at current applicable
prices and within normal inventory "turn" experience except for
items which are obsolete, damaged or slow moving which do not
materially exceed historical amounts for such categories of
items, and (iv) is carried in CHC's Financial Statements on the
basis disclosed in the notes thereto.
<PAGE>
2.13 Accounts Receivable. Except for immaterial
amounts, CHC's accounts receivable: (i) arose in the ordinary
course of business for goods or services delivered or rendered;
(ii) constitute only valid, undisputed claims; and (iii) are not
subject to counterclaims or set-offs. To the best knowledge of
CHC, all credits due to third parties, including third party
payors, are reflected in CHC's Financial Statements and 100% of
the aggregate recorded amounts of CHC's accounts receivable net
of reserves have been or will be collected in the ordinary course
of business without resort to litigation.
2.14 Books and Records. To CHC's best knowledge and belief:
the books of account of CHC reflect all items of income, gain,
loss, and expense and all assets and liabilities of CHC subject
to customary month-end and year-end adjustments and are accurate
and complete in all material respects; all of the other records
of CHC, including, without limitation, all of its payroll and
customer records, are accurate and complete in all material
respects. CHC shall cooperate in providing access to the books
and records of CHC on a reasonable basis in the event an audit of
such books and records is deemed necessary by counsel for Rx
Medical in order to comply with any federal or state securities
laws or regulations.
2.15 Defaults. To CHC's knowledge, neither CHC nor any of
its subsidiaries is in default under, nor has any event occurred
which, with the lapse of time or action by a third party, could
result in a default under, give rise to a right to accelerate or
terminate any provision thereof, or give rise to any lien, claim,
encumbrance or restriction on any of the assets or properties of
CHC or any of its subsidiaries, any outstanding indenture,
mortgage, contract, lease, instrument or agreement to which CHC
or any of its subsidiaries is a party or by which CHC or any of
its subsidiaries may be bound or under any provision of the
Articles of Incorporation or by-laws of CHC or any of its
subsidiaries. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
by this Agreement will not violate any provision of, or result
in the breach of, or constitute a default under, any law the
violation of which would result in a significant liability to CHC
or any of its subsidiaries, or any order, writ, injunction or
decree of any court, governmental agency or arbitration tribunal;
constitute a violation of or a default under, or a conflict with,
any term or provision of the Articles of Incorporation or by-laws
of CHC or any of its subsidiaries or any contract, commitment,
indenture, lease, instrument or other agreement, or any other
restriction of any kind to which CHC or any of its subsidiaries
is a party or is bound; or cause, or give any party grounds to
cause (with or without notice, the passage of time or both) the
maturity of any liability or obligation of CHC or any of its
subsidiaries, to be accelerated, or increase any such liability
or obligation.
2.16 Patents, Trademarks and Copyrights. CHC does not own
any trademarks, service marks, trade names, brands, copyrights or
patents and has not filed any applications for registration of
any such trademarks, copyrights or patents.
<PAGE>
2.17 Powers of Attorney. Exhibit 2.17 in the Exhibit
Volume lists any outstanding powers of attorney related to CHC
and a summary statement of the terms thereof.
2.18 Guarantees. Included as Exhibit 2.18 in the Exhibit
Volume is a list and brief description of all guarantees, matters
of suretyship and contingent liabilities of CHC and its
subsidiaries.
2.19 Permits and Licenses. Included as Exhibit 2.19 in the
Exhibit Volume is a schedule of all material permits and licenses
held by CHC and its subsidiaries. To the best knowledge of CHC:
(i) all of the licenses are, and as of the Closing Date will be,
valid and in good standing with applicable governmental
authorities or agencies; (ii) there is no pending or threatened
action by any governmental authority or agency or third party to
suspend, revoke, terminate or challenge any of such licenses;
(iii) none of such licenses are currently subject to or operating
under any agreement encumbering any of such licenses or any
waiver by governmental authorities of otherwise applicable rules
and regulations; (iv) no other material licenses, permits,
certifications, authorizations, accreditations, orders or
approvals are required in connection with the ownership or
operation of CHC's business as currently owned and operated.
2.20 Litigation, etc. Except as set forth in Exhibit 2.20
in the Exhibit Volume, to CHC's knowledge, there is no
litigation, arbitration, governmental claim, investigation or
proceeding pending or threatened against CHC or any of its
subsidiaries at law or in equity, before any court, arbitral
tribunal or governmental agency.
2.21 Compliance. To the best of CHC's knowledge: (i) CHC's
operations, as and where presently conducted and CHC's assets and
their uses, comply with all applicable federal, state and
municipal laws, rules, regulations and other requirements of any
court or governmental body, court or arbitrator material to the
conduct thereof (collectively, the "Laws"), in all cases where
noncompliance therewith, singly or in the aggregate, would have a
material adverse effect on the business, assets, liabilities,
properties, operations or condition (financial or other) of CHC;
and (ii) CHC has all permits and licenses required for its
operations from all applicable jurisdictions.
2.22 Obligations; Authorizations. To the best knowledge of
CHC: (i) CHC is not in violation of any judgment, injunction,
award or decree which is binding on CHC or any of its assets,
properties, operations, securities or business or which would
affect the consummation of the transactions contemplated hereby;
(ii) CHC has in all material respects performed all obligations
required to be performed by it under, is not in default in any
material respect under, in violation in any material respect of,
aware of any material default or violation by any other party to,
and has not breached any material representation or incurred any
contingent liability contained in, any of the oral and written
contracts and agreements to which CHC is a party or by which CHC
is bound (the "CHC Agreements"); (iii) there is no pending or, to
the best knowledge of CHC, threatened claim
<PAGE>
that operations pursuant to any of the CHC Agreements
have been improperly conducted or maintained or which would
lessen the rights of CHC thereunder; and, to the best knowledge
of CHC, no event has occurred and no condition exists that would
increase the obligations or costs of CHC thereunder in any manner
or amount that would be material to such CHC Agreements standing
alone; (iv) all material licenses, permits and other governmental
authorizations that are required for the ownership, operation and
maintenance of the CHC's business as now owned, operated and
maintained have been obtained and are valid and sufficient for
such ownership, operation, maintenance and location and are in
full force and effect; (v) and CHC has not taken any action, or
failed to take any action, or permitted or allowed to exist any
condition, which, with notice or lapse of time, or both, would
result in the termination, cancellation or forfeiture of, or
cause a default under, any such license, permit or other
governmental authorization.
2.23 Court Orders, Decrees and Laws. To CHC's knowledge:
there is not outstanding or threatened any order, writ,
injunction or decree of any court, governmental agency or
arbitration tribunal against or affecting CHC or any of its
subsidiaries or any of their assets which would significantly
interfere with their ability to conduct their businesses; no
governmental authorities are presently conducting proceedings
against CHC or any of its subsidiaries; and no such investigation
or proceeding is pending or being threatened.
2.24 Taxes. To CHC's knowledge: all federal, state and
other tax returns of CHC and its subsidiaries required by law to
be filed have been timely filed; CHC and its subsidiaries have
paid or provided for all taxes (including taxes on properties,
income, franchises, licenses, sales and payrolls) which have
become due pursuant to such returns or pursuant to any
assessment, except for any taxes and assessments of which the
amount, applicability or validity is currently being contested in
good faith by appropriate proceedings and with respect to which
CHC or its subsidiary, as the case may be, has set aside on its
books adequate reserves; all such tax returns have been prepared
in compliance with all applicable laws and regulations; the
amounts set up as provisions for taxes (including provision for
deferred income taxes) on CHC Financial Statements have been
reserved in accordance with generally accepted accounting
principles for the payment of all unpaid federal, state, county
and local taxes accrued for or applicable to all periods (or
portions thereof) ending on or before the Closing Date; there
are no tax liens on any of the property of CHC or any of its
subsidiaries except those with respect to taxes not yet due and
payable and except for any taxes and assessments of which the
amount, applicability or validity is currently being contested in
good faith by appropriate proceedings and with respect to which
CHC or its subsidiary, as the case may be, has set aside on its
books adequate reserves; there are no pending tax examinations
nor has CHC or any of its subsidiaries received a revenue agent's
report asserting a tax deficiency. Copies of CHC's last two
federal state and local income tax returns are included as
Exhibit 2.24 of the Exhibit Volume.
<PAGE>
2.25 Insurance; Malpractice. Exhibit 2.25 of the
Exhibit Volume is a list and brief description of all policies of
fire, general liability, professional liability, product
liability, environmental impairment liability, worker's
compensation, health and other forms of insurance policies or
binders currently in force insuring against risks of CHC. CHC
has no reason to believe that such insurance policies are not
valid, binding and enforceable policies in full force and effect,
and CHC believes that is has paid all premiums due and payable
thereon. To the best knowledge of CHC: (i) there are no gaps in
CHC' insurance coverage; (ii) CHC is not in default with respect
to any provisions contained in any such insurance policy nor has
it failed to give any material notice or present any material
claim under any such insurance policy in due and timely fashion
in each case where such default or failure to give notice or to
present a claim could reasonably be expected to lead to a denial
of coverage; and (iii) no insurer under any such insurance
policies has refused, or threatened to refuse, to pay any claim
currently pending under any of such insurance policies with
respect to its business. CHC shall maintain insurance coverage of
similar kinds and amounts and shall pay premiums for such
coverage through the Closing Date.
2.26 Labor Matters. There are no collective bargaining
agreements with any labor union to which CHC or any of its
subsidiaries is a party or by which CHC or any of its
subsidiaries is bound, and none of them are currently negotiating
with a labor union. There is no unfair labor practice complaint
against CHC or any of its subsidiaries pending before the
National Labor Relations Board. There is no labor strike,
dispute, slowdown or stoppage actually pending or, to its
knowledge, threatened against or affecting CHC or any of its
subsidiaries or the Hospital. No grievance which might have a
material adverse effect on CHC or any of its subsidiaries or the
conduct of their businesses nor any such arbitration proceeding
arising out of or under collective bargaining agreements is
pending and no claim therefor exists. Neither CHC nor any of its
subsidiaries has experienced any employee strikes during the last
three years. CHC will advise Rx Medical of any such labor
dispute, petition for representative election or negotiations
with any labor union which shall arise before the Closing Date.
Exhibit 2.26 of the Exhibit Volume lists all of the present
employees of CHC receiving compensation in excess of $100,000 per
annum, their titles, the date on which they became employees of
CHC, and their present rate of compensation. CHC has made no
commitment, oral or written and whether or not enforceable, which
would bind or purport to bind Rx Medical, concerning the future
employment or compensation of any of such employees. Except as
set forth in Exhibit 2.26, there are no termination benefits or
amounts due and owing under the terms of any employment agreement
as a result of a change in control of CHC as a result of the
transactions contemplated by this Agreement.
2.27 Benefit Plans. Except as set forth in Exhibit 2.27 of
the Exhibit Volume, CHC has not established, maintained or
contributed to, or maintain or contribute to, or proposed to
establish, maintain or contribute to, any employee benefit plan
as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). Except as set forth
in Exhibit 2.27, CHC has no other plan, trust agreement or
arrangement for any bonus, severance,
<PAGE>
hospitalization, vacation, deferred compensation, pension or
profit-sharing, retirement, payroll savings, stock option, group
insurance, self-insurance, death benefit, fringe benefit, welfare
or any other employee benefit plan or fringe benefit arrangement
of any nature whatsoever, including those benefiting former
employees (collectively, the "Employee Benefit Plans"). CHC is
and shall remain, both before and after the Closing, in
compliance with those provisions of the Consolidated Omnibus
Budget Reconciliation Act of 1985 that relate to continued
coverage under the Employee Benefit Plans.
2.28 Environmental Matters. To the best knowledge of CHC:
(i) CHC has not produced, used, handled disposed of, in
connection with the operation of its business, any hazardous
substances or hazardous wastes nor has CHC dumped, buried or
otherwise disposed of or stored any such substances or wastes on
the property on which its operations are is located, in each case
except in accordance with the Environmental Requirements (as
defined below); (ii) CHC is in compliance with all requirements
relating to its operations under federal, state, or local laws
relating to pollution or protection of the environment, including
laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, or hazardous or toxic
substances, materials or wastes into ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants, or hazardous
or toxic substances, materials or wastes (collectively,
"Environmental Requirements"); (iii) CHC is not required under
applicable requirements of federal, state or local laws, rules or
regulations to register any products or materials, including
underground storage tanks; and (iv) no investigation,
administrative order, consent order, lien, super lien or
agreement, litigation or settlement with respect to any hazardous
substance of any kind located on or under all or any portion of
any premises which have been leased or owned by CHC exists, is
pending or, is proposed or threatened in writing with respect to
any premises leased or owned by CHC. For the purpose of this
Section, "hazardous substances", "hazardous materials" and
"hazardous waste" refer to such terms as defined in the
Comprehensive Environmental Response Compensation and Liability
Act, as amended, 42 U.S.C. Section 9601 et seq., and regulations
thereunder, the Resource Conservation and Recovery Act; and
applicable federal, state and local laws pertaining to
environmental regulations.
<PAGE>
2.29 Third-Party Payment Contracts, Cost Reports.
(a) CHC has filed on a timely basis all claims, cost reports
or annual filings required to be filed to secure payment under
Medicare and Medicaid Programs. To the best knowledge of CHC: (i)
all services provided by CHC have been provided pursuant to valid
physician orders; (ii) all billings by CHC to third-party payors,
including, but not limited to, those under the Medicare Amendments
to the Social Security Act, as amended, and the regulations
promulgated pursuant thereto, Medicaid Programs and private
insurance companies, are true and correct in all material respects
and are in compliance in all material respects with all applicable
laws and regulations and the policies of such third-party payors;
and (iii) there are no outstanding, pending or threatened negative
adjustments, recoupments or deficiencies pertaining to the cost
reports or claims of CHC and there are no existing Medicare or
Medicaid compliance deficiencies otherwise with respect of the
conduct of CHC's business such as, but not limited to, licensing,
audit, and quality assurance requirements.
(b) To the best knowledge of CHC, none of the officers,
directors, employees or agents of CHC, on behalf of or for the
benefit of CHC, directly or indirectly, has: (i) offered or paid
any amount to, or made any financial arrangement with any of the
past or present customers or potential customers of CHC in order
to obtain business from such customers other than standard pricing
or discount arrangements consistent with proper business practices
and consistent with all applicable laws; (ii) given, or agreed to
give, or is aware that there has been made, or that there is an
agreement to make any gift or gratuitous payment of any kind,
nature or description (whether in money, property or services) to
any past or present customer, supplier, source of financing,
landlord, sub-tenant, licensee or anyone else at any time which
was not legal under applicable law; (iii) made, or has agreed to
make, or is aware that there is any agreement to make any
political payments not legal under applicable law or gifts of
their respective funds or property to or for the private use of
any governmental official, employee or agent where either the
payment or the purpose of such contribution, payment or bill
relates to the business of CHC and is illegal under the laws of
the United States, any state thereof or any other jurisdiction
(foreign or domestic); or (iv) made, or has agreed to make, or is
aware that there have been, or that there is any agreement to
make, any payments to any person with the intention or
understanding that any part of such payment was to be used
directly or indirectly for the benefit of any past or present
customer, employee, supplier or landlord of CHC, or for any
purpose other than that reflected in the documents supporting the
payments and was not legal under applicable law when made.
<PAGE>
2.30 Patients. CHC has no reason to believe that its
patients for whom reimbursement has been received from Medicare,
Medicaid or other third party payors did meet the applicable
eligibility standards. To its best knowledge, CHC has filed all
financial and medical documentation required to be filed therefor
and such records are, as of the date hereof, and will be, as of
the Closing Date, true, accurate, complete and current in all
material respects.
2.31 Questionable Payments. To the best knowledge of CHC,
neither CHC nor any of CHC's current or former stockholders,
directors, officers, agents, employees or other persons associated
with or active on behalf of CHC, has on behalf of CHC or in
connection with its business, (i) used any corporate funds for
unlawful contributions, gifts, entertainment or other unlawful
expense related to political activity, (ii) made any direct or
indirect unlawful payments to foreign or domestic government
officials or employees from corporate funds, (iii) violated any
provision of the Foreign Corrupt Practices Act of 1977, (iv)
established or maintained any unlawful or unrecorded fund of
corporate monies or other assets, (v) made any false or fictitious
entries on the books and records of CHC, or made any unlawful
bribe, rebate, payoff, influence payment, kickback or other
unlawful payment of any nature, or (vi) offered, paid, solicited
or received any remuneration in violation of Medicare or Medicaid
Programs including, without limitation, the Medicare and Medicaid
Anti-Kickback Act.
2.32 Certain Representations With Respect to Smith County
Hospital.
(a) Smith County Hospital (the "Hospital"), leased by CHC
Management, is licensed by the Mississippi Department of Health
as an acute hospital authorized to operate 30 beds in its existing
facilities located in Raleigh, MS. To CHC's knowledge, except as
set forth in Exhibit 2.32(a)-1 of the Exhibit Volume, the Hospital
is presently in compliance with all the terms, conditions and
provisions of such license. Exhibit 2.32(a)-2 of the Exhibit
Volume is a copy of such license.
(b) The Hospital has current contractual arrangements with
Blue Cross. A copy of its existing Blue Cross contract is
included as Exhibit 2.32(b) of the Exhibit Volume; and to CHC's
knowledge, the Hospital is presently in com\pliance with all of
the terms, conditions and provisions of such contract.
(c) The Hospittal is qualified for participation in the
Medicare Program. A copy of its existing Medicare contract is
included as Exhibit 2.32(c) of the Exhibit Volume; and to CHC's
knowledge, the Hospital is presently in compliance with all of the
terms, conditions and provisions of such contract.
<PAGE>
(d) The Hospital is qualified for participation in the
Medicaid program. A copy of its existing Medicaid
contract is included as Exhibit 2.32(d) of the Exhibit
Volume; and to CHC's knowledge, the Hospital is
presently in compliance with all the terms, conditions
and provisions of such contract.
(e) Except as set forth in Exhibit 2.32(f) of the Exhibit
Volume, CHC has received no written notification that the
Hospital is in violation of local building codes, ordinances or
zoning laws.
(f) Included as Exhibit 2.32(f) to the Exhibit Volume is a
copy of the surveys of the Hospital by the Tennessee Department of
Health after January 1, 1994.
(g) Included as Exhibit 2.32(g) of the Exhibit Volume are
the by-laws of the Medical Staff of the Hospital.
2.33 No Finders or Brokers. Neither CHC or any of its
subsidiaries nor any officer or director of CHC or any of its
subsidiaries has engaged any finder or broker in connection with
the transactions contemplated hereunder.
2.34 Minute Books. The minute books of CHC, as previously
made available to Rx Medical, contain complete and accurate
records of all meetings and accurately reflect all other corporate
action of the respective stockholders and board of directors of
CHC.
2.35 Competitive Interests. To the best knowledge of CHC,
none of its stockholders and no affiliate of any stockholder has
any direct or indirect interest of any kind in any business which
is competitive with or engages in any actual or potential business
transactions with CHC.
2.36 Authority; Binding Effect. CHC has full power and
authority to enter into this Agreement and, subject to the
convening of a stockholders' meeting and the approval of
stockholders as required by Mississippi law, to carry out the
transactions contemplated hereby. The Board of Directors of CHC
has taken all action required by law and by CHC's Articles of
Incorporation and by-laws, or otherwise, to authorize the
execution and delivery of this Agreement and the transactions
contemplated hereby. The execution, delivery, and performance of
this Agreement constitutes the valid and binding agreement of CHC
enforceable in accordance with its terms (except as the same may
be restricted, limited or delayed by applicable bankruptcy or
other laws affecting creditors' rights generally and equitable
principles generally).
2.37 Misleading Statements. To the best knowledge of CHC,
none of the information concerning CHC contained in this Agreement
(including, without limitation, the preamble hereto), the
Financial Statements, the Exhibits in the Exhibit Volume or in the
documents to be delivered by
<PAGE>
CHC at or prior to Closing contains or will, when delivered,
contain any untrue or misleading statements of material fact or
omits or will, when delivered, omit any material fact or statement
necessary to make the other facts or statements set forth herein
or therein not material misleading. There is no fact known to CHC
which has not been disclosed to Rx Medical which has, or so far as
CHC can now reasonably foresee, will have a material adverse
effect on CHC, its operations, assets, prospects or Financial
Statements.
2.38 Representations and Warranties Deemed to be Repeated at
Effective Date of Merger. CHC's representations and warranties
contained in this Agreement shall be deemed to have been made
again at and as of the Effective Date and shall then be true,
accurate and complete in all material respects.
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF RX MEDICAL AND
ACQUISITION CORP
Rx Medical and Acquisition Corp hereby represent and
warrant as follows:
3.1 Organization and Standing of Rx Medical and Acquisition
Corp. Rx Medical and Acquisition Corp are corporations duly
organized, validly existing and in good standing under the laws of
the states of Nevada and Mississippi, respectively; have full
corporate power and authority to conduct their businesses as now
being conducted; and are duly qualified to do business in each
jurisdiction in which the nature of the property owned or leased
or the nature of the businesses conducted by them requires such
qualification.
3.2 Financial Statements. Rx Medical has delivered to CHC a
copy of its Form 10-K to the Securities and Exchange Commission
("SEC") for the year ended December 31, 1994, containing the
consolidated balance sheets of Rx Medical and its subsidiaries at
December 31, 1994, December 31, 1993 and December 31, 1992, and
the related consolidated statement of operations, stockholders'
equity and cash flows for the year then ended, together with the
opinion thereon of Grant Thornton (with respect to December 31,
1993 and 1994) and Ernst & Young (with respect to December 31,
1992), certified public accountants; and a copy of its Form 10-Qs
filed with the SEC for the quarter ended March 31, 1995 containing
the unaudited consolidated balance sheets of Rx Medical and its
subsidiaries as of March 31, 1995 and 1994 and unaudited
consolidated statement of operations for the three months then
ended on each such date, accompanied by Management's Discussion
and Analysis of the Quarterly Consolidated Statements of Earnings
(the audited and unaudited financial statements and the related
notes being herein called "Rx Medical Financial Statements"). The
Rx Medical Financial Statements are true, complete and accurate
and present fairly the assets, liabilities and financial condition
of Rx Medical and its subsidiaries as at the respective dates
thereof and the results of their operations for the periods ended
at the respective dates thereof prepared in conformity
<PAGE>
with generally accepted accounting principles applied on a
consistent basis throughout the periods involved, except as stated
in the unaudited portion of the Rx Medical Financial Statements.
3.3 Capitalization. As of the date hereof, the
authorized capital stock of Rx Medical consists of (i) 25,000,000
shares of Rx Common Stock, of which 8,779,511 shares are issued
and outstanding, and 5,710,339 shares are reserved for issuance
upon the exercise of stock options held by current and former
directors, officers, employees and consultants, exercise of
warrants and conversion of series of Rx preferred stock other than
the Rx Preferred Stock, (ii) 20,000,000 shares of Rx preferred
stock other than the Rx Preferred Stock, of which 1,890,767 shares
are issued and outstanding, and (iii) 1,100,000 shares of Rx
Preferred Stock, of which no shares are issued and outstanding.
Except as set forth above, there are (A) no shares of capital
stock or other equity securities of Rx Medical outstanding, (B) no
other outstanding options, warrants or rights to purchase or
acquire, or securities or rights convertible into or exchangeable
for, shares of capital stock of Rx Medical and (C) no contracts,
commitments, understandings or arrangements by which Rx Medical is
obligated to issue additional shares of its capital stock or
options, warrants or rights to purchase or acquire any additional
shares of its capital stock. The shares of Rx Preferred Stock and
Rx Common Stock to be issued or transferred in connection with the
consummation of the transactions contemplated hereby have been
duly authorized and, upon the issue or transfer in accordance with
the terms of this Agreement, will be validly issued, fully paid
and nonassessable.
3.4 Subsidiaries. Except as set forth on Exhibit 3.4 to the
Exhibit Volume, Rx Medical does not own, directly or indirectly,
any capital stock or other equity participation in or of any
corporation, association, joint venture or other legal entity.
Exhibit 3.4 to the Exhibit Volume sets forth Rx Medical's
ownership and voting interest in each such entity.
3.5 Absence of Certain Changes. Since March 31, 1995, there
has not been any change in the assets, liabilities or financial
condition of Rx Medical and its subsidiaries other than changes
which, in the aggregate, have not been materially adverse; any
material adverse change in the business of Rx Medical and its
subsidiaries; or any damage, destruction, casualty or loss
materially and adversely affecting the business or property of Rx
Medical and its subsidiaries.
3.6 Authority; Binding Effect. Rx Medical and Acquisition
Corp have corporate power to execute and deliver this Agreement
and consummate the transactions contemplated hereby and have taken
(or by the Closing Date will have taken) all action required by
law, their Articles of Incorporation, by-laws or otherwise to
authorize such execution and delivery and the consummation of the
transactions contemplated hereby. The execution, delivery, and
performance of this Agreement constitutes the valid and binding
agreement of Rx Medical and Acquisition Corp enforceable in
accordance with its terms (except as the same may be restricted,
limited or delayed by applicable bankruptcy or other laws
affecting creditors' rights generally and except as to the remedy
of specific performance which may not be available under the laws
of various jurisdictions).
<PAGE>
3.7 No Finders or Brokers. Neither Rx Medical nor
Acquisition Corp nor any officer or director thereof has engaged
any finder or broker in connection with the transactions
contemplated hereunder.
3.8 Defaults. Except as set forth in Exhibit 3.8 to the
Exhibit Volume, to Rx Medical's knowledge, neither Rx Medical nor
any of its subsidiaries is in default under, nor has any event
occurred which, with the lapse of time or action by a third party,
could result in a default under, any outstanding material
indenture, mortgage, contract or agreement to which Rx Medical or
any of its subsidiaries is a party or by which Rx Medical or any
of its subsidiaries may be bound or under any provision of the
Articles of Incorporation or by-laws of Rx Medical or any of its
subsidiaries. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated by
this Agreement will not violate any provision of, or result in
the breach of, or constitute a default under, any law the
violation of which would result in a material liability to Rx
Medical and its subsidiaries considered as a whole, or any order,
writ, injunction or decree of any court, governmental agency or
arbitration tribunal; constitute a violation of or a default
under, or a conflict with, any term or provision of the Articles
of Incorporation or by-laws of Rx Medical or any of its
subsidiaries or any material contract, commitment, indenture,
lease or other agreement, or any other restriction of any kind to
which Rx Medical or any of its subsidiaries is a party or by which
it is bound; or cause, or give any party grounds to cause (with or
without notice, the passage of time or both) the maturity of any
material liability or obligation of Rx Medical or any of its
subsidiaries to be accelerated, or increase any such liability or
obligation.
3.9 Pending Litigation. Except as set forth in Exhibit 3.9
and more fully described in Rx Medical's Form 10-K for the year
ended December 31, 1994, and its Form 10-Q for the three months
ended March 31, 1995, there are no proceedings pending or, to the
knowledge of Rx Medical, threatened, against or affecting Rx
Medical or any of its subsidiaries in any court or before any
governmental authority or arbitration board or tribunal which
involve the possibility of materially and adversely affecting the
properties, business, prospects, profits or condition (financial
or otherwise) of Rx Medical or any of its subsidiaries considered
as a whole. Rx Medical shall promptly notify CHC of any material
lawsuits, claims, proceedings or investigations which are
commenced against either it or Acquisition Corp or any Affiliate
thereof between the date of this Agreement and the Closing Date.
3.10 Court Orders, Decrees and Laws. Except as set forth in
Exhibit 3.10 and more fully described in Rx Medical's Form 10-K
for the year ended December 31, 1994, and its Form 10-Q for the
three months ended March 31, 1995: (i) there is not outstanding
or, to Rx Medical's knowledge, threatened any order, writ,
injunction or decree of any court, governmental agency or
arbitration tribunal against or affecting Rx Medical or any of its
subsidiaries or any of their assets which would significantly
interfere with their ability to conduct their businesses; (ii) to
Rx Medical's knowledge, Rx Medical and its subsidiaries are in
compliance with all applicable federal, state and local laws,
<PAGE>
regulations and administrative orders which are material the
business of Rx Medical and its subsidiaries; (iii) no governmental
authorities are presently conducting any investigation or
proceeding against Rx Medical or any of its subsidiaries and (iv)
to Rx Medical's knowledge, no such investigation or proceeding is
pending or being threatened.
3.11 Taxes. Except as set forth in Exhibit 3.11, all
federal, state and other tax returns of Rx Medical and its
subsidiaries required by law to be filed have been timely filed,
and Rx Medical and its subsidiaries have paid or provided for all
taxes (including taxes on properties, income, franchises,
licenses, sales and payrolls) which have become due pursuant to
such returns or pursuant to any assessment, except for any taxes
and assessments of which the amount, applicability or validity is
currently being contested in good faith by appropriate proceedings
and with respect to which Rx Medical and its subsidiaries have set
aside on its books reserves deemed to be adequate. The amounts
set up as provisions for taxes on the Rx Medical Financial
Statements are sufficient for the payment of all unpaid federal,
state, county and local taxes accrued for or applicable to the
period then ended and all periods prior thereto for which Rx
Medical or any of its subsidiaries may be liable, except for any
taxes and assessments of which the amount, applicability or
validity is currently being contested in good faith by appropriate
proceedings and with respect to which Rx Medical or its
subsidiary, as the case may be, has set aside on its books
reserves deemed to be adequate. There are no tax liens on any of
the property of Rx Medical or any of its subsidiaries except those
with respect to taxes not yet due and payable and except for any
taxes and assessments of which the amount, applicability or
validity is currently being contested in good faith by appropriate
proceedings and with respect to which Rx Medical or its
subsidiary, as the case may be, has set aside on its books
reserves deemed to be adequate. Rx Medical and its subsidiaries
have withheld from each payment made to employees the amount of
all taxes (including, but not limited to, federal, state and local
income taxes and Federal Insurance Contribution Act taxes)
required to be withheld therefrom and all amounts customarily
withheld therefrom, and have set aside all other employee
contributions or payments customarily set aside with respect to
such wages and have paid or will pay the same to, or have
deposited or will deposit such payment with, the proper tax
receiving officers or other appropriate authorities.
3.12 Labor Matters. To Rx Medical's knowledge, Rx Medical and
its subsidiaries are in compliance with all applicable laws and
agreements respecting employment and employment practices, terms
and conditions of employment and wages and hours, and are not
engaged in any unfair labor practice. There is no labor strike,
dispute, slowdown or stoppage actually pending or, to Rx Medical's
knowledge, threatened against or affecting Rx Medical or any of
its subsidiaries which materially adversely affects the business
of Rx Medical and its subsidiaries taken as a whole. No grievance
which might have a material adverse effect on Rx Medical and its
subsidiaries or the conduct of their businesses considered as a
whole is pending.
<PAGE>
3.13 Exchange Act ReportsExcept as set forth in Exhibit
3.13, Rx Medical has timely filed all reports required to be filed
by 13 or 15(d) of the 1934 Act for the 12 months preceding the
date hereof. As of their respective dates, each report or other
statement required to be filed thereunder complied in all material
respects with the rules and regulations promulgated by the
Securities and Exchange Commission and none of such reports
contains any untrue statement of a material fact or omits to state
a material fact required to be stated therein in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading.
3.14 Potential Liability under Stark Act. The potential
liabilities of Rx Medical are disclosed in the opinion of auditors
contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994. Rx Medical does not meet the
$75 million stockholders' equity requirement of the OBRA 1993
amendments to the Stark Act which, if met, would generally allow
physician/shareholders to refer patients, and it is unlikely that
Rx Medical will meet this threshold in the foreseeable future.
Since January 1, 1995 and continuing through the present,
physicians who hold investment interests in Rx Medical have made
referrals to facilities owned by Rx Medical and its subsidiaries.
Only a relatively small number of physicians who refer Medicare or
Medicaid business to Rx Medical also own common stock of Rx
Medical, and the volume of business represented by these referring
physician/shareholders accounts for less than 7% of total
revenues. That notwithstanding, management of Rx Medical believes
that Rx Medical's failure to qualify for the Stark Act exception
may have a material adverse impact on the business, financial
condition, cash flows and results of operations of Rx Medical. Rx
Medical is taking steps to notify physician/shareholders of the
requirements of the Stark Act and to monitor its operations so
that physician/shareholder referrals are no longer accepted.
However, there can be no assurance that Rx Medical will, in all
instances, be able to prevent the referral of Medicare or Medicaid
business to facilities owned by Rx Medical by
physician/shareholders.
3.15 Disclosure. No representations and warranties by Rx
Medical in this Agreement and no statement in this Agreement or
any document or certificate furnished or to be furnished to CHC
pursuant hereto contains or will contain any untrue statement or
omits or will omit to state a fact necessary in order to make the
statements contained therein not misleading. Rx Medical has
disclosed to CHC all facts known to Rx Medical material to the
assets, liabilities, business operations and property of Rx
Medical and its subsidiaries. There are no facts known to Rx
Medical not yet disclosed which would materially adversely affect
the future operations of Rx Medical and its subsidiaries.
3.16 Representations and Warranties Deemed to be Repeated at
Time of Merger. Rx Medical's representations and warranties
contained in this Agreement shall be deemed to have been made
again at and as of the Effective Date and shall then be true,
accurate and complete in all material respects.
<PAGE>
ARTICLE COVENANTS OF RX MEDICAL
Rx Medical hereby covenants and agrees as follows:
4.1 Acquisition Corp. Prior to the Closing Date, Rx Medical
shall provide Acquisition Corp with a sufficient number of shares
of Rx Medical Common and Preferred Stock and cash for distribution
to the Shareholders in accordance with this Agreement.
4.2 Listing
(a) Common Stock. As soon as practicable after the
Closing, and in any event within 180 days after the Closing, Rx
Medical shall take all steps necessary to list on the American
Stock Exchange the 250,002 shares of Rx Medical Common Stock which
Rx Medical is required to issue as contemplated by Section 1.2(b)
of this Agreement and shall have caused the issuance of the Rx
Medical Common Stock Rx Medical is obligated to issue under this
Agreement. In the event Rx Medical shall not have complied with
this 4.2(a), Rx Medical shall pay, the following amounts to the
former minority shareholders of CHC:
Section 4.2 (a) Common Stock
<TABLE>
<CAPTION>
CHC Shareholder/Optioneee Amount
<S> <C>
Sam J. Lewis, Jr. $425,087
C.J. Herring 37,299
Margaret Muse 81,028
Paul Black 17,322
Brenda Olters 17,322
Mike Edwards 17,322
Michael Lindley 26,303
$621,683
</TABLE>
(b) Preferred Stock Conversion Shares. Within 365 days
after the Closing, Rx Medical shall take all steps necessary to
list on the American Stock Exchange the Rx Medical Common Stock
which is issuable upon conversion of the Rx Preferred Stock. In
the event Rx Medical shall not have complied with this 4.2(b),
Rx
<PAGE>
Medical shall pay, immediately after such 365th day
against surrender of the Rx Preferred Stock, the
following amounts to the former shareholders and
optionees of CHC:
<TABLE>
<CAPTION>
CHC Amount
Shareholder/Optionee
<S> <C>
Sam J. Lewis, Jr. $1,674,465
C. J. Herring 144,255
Margaret Muse 324,110
Churchill 3,001,350
Technologies, Inc.
Paul Black 71,420
Brenda Olters 71,420
Mike Edwards 71,420
Michael Lindley
97,810
Total $
5,456,250
</TABLE>
4.3 Optional Registration of Rx Medical Common Stock. If at
any time Rx Medical intends to file a registration statement with
the SEC under the Securities Act of 1933, as amended (the
"Securities Act") relating to the offer and sale of shares of Rx
Common Stock (other than a registration statement that relates
exclusively to the registration of securities under an employee
stock option, bonus, retirement or other compensation plan or
solely to the issuance of securities in connection with a business
acquisition or combination), Rx Medical shall so notify the
stockholders of CHC listed on the signature page hereto (the
"Shareholders") or their transferees in writing of its intention
at least 30 days prior to the filing of such registration
statement. If any such Shareholder or its transferee gives
written notice to Rx Medical, within ten days of delivery of such
notice from Rx Medical, of his, her or its desire to have any Rx
Medical Shares included in such registration statement, such Rx
Medical Shares shall be so included. All legal, accounting and
printing costs and all other expenses of Rx Medical in connection
with the foregoing registration shall be paid by Rx Medical.
4.4 Mandatory Registration of Rx Medical Common Stock.
During the first three months of any calendar year after the
Closing Date, any Shareholder or its transferee shall be entitled,
upon demand in writing, to require that Rx Medical file a
registration statement under the Securities Act to register all or
any of the shares of Rx Common Stock held by such Shareholder or
its transferee or into which any shares of Rx Preferred Stock held
by such person is convertible, provided that the aggregate market
value of all such shares with respect to which such Shareholder
and other
<PAGE>
Shareholders demand registration shall be at least
$1,000,000. Upon receipt of such demand, Rx Medical shall use
commercially reasonable efforts to diligently prepare, file and
process to effectiveness a registration statement under the
Securities Act and thereafter to maintain the effectiveness of
such registration statement until the earlier of (i) the date on
which the last of the shares of Rx Medical Common Stock covered by
the registration statement have been sold and (ii) the second
anniversary of the effective date of such registration.
4.5 Prospectus Concerning Registration. Rx Medical, at
its sole cost and expense, will furnish to the Shareholders or the
transferees of such Shareholders requesting such registration a
prospectus (in such reasonable quantities as shall be requested)
containing such financial statements and other information as may
be necessary to meet the requirements of the Act and the rules and
regulations thereunder and relating to the Rx Medical Common
Stock.
4.6 Best Efforts to Secure Consents. Rx Medical shall use
its best efforts to secure before the Closing all necessary
consents and approvals needed to satisfy all the conditions
precedent to the obligations of CHC hereunder.
4.7 Information. Rx Medical shall promptly provide to CHC
upon reasonable request any information or documents reasonably
necessary for CHC or its stockholders to make an informed judgment
as to the advisability of consummating the transactions
contemplated hereby or to verify the representations and
warranties of Acquisition Corp herein. Until the Closing Date Rx
Medical shall notify CHC of any matter which may be materially
adverse to Rx Medical and its subsidiaries considered as a whole
and shall keep CHC fully informed of such events.
4.8 Corporate Action. Rx Medical and Acquisition Corp will
take all necessary corporate and other action and use its best
efforts to obtain all consents, approvals and amendments of
agreements required of them to carry out the transactions
contemplated by this Agreement and to satisfy the conditions
specified herein.
4.9 Handling of Documents. With respect to information
provided by CHC pursuant to this Agreement prior to the Closing,
Rx Medical and Acquisition Corp shall keep all such information
confidential which is not in the public domain, except to the
extent that such information (i) becomes generally available to
the public other than as a result of a disclosure directly or
indirectly by Rx Medical, (ii) was known by Rx Medical on a non-
confidential basis prior to disclosure to Rx Medical by CHC
pursuant to this Agreement or (iii) becomes available to Rx
Medical on a non-confidential basis from a source (other than CHC)
which is entitled to disclose the same, and to exercise the same
care in handling such information as they would exercise with
similar information of their own.
<PAGE>
ARTICLE 5 COVENANTS OF CHC
CHC hereby covenants and agrees as follows:
5.1 Access and Information. Between the date of this
Agreement and the Effective Date; CHC will: (i) provide to Rx
Medical and its officers, attorneys, accountants and other
representatives, during normal business hours, or otherwise if Rx
Medical deems necessary, free and full access to all of the
properties, assets, agreements, commitments, books, records,
accounts, tax returns, and documents of CHC and its subsidiaries
and permit them to make copies thereof; (ii) furnish Rx Medical
and its representatives with all information concerning the
business, properties and affairs of CHC and its subsidiaries as Rx
Medical requests and certified by the officers, if requested;
(iii) cause the independent public accountants of CHC and its
subsidiaries to make available to Rx Medical and its
representatives all financial information relating to CHC and its
subsidiaries requested, including all working papers pertaining to
audits and reviews made heretofore by such auditors; (iv) furnish
Rx Medical true and complete copies of all financial and operating
statements of CHC and its subsidiaries; (v) permit access to
customers and suppliers for consultation or verification of any
information obtained by Rx Medical and use their best efforts to
cause such customers and suppliers to cooperate with Rx Medical in
such consultation and in verifying such information; and (vi)
cause their employees, accountants and attorneys to make
disclosure of all material facts known to them affecting the
financial condition and business operations of CHC and its
subsidiaries and to cooperate fully with any audit, review,
investigation or examination made by Rx Medical and its
representatives, including, without limitation, with respect to:
(a) The books and records of CHC and its subsidiaries;
(b) The reports of state and federal regulatory
examinations;
(c) Leases, contracts and commitments between CHC or any of
its subsidiaries and any other person;
(d) Physical examination of the Real Property; and
(e) Physical examination of the Equipment and Furnishings.
5.2 Conduct of Business. Between the date hereof and the
Effective Date, except as otherwise expressly approved in writing
by Rx Medical, CHC and its subsidiaries shall conduct their
businesses only in the ordinary course thereof consistent with
past practice and in such a manner that the representations and
warranties contained in Article 2 of this Agreement shall be true
and correct at and as of the Effective Date (except for changes
contemplated, permitted or required by this Agreement) and so that
the conditions to be satisfied by CHC at the Closing shall have
been
<PAGE>
satisfied. CHC will, consistent with conducting its business
in accordance with reasonable business judgment, preserve the
business of CHC intact; use its best efforts to keep available to
Rx Medical and Acquisition Corp the services of the present
employees of CHC (except those dismissed for cause or those who
voluntarily discontinue their employment) and preserve for Rx
Medical and Acquisition Corp the goodwill of the suppliers,
patients and others having business relations with CHC.
5.3 Compliance with Agreement. CHC shall not undertake any
course of action inconsistent with satisfaction of the conditions
applicable to it set forth in this Agreement, and shall do all
such acts and take all such measures as may be reasonably
necessary to comply with the representations, agreements,
conditions and other provisions of this Agreement. CHC shall give
Rx Medical prompt written notice of any change in any information
contained in the representations and warranties made in Article 2
hereof and on the Exhibits referred to therein (provided, however,
that such notice shall not limit Rx Medical's rights under 7.1
hereof) and of any condition or event which constitutes a default
of any covenant or agreement made in Article 5 or in any other
section hereof.
5.4 Best Efforts to Secure Consents. CHC shall take the
necessary corporate and other action and shall use its best
efforts to secure before the Closing Date all necessary consents
and approvals required to carry out the transactions contemplated
by the Agreement and to satisfy all other conditions precedent to
the obligations of Rx Medical and Acquisition Corp and CHC.
5.5 Unusual Events. Until the Effective Date, CHC shall
supplement or amend all relevant Exhibits in the Exhibit Volume
with respect to any matter thereafter arising or discovered which,
if existing or known at the date of this Agreement, would have
been required to be set forth or described in such Exhibits.
5.6 Interim Financial Statements. Within 30 days after the
end of each calendar month subsequent to the date of this
Agreement and prior to the Effective Date, CHC shall deliver to Rx
Medical an unaudited consolidated balance sheet of CHC and its
subsidiaries as at the end of such calendar month together with
the related consolidated statement of operations. All such
financial statements shall fairly present the financial position,
results of operations and changes in financial periods indicated,
in accordance with generally accepted accounting principles
consistently applied, except that note information may be omitted
in such statements, subject to normal year-end audit adjustments,
but only if such adjustments are of a normal, recurring type and
are not material in the aggregate.
5.7 Departmental Violations. All notes or notices of
violations of law or municipal ordinances, orders or requirements
noted in or issued by the Departments of Buildings, Fire, Labor,
Health, or any other State or Municipal Department having
jurisdiction against or affecting the
<PAGE>
business, property or assets of CHC shall be complied with
prior to the Closing Date. All such notes or notices, after the
date hereof and prior to the Closing Date, shall be complied with
by CHC prior to the Closing Date. Upon written request, CHC shall
furnish Rx Medical and Acquisition Corp with an authorization to
make the necessary searches for such notes or notices.
ARTICLE 6 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF CHC
All obligations of CHC which are to be discharged under
this Agreement at the Closing are subject to the performance, at
or prior to the Closing, of all covenants and agreements contained
herein which are to be performed by Rx Medical and Acquisition
Corp at or prior to the Closing and to the fulfillment at, or
prior to, the Closing, of each of the following conditions (unless
expressly waived in writing by CHC at any time at or prior to the
Closing):
6.1 Representations and Warranties True. All of the
representations and warranties made by Rx Medical and Acquisition
Corp contained in Article 3 of this Agreement shall be true as of
the date of this Agreement, shall be deemed to have been made
again at and as of the date of Closing, and shall be true at and
as of the date of Closing in all material respects; Rx Medical and
Acquisition Corp shall have performed and complied in all material
respects with all covenants and conditions required by this
Agreement to be performed or complied with by them prior to or at
the Closing; and CHC shall have been furnished with a certificate
of the President or any Vice President of Rx Medical and
Acquisition Corp, dated the Closing Date, in such officer's
capacity, certifying to the truth of such representations and
warranties as of the Closing and to the fulfillment of such
covenants and conditions.
6.2 Authority. All action required to be taken by or on the
part of Rx Medical and Acquisition Corp to authorize the
execution, delivery and performance of this Agreement by Rx
Medical and Acquisition Corp and the Articles of Merger by
Acquisition Corp and the consummation of the transactions
contemplated hereby shall have been duly and validly taken by the
Board of Directors of Rx Medical and Acquisition Corp.
6.3 No Obstructive Proceeding. No action or proceedings
shall have been instituted against, and no order, decree or
judgment of any court, agency, commission or governmental
authority shall be subsisting against CHC, or the officers or
directors of CHC, which seeks to, or would, render it unlawful as
of the Closing to effect the transactions contemplated hereby in
accordance with the terms hereof, and no such action shall seek
damages in a material amount by reason of the transactions
contemplated hereby. Also, no substantive legal objection to the
transactions contemplated by this Agreement shall have been
received from or threatened by any governmental department or
agency.
<PAGE>
6.4 Delivery of Certain Certified Documents. At the Closing,
Rx Medical shall deliver to CHC copies of the Articles of
Incorporation of Rx Medical and Acquisition Corp certified (not
more than 30 days prior to the Closing Date) by the appropriate
governmental authorities and copies of resolutions of the Boards
of Directors of Rx Medical and Acquisition Corp and the consent of
Rx Medical as the sole stockholder of Acquisition Corp, certified
by the secretary or assistant secretary of Rx Medical and
Acquisition Corp approving and authorizing the execution and
delivery of this Agreement and the consummation of the
transactions contemplated hereby.
6.5 Approval by Stockholders of CHC. The stockholders of CHC
shall have approved the Merger in accordance with the Mississippi
Business Corporation Act.
6.6 Proceedings and Documents Satisfactory. All proceedings
in connection with the transactions contemplated hereby and all
certificates and documents delivered to CHC pursuant to this
Agreement shall be satisfactory in form and substance to CHC and
its counsel acting reasonably and in good faith.
6.7 No Agency Proceedings. There shall not be pending or, to
the knowledge of Rx Medical, threatened, any claim, suit, action
or other proceeding brought by a governmental agency before any
court or governmental agency, seeking to prohibit or restrain the
transactions contemplated by this Agreement or material damages in
connection therewith.
ARTICLE 7 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF RX
MEDICAL AND ACQUISITION CORP
All obligations of Rx Medical and Acquisition Corp which
are to be discharged under this Agreement at the Closing are
subject to the performance, at or prior to the Closing, of all
covenants and agreements contained herein which are to be
performed by CHC at or prior to the Closing and to the fulfillment
at or prior to the Closing of each of the following conditions
(unless expressly waived in writing by Rx Medical and Acquisition
Corp at any time at or prior to the Closing):
7.1 Representations and Warranties True; Right of Offset.
(a) All of the representations and warranties of CHC
contained in Article 2 of this Agreement shall be true and correct
as of the date of this Agreement, shall be deemed to have been
made again at and as of the Closing, and shall be true and correct
at and as of the date of Closing (without taking into account any
disclosures made by CHC to Rx Medical and Acquisition Corp
pursuant to 5.5 hereof). CHC shall have performed or complied
in all material respects with all covenants and conditions
required by this Agreement to be performed or complied with by it
prior to or at the Closing. Rx Medical and Acquisition Corp shall
be furnished with a certificate of the President or any Vice
President of CHC, dated the Closing Date, in such person's
corporate capacity,
<PAGE>
certifying to the truth and accuracy of CHC's representaions
and warranties as of the time of the Closing and to the
fulfillment of such covenants and conditions. For the purposes of
this 7.1 only, CHC shall have breached its representations and
warranties hereunder (and shall be deemed not to have complied
with the covenants and conditions to be performed or complied with
by CHC hereunder) if such breach results in undisclosed
liabilities, claims, obligations, causes of action, losses,
damages or expenses (collectively, the "Losses"), determined
within six (6) months after the Effective Date, in excess of
$500,000.
(b) Rx Medical shall have a right of offset in the
amount of the Losses against the shares of Common Stock underlying
the Preferred Stock. The amount of the offset shall be determined
by (i) dividing the amount of the Losses by the Market Value per
share of the Common Stock (as defined in Appendix 1.2 attached
hereto on the date immediately preceding the date on which this
right of offset shall be effected), and (ii) reducing the number
of shares of Common Stock issuable upon conversion of the
Preferred Stock by the resulting number of shares of Common Stock
derived in (i) hereof.
7.2 No Obstructive Proceeding. No action or proceedings
shall have been instituted against, and no order, decree or
judgment of any court, agency, commission or governmental
authority shall be subsisting against Rx Medical, Acquisition Corp
or the officers or directors of Rx Medical or Acquisition Corp
which seeks to restrain, or would render it unlawful as of the
Closing to effect, the transactions contemplated hereby in
accordance with the terms hereof, and no such action shall seek
damages in a material amount by reason of the transaction
contemplated hereby. Also, no substantive legal objection to the
transactions contemplated by this Agreement shall have been
received from or threatened by any governmental department or
agency.
7.3 Proceedings and Documents Satisfactory. All proceedings
in connection with the transactions contemplated hereby and all
certificates and documents delivered to Rx Medical and Acquisition
Corp pursuant to this Agreement shall be satisfactory in form and
substance to Rx Medical and its counsel acting reasonably and in
good faith.
7.4 No Adverse Change. From the date of this Agreement until
the Closing, the operations of CHC and its subsidiaries shall have
been conducted in the ordinary course of business consistent with
past practice and from the date of the CHC Financial Statements
until the Closing; no event shall have occurred or have been
threatened which has or would have a material and adverse affect
upon the financial condition, assets, liabilities, operations, net
worth, prospects or business of CHC or any of its subsidiaries;
and CHC and its subsidiaries shall have not sustained any loss or
damage to their assets, whether or not insured, or union activity
that affects materially and adversely their ability to conduct
their businesses.
<PAGE>
7.5 Approval by Stockholders of CHC. The stockholders
of CHC shall have approved the Merger in accordance with the
Mississippi Business Corporation Act.
7.6 Delivery of Certain Documents. At the Closing, CHC shall
have delivered to Rx Medical copies of the Articles of
Incorporation of CHC and its subsidiaries certified (not more than
30 days prior to the Closing Date) by the appropriate governmental
authorities and copies of resolutions of the stockholders of CHC
and of the Board of Directors of CHC, certified by the secretary
of CHC, approving and authorizing the execution and delivery of
this Agreement and the consummation of the transactions
contemplated hereby.
7.7 Estoppel Certificates. Rx Medical shall have such
estoppel certificates as it may deem necessary from the owners of
the managed facilities which are subject to all management
agreements held by CHC which reflect that such management
agreements are valid and enforceable, not in default, and
otherwise free of any material adverse contingency and from the
lessor of the Smith County Hospital to the effect that the lease
is valid and subsisting, not in default and otherwise free of any
material adverse contingency.
7.8 Required Consents. Rx Medical shall have received all
consents necessary to its performance of this Agreement.
ARTICLE 8 TERMINATION
8.1 Optional Termination. This Agreement may be terminated
and the transactions contemplated hereby abandoned at any time
prior to the Effective Date, notwithstanding stockholder approval
as follows:
(a) By the mutual consent of Rx Medical and CHC; or
(b) By CHC, if any of the conditions set forth in Article 6
shall not have been met by July 7, 1995; provided that CHC shall
not be entitled to terminate this Agreement pursuant to this
8.1(b) if CHC's willful breach of this Agreement has prevented the
consummation of the transactions contemplated hereby; or
(c) By Rx Medical, if any of the conditions provided in
Article 7 hereof have not been met by July 7, 1995; provided that
Rx Medical shall not be entitled to terminate this Agreement
pursuant to this 8.1(c) if Rx Medical's willful breach of this
Agreement has prevented the consummation of the transactions
contemplated hereby.
8.2 Notice of Abandonment. In the event of such termination
by either Rx Medical or CHC pursuant to 8.1 above, written
notice shall forthwith be given to the other party hereto.
<PAGE>
8.3 Mandatory Termination. If the Closing has not occurred
by July 7, 1995, this Agreement shall automatically terminate and
no longer be of any force or effect.
8.4 Termination. In the event this Agreement is terminated
as provided above, Rx Medical and Acquisition Corp shall deliver
to CHC all documents (and copies thereof in its possession)
concerning CHC and its subsidiaries previously delivered by CHC to
Rx Medical and Acquisition Corp; and none of the parties nor any
of their respective partners, stockholders, directors, or officers
shall have any liability to the other party for costs, expenses,
loss of anticipated profits, consequential damages, or otherwise,
except for any deliberate breach of any of the provisions of this
Agreement.
ARTICLE 9 INDEMNIFICATION
9.1 By CHC. CHC shall indemnify, defend, protect and hold
harmless Rx Medical, Acquisition Corp, and their affiliates,
promptly upon demand at any time and from time to time, against
any and all losses, liabilities, claims, actions, damages, and
expenses, including, without limitation, reasonable attorneys'
fees and disbursements incurred by Rx Medical and Acquisition Corp
or their affiliates, arising out of or in connection with any of
the following: (a) any misrepresentation or breach of any warranty
made by CHC in any document, certificate or instrument delivered
by CHC hereunder ("CHC Documents"); (b) any breach or
nonfulfillment of any covenant or agreement made by CHC in any of
CHC Documents; (c) the claims of any broker or finder engaged by
CHC; and (d) without in any manner limiting the foregoing, any
liabilities or obligations of, or claims or causes of action
against, CHC which arose prior to the Closing Date except those
which are set forth or reserved against in the CHC Financial
Statements or are set forth in an Exhibit in the Exhibit Volume,
or were incurred in the ordinary course of business as heretofore
conducted and are not materially adverse to the operations or
prospects of CHC's business.
9.2 By Rx Medical and Acquisition Corp. Rx Medical and
Acquisition Corp shall indemnify, defend, protect and hold
harmless CHC and its affiliates, promptly upon demand at any time
and from time to time, against any and all losses, liabilities,
claims, actions, damages, and expenses, including, without
limitation, reasonable attorneys' fees and disbursements incurred
by CHC or its affiliates, arising out of or in connection with any
of the following: (a) any misrepresentation or breach of any
warranty made by Rx Medical or Acquisition Corp in any document,
certificate or instrument delivered by RX Medical or Acquisition
Corp hereunder ("Rx Medical Documents"); (b) any breach or
nonfulfillment of any covenant or agreement made by Rx Medical or
Acquisition Corp in any of the Rx Medical Documents; (c) the
claims of any broker or finder engaged by Rx Medical or
Acquisition Corp; and (d) without in any manner limiting the
foregoing, any liabilities or obligations of, or claims or causes
of action against, Rx Medical or Acquisition Corp which arose
prior to the Closing Date except those which are set forth or
reserved against in the Rx Medical Financial Statements or are set
forth in an Exhibit in the Exhibit Volume,
<PAGE>
or were incurred in the ordinary course of business as
heretofore conducted and are not materially adverse to the
operations or prospects of Rx Medical's or Acquisition Corp's
business.
9.3 Survival. All representations, warranties, indemnities,
covenants, and agreements made by CHC, Rx Medical and Acquisition
Corp in CHC's or Rx Medical's and Acquisition Corp's Documents
shall survive the closing hereof, notwithstanding any examination
or investigation made by or for any party.
9.4 Limitations. Notwithstanding the foregoing, CHC, on the
one hand, and Rx Medical and Acquisition Corp on the other (CHC,
on the one hand, and Rx Medical and Acquisition Corp on the other,
are each sometimes hereinafter referred to in this 9.4 as a
"party") shall only be entitled to indemnification for Losses
arising out of matters referred to in this Article 9 if it shall
have given written notice to the other party, setting forth its
claim for indemnification in reasonable detail, within the earlier
of three years after the date hereof or one year after the
discovery by it of its claim for indemnification.
9.5 Defense An indemnified party shall promptly give written
notice to the indemnifying party after the indemnified party has
knowledge that any legal proceeding has been instituted or any
claim has been asserted, in respect of which, indemnification may
be sought under the provisions of Article 9, provided that failure
to give such notice shall not preclude indemnification with
respect to such proceeding or claim except to the extent of any
additional or increased Losses directly caused by such failure.
If the indemnifying party, within ten days after the indemnified
party has given such notice (or within such shorter period of time
as an answer or other responsive motion may be required), shall
have acknowledged in writing its obligation to indemnify and shall
have furnished to the indemnified party a bond, letter of credit,
escrow or similar arrangement in an amount equal to the total
amount demanded in such claim or proceeding, then the indemnifying
party shall have the right to control the defense of such claim or
proceeding, and the indemnified party shall not settle or
compromise such claim or proceeding without the written consent of
the indemnifying party, which consent shall not unreasonably be
withheld or delayed.
ARTICLE 10 MISCELLANEOUS
10.1 Expenses. All expenses of the preparation of this
Agreement and of the transactions contemplated hereby, including,
without limitation, counsel fees, accounting fees, investment
adviser's fees and disbursements, shall be borne by the respective
parties incurring such expense, whether or not such transactions
are consummated.
10.2 Notices. All notices, demands and other communications
hereunder shall be in writing and shall be deemed to have been
duly given if delivered in person or mailed by certified mail or
registered mail (postage prepaid) or sent by reputable overnight
courier service (charges prepaid):
<PAGE>
To CHC: Consolidated Health Corporation of
Mississippi, Inc.
5550 Franklin Rd.
Suite 201
Nashville, TN 37220
Attention: Sam J. Lewis, Jr., CEO
with a copy to: H. Frederick Humbracht
Boult, Cummings, Conners & Berry
414 Union St., Suite 1600
Nashville, TN 38219
and a copy to: Churchill Technology, Inc.
181 Cooper Ave.
Tonawanda, NY 14150
Attention: Jerry Dennis, Esq.
and a copy to: Boult, Cummings, Conners & Berry
414 Union Street, Suite 1600
Nashville, TN 37219
Attention: John E. Gillmor
To Rx Medical and Rx Medical Services Corp.
Acquisition Corp 888 East Las Olas Blvd., Suite
300
Ft. Lauderdale, FL 33301
Attention: Joseph C. Wasch, Esq.
and a copy to: Proskauer Rose Goetz & Mendelsohn
2255 Glades Road, Suite 340 West
Boca Raton, Fl 33431
Attention: Christine A. Butler
or to such other address as either CHC or Rx Medical may
designate by notice to the other.
10.3 Entire Agreement. pursuant hereto constitute the entire
contract between the parties hereto pertaining to the subject
matter hereof and supersede all prior and contemporaneous
agreements, understandings, negotiations and discussions, whether
written or oral, of the parties, and there are no representations,
warranties or other agreements between the parties in connection
with the subject matter hereof, except as specifically set forth
herein. No supplement, modification or waiver of this Agreement
shall be binding unless executed in writing by the parties to be
bound thereby.
<PAGE>
10.4 Governing Law. THE VALIDITY AND CONSTRUCTION OF THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF
MISSISSIPPI WITHOUT REGARD TO THE CONFLICTS OF LAW PROVISIONS
THEREOF.
10.5 Legal Fees and Costs. In the event either party elects
to incur legal expenses to enforce or interpret any provision of
this Agreement, the prevailing party will be entitled to recover
such legal expenses, including, without limitation, reasonable
attorneys' fees, costs and necessary disbursements, in addition to
any other relief to which such party shall be entitled.
10.6 CON Disclaimer. This Agreement shall not be deemed to
be an acquisition or obligation of a capital expenditure or of
funds within the meaning of the certificate of need law of any
state, until the appropriate governmental agencies shall have
granted a certificate of need or other appropriate approval or
ruled that no certificate of need or other appropriate approval
is required.
10.7 Time. Time is of the essence for purposes of each and
every provision of this Agreement.
10.8 Section Headings. The Section headings are for
reference only and shall not limit or control the meaning of any
provision of this Agreement.
10.9 Waiver. No delay or omission on the part of any party
hereto in exercising any right hereunder shall operate as a waiver
of such right or any other right under this Agreement.
10.10 Nature and Survival of Representations. All
representations and warranties contained in any certificate or
other instrument delivered pursuant hereto by or on behalf of CHC
or by or on behalf of Rx Medical, shall be deemed to be
representations and warranties made pursuant to this Agreement by
the delivering party. All representations or warranties made by
the parties shall survive until December 31, 1996.
10.11 Exhibits. All Exhibits, Appendices, schedules and
documents referred to in or attached to this Agreement are
integral parts of this Agreement as if fully set forth herein and
all statements appearing therein shall be deemed to be
representations. All items disclosed hereunder shall be deemed
disclosed only in connection with the specific representaion to
which they are explicitly referenced.
10.12 Assignment. No party hereto shall assign this
Agreement without first obtaining the written consent of the other
party.
10.13 Binding on Successors and Assigns. Subject to 10.12,
this Agreement shall inure to the benefit of and bind the
respective heirs, administrators, successors and assigns of the
parties hereto. Nothing expressed or referred to in this
Agreement is intended or shall be construed to give
<PAGE>
any person other than the parties to this Agreement or their
respective successors or permitted assigns any legal or equitable
right, remedy or claim under or in respect of this Agreement or
any provision contained herein, it being the intention of the
parties to this Agreement that this Agreement shall be for the
sole and exclusive benefit of such parties or such successors and
assigns and not for the benefit of any other person.
10.14 Parties in Interest. Nothing in this Agreement is
intended to confer any right on any person other than the parties
to it and their respective successors and assigns, nor is anything
in this Agreement intended to modify or discharge the obligation
or liability of any third person to any party to this Agreement,
nor shall any provision give any third person any right of
subrogation or action over against any party to this Agreement.
10.15 Amendments. This Agreement may be amended, but only in
writing, signed by the parties hereto, at any time prior to the
Closing, before or after approval hereof by the stockholders of
CHC, with respect to any of the terms contained herein, but after
such stockholder approval, no amendment shall be made which
reduces the consideration per share paid each such stockholder
without the further approval of such stockholders.
10.16 Drafting Party. The provisions of this Agreement, and
the documents and instruments referred to herein, have been
examined, negotiated, drafted and revised by counsel for each
party hereto and no implication shall be drawn nor made against
any party hereto by virtue of the drafting of this Agreement.
10.17 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be an original, but
all of which together shall comprise one and the same instrument.
<PAGE>
10.18 Press Releases. Rx Medical, Acquisition Corp and
CHC shall cooperate with each other in releasing information
concerning this Agreement and the transactions contemplated
hereby. Where practicable, each of the parties to this Agreement
shall furnish to the others drafts of all releases prior to
publicaion. Nothing contained in this Agreement shall prevent any
party to this Agreement at any time from furnishing any
information to any governmental body or agency.
IN WITNESS WHEREOF, the parties hereto have duly
executed this Agreement as of the day and year first above
written.
RX MEDICAL SERVICES CORP.
By
Its
Name
CHC ACQUISITION CORPORATION
By
Its
Name
CONSOLIDATED HEALTH CORPORATION OF MISSISSIPPI, INC.
By
Its
Name
<PAGE>
AGREEMENT OF STOCKHOLDERS
Each of the undersigned
stockholders of CHC hereby:
1. Severally joins in
the representations of CHC contained in the above Agreement for
Statutory Merger (the "Agreement") and agrees to be liable up to
the extent of any consideration received by such stockholder
pursuant to 1.2 of the Agreement for any breach of such
representation which such stockholder knew to be false;
2. Certifies that (i) such stockholder is
acquiring the Rx Preferred Stock and/or Common Stock for his or
her own account, with the intent of holding such securities for
investment, and without the intent of participating, directly or
indirectly, in a distribution of such securities in any manner
which would violate federal or applicable state securities laws;
(ii) such stockholder by reason of such stockholder's or
financial
experience, has the capacity to protect his or her interests in
connection with the purchase of such securities; (iii) upon
receipt of such securities, such stockholder will be the
respective sole beneficial owner thereof and (iv) such
stockholder
acknowledges that the offer and sale of such securities have not
been and will not be accomplished or accompanied by the means of
any form of general or public solicitations or advertisements.
3. Hereby waives all rights such stockholder
has under Article 13 of the Mississippi Business Corporation Act
to receive payment of fair value for CHC Common or Preferred
Stock
held by such stockholder; and
<PAGE>
4. Hereby agrees to vote all shares
held by such stockholder in favor of the merger
contemplated by the Agreement.
IN WITNESS WHEREOF, we have executed this Agreement of
Stockholders as of this 23rd day of June, 1995.
Sam J. Lewis, Jr. Margaret Muse
2,020 Shares of Common Stock 410 Shares of Common
Stock
Churchill Technologies,
Inc.
Joe Herring
100 Shares of Common Stock
By
Name:
Title
3,000 Shares of Common
Stock
1,500 Shares of Preferred
Stock
<PAGE>
LIST OF APPENDICES
Number Description
1.2 Attributes of Rx Medical
Preferred Stock
<PAGE>
LIST OF EXHIBITS
Number Description
2.2 Equity Securities of CHC
in addition to its capital stock
2.3A List of subsidiaries of CHC
2.3B Articles of Incorporation and Bylaws of each
subsidiary of CHC
2.4 CHC Financial Statements
2.5 CHC liabilities to insiders
2.6 Letters of Credit
2.7 Exceptions to Absence of Recent Changes
Representation
2.9A Recent title report respecting CHC's real
property
2.9B Recent UCC report on CHC's other assets
2.10 Copies of Contracts of CHC and its
subsidiaries
2.17 Powers of Attorney
2.18 Guarantees
2.19 Permits and licenses
2.20 Litigation
2.24 Last two federal and state income tax returns
of CHC
2.25 List of Insurance coverages
2.26 List of highly compensated CHC employees
2.27 List of CHC ERISA plans
2.32(a)-1 Exceptions to License Compliance Representation
2.32(a)-2 Copy of Hospital License
2.32(b) Blue Cross Contract
2.32(c) Medicare contract
2.32(d) Medicaid contract
2.32(f) Notices of zoning and other violations
2.32(g) Health Department Surveys
2.32(h) Medical Staff Bylaws
3.4 List of Rx Medical Subsidiaries
3.8 Rx Medical defaults
3.9 Rx Medical litigation
3.10 Rx Medical court orders etc.
3.11 Exceptions to Rx Medical tax representation
3.13 Exception to Rx Medical SEC compliance
representation
EXHIBIT 21.1
VARIOUS OIL AND GAS DISCLOSURES
OF CHURCHILL U.S.A., INC.
<PAGE>
Churchill U.S.A., Inc. ("CUSA" or the "Company") was incorporated
on January 18, 1994. 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. In
conjunction with the acquisition of Churchill Technology (Isle of
Man), Ltd. by Churchill Technology Inc., the assets, liabilities
and operations of Churchill Technology Inc. prior to the
acquisition were transferred to CUSA to be held in trust until
February, 2001.
The Company's subsidiaries and equity interests are as follows:
<TABLE>
<CAPTION>
SUBSIDIARIES
Name Equity Ownership
<S> <C>
KTP Energy, Inc. ("KTP") 82.30%
Churchill Energy, Inc. ("CEI") 80.21%
Trans Energy, Inc. ("TRANS") 100.00%
</TABLE>
<TABLE>
<CAPTION>
EQUITY INTERESTS
Name Equity Ownership
<S> <C>
Caspen Oil, Inc. 25.00%
CSV Holdings, Inc. ("CSV") 28.30%
</TABLE>
Recent Developments
Consolidation of Working Interest in Nukern Lease
Pursuant to an agreement dated September 20, 1994, and finalized
on December 1, 1994, between Churchill U.S.A., Inc., Summit
Overseas Exploration, Inc. and the Villiers Group plc, a public
limited company organized under the laws of Northern Ireland,
each party agreed to capitalize a
2
<PAGE>
newly formed company, CSV Holdings Inc., a Colorado corporation
("CSV") for the purpose of administering the Nukern lease
holdings 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-parsu working capital loan to cover the estimated
projected maintenance costs of the Nukern lease through fiscal
1995. Of this, CUSA transferred its 24.47% working interest for
which it received 28.3% of the equity in CSV and a production
loan of $1,116,477. In addition, CUSA paid $24,465 as its share
of the working capital loan. The working capital loan is tied to
a promissory note dated December 1, 1994, with principal and
interest, at six percent, due in full December 1, 1998.
Oil and Gas Activities
Since its acquisition of oil and gas properties through
bankruptcy proceedings, the Company has been engaged in the
development of leasehold acreage in potential oil and gas
producing areas, located primarily in the western United States.
Workovers that will provide the greatest return on investment
will be identified and scheduled for completion. In addition,
new development and drilling projects will be identified and
analyzed as to benefits and funding requirements.
The Company presently plans to keep exploratory drilling to a
minimum. In order to do this, the Company typically enters into
farm out agreements or other such agreements with third parties
with respect to certain of its undeveloped properties. As an
alternative, the Company may eventually sell certain undeveloped
properties and attempt to retain an overriding royalty or other
reversionary interest.
During fiscal 1995, two wells were successfully recompleted by
adding additional pay zones for which reserves had not been
previously assigned. The Colorado Oil and Gas Conservation
Commission amended its rules regarding spacing and commingling in
the Wattenberg field area of Weld and Adams Counties, Colorado.
As a result, the Company is able to include behindpipe reserves
in ten (10) wells in which it retains ownership. The operators
of these wells have proposed recompletions for exploitation of
these reserves during the 1996 Fiscal Year. One additional
prospect was farmed out for drilling during 1996. One well was
successfully recompleted during the 1995 Fiscal Year which
resulted in commercial production from a previously abandoned
zone. During the fiscal year, minority working interests in one
property was disposed of through sale due to low relative and
future value.
The properties are subject to royalty agreements, current taxes
and other burdens, minor encumbrances, easements and
restrictions. The Company does not believe any of the foregoing
factors materially detract from the value of its properties or
would materially interfere with future operations.
3
<PAGE>
The Company's subsidiaries serve as the operators of its major
oil and gas properties. Being the operator of a property
increases the Company's ability to control the timing, cost and
method of development drilling activity on that property.
Competition
There are numerous firms which are larger, better established and
better financed than the Company. The Company has a limited
amount of money available for acquisitions and is at a
competitive disadvantage to firms with greater financial
resources.
Many companies and individuals are engaged in the oil and gas
business. Some are very large and well established with
substantial capabilities and long earnings records. The Company
may be at a competitive disadvantage in acquiring oil and gas
prospects, obtaining drilling funds to explore its lease acreage,
purchasing producing properties, and marketing oil and gas since
it must compete with these individuals and companies, many of
which have greater financial resources and larger technical
staffs than the Company.
The acquisition, exploration, development, production and sale of
oil and gas interests and the production and sale of oil and gas
are subject to many factors which are outside the Company's
control. These factors include worldwide and domestic economic
conditions, oil import quotas, availability of drilling rigs and
pipelines, supply and price of other fuels, local demand for
natural gas, and the regulation of production, transportation,
and marketing by Federal and State governmental authorities.
Environmental Regulation
Various federal, state and local laws and regulations covering
the discharge of materials into the environment, or otherwise
relating to the protection of the environment, may affect the
Company's operations and costs as a result of their effect on oil
and gas exploration, development and production operations. It
is not anticipated that the Company will be required in the near
future to expend amounts that are material in relation to its
total capital expenditure program by reason of environmental laws
and regulations, but because such laws and regulations are
constantly being changed, the Company is unable to predict the
ultimate cost to it of complying with present and future
environmental laws and regulations.
Governmental Regulation
Domestic exploration for and production and sale of oil and gas
is subject to federal and state governmental regulation in a
variety of ways. Legislation affecting the oil and gas industry
is under constant review for amendment or expansion, frequently
increasing the regulatory burden. Also, numerous departments and
agencies, both federal and state, are authorized by statute to
issue, and
4
<PAGE>
have issued, rules and regulations applicable to the oil and gas
industry that are often difficult and costly to comply with and
that may carry substantial penalties for failure to comply. In
as much as new legislation affecting the oil and gas industry is
commonplace and existing laws and regulations are frequently
amended or reinterpreted, the Company is unable to predict the
future cost or impact of complying with such laws and
regulations.
Oil and Gas Properties
(a) General. As of September 30, 1995, the Company, through its
majority-owned subsidiaries, had a working interest in 25 gross
and 4.51 net oil wells, 15 gross and 5.88 net gas wells and
approximately 7,001 gross (2,929 net) developed leasehold acres
and 5,045 gross (675 net) undeveloped leasehold acres in the
states of Colorado, Nebraska, Oklahoma and Texas. In addition,
the Company owns overriding royalty interests in 23 gross oil
wells, 37 gross gas wells covering 9,493 gross developed acres
and 2,960 gross undeveloped acres in Colorado, North Dakota,
Oklahoma and Texas. The Company also owns mineral interests in 6
gross oil wells, 4 gross gas wells, 1,480 gross developed acres,
and 10,926 gross undeveloped acres.
Detailed information with respect to the Company's oil and gas
properties is set forth below. The information includes oil and
gas properties owned by the Company's subsidiaries as shown.
(b) Oil and Gas Properties.
1. Oil and Gas Reserves. Oil and gas reserves for the
Company's properties have been evaluated at October 1, 1995 and
October 1, 1994 for the Company's subsidiaries CEI and KTP and at
October 1, 1994 for the Company's California properties, by
Savage Engineers, Petroleum Engineering Consultants.
RESERVE CALCULATIONS BY INDEPENDENT PETROLEUM ENGINEERS INVOLVE
THE ESTIMATION OF FUTURE NET RECOVERABLE RESERVES OF OIL AND GAS
AND THE TIMING AND AMOUNT OF FUTURE NET REVENUES TO BE RECEIVED
THEREFROM. THOSE ESTIMATES ARE BASED ON NUMEROUS FACTORS, MANY
OF WHICH ARE VARIABLE AND UNCERTAIN. RESERVE ESTIMATORS ARE
REQUIRED TO MAKE NUMEROUS JUDGMENTS BASED UPON THEIR PROFESSIONAL
TRAINING, EXPERIENCE AND EDUCATIONAL BACKGROUND. THE EXTENT AND
SIGNIFICANCE OF THE JUDGMENTS IN THEMSELVES ARE SUFFICIENT TO
RENDER RESERVE ESTIMATES INHERENTLY IMPRECISE. SINCE RESERVE
DETERMINATIONS INVOLVE ESTIMATES OF FUTURE EVENTS, ACTUAL
PRODUCTION, REVENUES AND OPERATING EXPENSES MAY NOT OCCUR AS
ESTIMATED. ACCORDINGLY, IT IS COMMON FOR THE ACTUAL PRODUCTION
AND REVENUES LATER RECEIVED TO VARY FROM EARLIER ESTIMATES.
ESTIMATES MADE IN THE FIRST FEW YEARS OF PRODUCTION FROM A
PROPERTY ARE GENERALLY NOT AS RELIABLE AS LATER
5
<PAGE>
ESTIMATES BASED ON A LONGER PRODUCTION HISTORY. RESERVE
ESTIMATES BASED UPON VOLUMETRIC ANALYSIS ARE INHERENTLY LESS
RELIABLE THAN THOSE BASED ON LENGTHY PRODUCTION HISTORY. ALSO,
POTENTIALLY PRODUCTIVE GAS WELLS MAY NOT GENERATE REVENUE
IMMEDIATELY DUE TO LACK OF PIPELINE CONNECTIONS AND POTENTIAL
DEVELOPMENT WELLS MAY HAVE TO BE ABANDONED DUE TO UNSUCCESSFUL
COMPLETION TECHNIQUES. HENCE, RESERVE ESTIMATES MAY VARY FROM
YEAR TO YEAR.
Estimated Proved Reserves
The following tables set forth the estimated proved developed oil
and gas reserves and proved undeveloped oil and gas reserves of
the Company for the fiscal years ended September 30, 1995, and
1994, see Note D to CUSA's "Consolidated Financial Statements"
and the above discussion.
<TABLE>
<CAPTION>
Proved Reserves Oil (Bbls) Gas (Mcf)
<S> <C> <C>
Estimated quantity September 30, 365,243 4,839,987
1995
Estimated quantity September 30, 829,631 4,594,601
1994
</TABLE>
<TABLE>
<CAPTION>
Developed and Undeveloped
Reserves
Developed Undeveloped Total
<S> <C> <C>
<C>
Oil (Bbls)
September 30, 1995 237,026 128,217 365,243
September 30, 1994 695,240 134,391 829,631
Gas (Mcf)
September 30, 1995 4,747,754 92,233 4,839,987
September 30, 1994 4,314,701 279,900 4,594,601
</TABLE>
The decline in oil reserves from fiscal 1994 to fiscal 1995 is
primarily due to the transfer of CUSA's Nukern lease reserves to
CSV Holdings, Inc. All of the Company's producing reserves are
located within the United States.
6
<PAGE>
2. Production, Average Sales Price and Average Production Costs
(Lifting). The following table sets forth the net quantities of
oil and gas production (net of all royalties, overriding
royalties and production due to others) attributable to the
Company for the fiscal years ended September 30, 1995 and 1994
and the average sales prices and average production costs per
unit of production.
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, September 30,
1995 1994
<S> <C> <C>
Sales:
Oil (Bbls) 8,536 13,270
Gas (Mcf) 169,545 194,134
Average Sales
Price:
Oil (per $16.67 $13.04
Bbl)
Gas (per $1.27 $1.46
Mcf)
Average
Production Costs
Per Equiv. $4.02 $6.91
Bbl of Oil
</TABLE>
4. Gross and Net Productive Oil and Gas Wells and Developed
Acres. The following table sets forth at September 30, 1995, the
Company's leasehold interests in productive oil and gas wells and
in developed acres.
<TABLE>
<CAPTION>
Productive Wells<F1>
Gross<F2> Net<F3>
Oil Gas Oil
Gas
BPO APO
BPO APO
September 30, 1995
<S> <C> <C> <C> <C> <C> <C>
<C>
KTP 1 4 0.00 0.20 2.80 1.00
CEI 17 4 0.96 2.42 0.00 1.33
CUSA 6 7 0.00 0.93 0.00 0.75
</TABLE>
[FN]
__________________
(1) Includes producing wells and wells capable of production.
One or more completions in
the same bore hole are counted as one well.
(2) A gross well is a well in which a working interest is owned.
The number of gross wells
is the total number of wells in which a working interest is
owned.
(3) A net well is deemed to exist when the sum of fractional
ownership working interests in
gross wells equals one. The number of net wells is the sum
of the fractional working
interests owned in gross wells expressed as whole numbers
and fractions thereof.
7
<PAGE>
[CAPTION]
<TABLE>
Developed Acreage Table
September 30, 1995
Company/ Interest
State Working %<F1> Net Revenue
%<F1> Developed Acres<F2>
BPO APO BPO APO Gross<F3 Net<F4>
>
<S> <C> <C> <C> <C> <C> <C
<C> >
KTP:
0.83- 0.99 0.65- 0.81 1,920 1,789
Oklahoma 1.00 0.81
0 0.20 0 0.15 72 14
Texas
CEI:
0.96 0.04- 0.74 0.03- 2,976 879
Colorado 0.62 0.49
CUSA:
0 0.58 0 0.44 72 42
Texas
0.14 0 0.10 0 640 88
Oklahoma
0 0.03- 0 0.02- 1,241 107
Colorado 0.27 0.20
0 0.12- 0 0.10- 80
Nebraska 0.13 0.11 10
7,001 2,929
</TABLE>
[FN]
___________________
(1) Represents a range of low to high working and net revenue
interests, respectively.
(2) Consists of acres spaced or assignable in productive wells.
(3) A gross acres is an acre in which a working interest is
owned. The number of gross
acres is the total number of acres in which a working
interest is owned.
(4) A net acre is deemed to exist when the sum of fractional
ownership working interests in
gross acres equals one. The number of net acres is the sum
of the fractional working
interest owned in gross acres expressed as whole numbers and
fractions thereof. The
net acreage as reflected herein is reduced after payout.
8
<PAGE>
Overriding Royalty Interests
The following table sets forth at September 30, 1995, the
Company's royalty interests in productive oil and gas wells and
in developed acreage:
<TABLE>
<CAPTION>
Productive
Company/State Interest (%) Wells<F1> Acreage<F
Oil 2>
Gas
<S> <C> <C> <C>
<C> <C>
CUSA:
Texas 0.225% 2 0 186
Colorado 0.00095- 16 30 6,647
1.5997%
North Dakota 0.25% 2 0 640
KTP:
Oklahoma 0.0938- 1 3 1,640
2.1875%
CEI:
Colorado 0.557-5.000% 2 4 380
</TABLE>
<TABLE>
<CAPTION>
Mineral Royalty Interests
Company Productive Net
County/State Interest (%) Wells<F1> Acreage<F
Oil 2>
Gas
<S> <C>
<C> <C> <C> <C>
CUSA:
Washington, 1.0938% 3 0 70
Colorado
0.5208% 0 3 33
0.3906% 3 0 5
Adams, 3.125% 0 1 80
Colorado
</TABLE>
[FN]
_______________________
(1) Includes producing wells and wells capable of production.
One or more completions in
the same bore hole are counted as one well.
(2) Consists of net acres spaced or assignable to productive
wells.
9
<PAGE>
5. Undeveloped Acreage. The following tables set forth at
September 30, 1995, the Company's leasehold interests in
undeveloped acreage.
<TABLE>
<CAPTION>
Working Interests
Working
Expiration Interest Acreage
Dates Gross<F1>
Net<F2>
<S> <C> <C> <C> <C> <C> <C>
<C>
CEI:
Held by 38.5- 163 76
Colorado Production 49.5%
CUSA:
Held by 0.1- 4,482 549
Colorado Production 100.0%
Held by 12.1- 400 50
Nebraska Production 12.5%
</TABLE>
<TABLE>
<CAPTION>
Overriding Royalty Interests
ORRI Acreage
Expiration Intere Gross<F1>
Dates st
<S> <C> <C> <C> <C> <C>
<C>
CEI:
Held by 2.5% 640
Colorado Production
CUSA:
Held by .2- 1,240
Colorado Production 1.5%
N. Held by .25- 1,080
Dakota Production .44%
</TABLE>
<TABLE>
<CAPTION>
Mineral Royalty Interests
Acreage Owned Net<F2>
Gross<F1>
<S> <C> <C>
<C> <C>
CUSA:
12,326 1,019
Colorado
CEI:
80 80
Colorado
</TABLE>
[FN]
______________________
(1) A gross acre is an acre in which a working, overriding
royalty or mineral interest is
owned. The number of gross acres is the total number of
acres in which such interest(s)
is (are) owned.
(2) A net acre is deemed to exist when the sum of fractional
ownership interests in gross
acres equals one. The number of net acres is the sum of the
fractional working interests
owned in gross acres expressed in whole numbers and
fractions thereof.
10
<PAGE>
6. Productive and Dry Exploration and Development Wells. The
following table sets forth the number of gross and net productive
and dry development wells drilled in which the Company had an
Interest during the fiscal years 1995 and 1994.
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
September 30, 1995<F1> September 30,
1994<F1>
Explora Develop Explora Develop
tory ment tory ment
<S> <C> <C>
<C> <C>
Total Gross 0 3 2 12
Wells:
Recompleted<F 3 7
2>
Drilled 0 0 0 5
Productive 0 3 0 5
Dry Holes 0 0 2 0
Total Net 0.00 1.01 0 1.16
Wells:
Recompleted 0.00 1.01 0 1.15
Drilled 0.00 0.00 0 0.01
Productive 0.00 1.01 0 0.01
Dry Holes 0.00 0.00 0 0
</TABLE>
[FN]
________________
(1) Includes wells participated in which the Company did not pay
drilling costs as a result of
promotions to third parties.
(2) Includes wells which were previously nonproducers and
reworked for production.
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 138,293
<SECURITIES> 0
<RECEIVABLES> 198,891
<ALLOWANCES> 27,745
<INVENTORY> 222,855
<CURRENT-ASSETS> 559,358
<PP&E> 2,577,145
<DEPRECIATION> (182,026)
<TOTAL-ASSETS> 19,934,586
<CURRENT-LIABILITIES> 3,088,916
<BONDS> 0
0
1,000,000
<COMMON> 1,996,607
<OTHER-SE> 13,960,049
<TOTAL-LIABILITY-AND-EQUITY> 19,934,586
<SALES> 878,842
<TOTAL-REVENUES> 878,842
<CGS> 841,275
<TOTAL-COSTS> 454,448
<OTHER-EXPENSES> 4,364,998
<LOSS-PROVISION> 353,937
<INTEREST-EXPENSE> 223,592
<INCOME-PRETAX> (8,173,021)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,448,767)
<DISCONTINUED> (2,724,254)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,173,021)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.10)
</TABLE>
