12
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________
FORM 10-QSB
___________
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For quarterly period ended March 31, 1996
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
Commission file number: 0-11372
CHURCHILL TECHNOLOGY INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-0904172
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
181 Cooper Avenue
Tonawanda, N.Y. 14150
(address of principal executive offices)
(716) 874-8696
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
As of May 1, 1996, the Registrant had 140,518,906 shares of Common Stock
outstanding.
Traditional Small Business Disclosure Format (check one): Yes [ ]No[x]
<PAGE>
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Form 10-QSB Quarterly Report
Quarter ended March 31, 1996
INDEX
PART I - Financial Information
_______________________________
Item 1. Financial Statements
Consolidated Balance Sheet 3-4
March 31, 1996
Consolidated Statements of Operations 5
Three and Six Months Ended March 31, 1996 and 1995
Consolidated Statements of Cash Flows 6
Six Months Ended March 31, 1996 and 1995
Consolidated Statement of Shareholders' Equity 7
Six Months Ended March 31, 1996
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-18
PART II - Other Information
___________________________
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited)
March 31, 1996
<TABLE>
<CAPTION>
March 31, 1996
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 79,047
Accounts receivable-trade, less allowance for doubtful
accounts of $ 63,898 185,095
Interest receivable 4,534
Inventories 226,125
Prepaid expenses 50,899
___________
545,700
PROPERTY AND EQUIPMENT, AT COST
Machinery and equipment 2,809,691
Furniture, fixtures and leasehold improvements 127,758
___________
2,937,449
Accumulated depreciation and amortization (330,009)
___________
2,607,440
OTHER ASSETS
Investments 6,458,010
Note receivable 150,000
Patents and related technology,
net of accumulated amortization of $1,324,935 11,474,868
Prepaid royalties 102,538
Other assets 56,919
___________
18,242,335
___________
TOTAL ASSETS 21,395,475
___________
*See accompanying notes to consolidated financial statements.*
</TABLE>
<PAGE>
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited) (Continued)
March 31,1996
<TABLE>
<CAPTION>
March 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C>
Accounts payable - trade $ 1,448,228
Accrued liabilities 287,526
Notes payable - banks and other 844,020
Current portion - long-term debt 343,935
Notes payable - related party 608,201
___________
3,531,910
LONG-TERM DEBT, LESS CURRENT MATURITIES 1,155,313
___________
COMMITMENTS AND CONTINGENCIES
WARRANTS SUBJECT TO REPURCHASE 1,491,600
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;
117,292,306 shares issued and 116,328,306 shares
outstanding 2,345,847
Additional paid-in capital 37,302,505
Unearned consulting fees (1,910,166)
Accumulated deficit (23,098,900)
Cumulative translation adjustment 15,986
___________
15,655,272
Treasury stock, 964,000 shares, at cost (438,620)
15,216,652
___________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 21,395,475
___________
*See accompanying notes to consolidated financial statements.*
</TABLE>
<PAGE>
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Consolidated Statement of Operations (Unaudited)
For the Periods Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31 Ended March 31
1996 1995 1996 1995
REVENUES
<S> <C> <C> <C> <C>
Product Sales $ 298,831 $ 226,419 $ 516,069 $ 226,419
Royalty Income 26,548 26,548
__________ __________ __________ __________
325,379 226,419 542,617 226,419
__________ __________ __________ __________
OPERATING EXPENSES
Manufacturing 348,222 196,750 596,412 196,750
General/admin. 726,801 467,717 1,199,313 1,048,745
Research/dev. 50,753 25,991 110,270 25,991
Marketing and selling 110,955 86,014 257,833 86,014
Depreciation and
amortization 431,612 188,406 768,449 247,437
Impairment of assets 118,000 118,000
Bad debt expense 36,643 187,310 36,643 187,310
Other 416 416
__________ __________ __________ __________
1,704,986 1,270,604 2,968,920 1,910,663
LOSS FROM OPERATIONS (1,379,607) (1,044,185) (2,426,303) (1,684,244)
OTHER EXPENSE (INCOME)
Interest expense 62,456 101,742 119,900 101,742
Interest and other
income (22) (81,760) (18,749) (96,059)
__________ __________ __________ __________
62,434 19,982 101,151 5,683
__________ __________ __________ __________
LOSS FROM CONTINUING
OPERATIONS (1,442,041) (1,064,167) (2,527,454) (1,689,927)
__________ __________ __________ __________
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS
Income (Loss) from
discontinued
operations (15,251) 36,346
Loss on disposal of
discontinued
operations (1,201,346) (1,201,346)
__________ __________ __________ __________
(1,216,597) (1,165,000)
__________ __________ __________ __________
NET LOSS $(1,442,041)$ (2,280,764)$(2,527,454)$ (2,854,927)
___________ ___________ ___________ ___________
LOSS PER SHARE OF
COMMON STOCK
Loss from continuing
operations $ -- $( .02) $ -- $( .03)
Net loss $( .02) $( .04) $( .03) $(
.05)
WEIGHTED-AVERAGE No.
OF COMMON SHARES
OUTSTANDING DURING
THE PERIOD 97,720,306 58,901,191 98,588,481 53,879,126
*See accompanying notes to consolidated financial statements.*
</TABLE>
<PAGE>
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
For the Periods Ended March 31, 1995 and 1996
<TABLE>
<CAPTION>
Six Months Ended
3/31/96 3/31/95
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $(1,228,834) $(1,267,402)
CASH FLOWS FROM INVESTING ACTIVITIES (360,304) (2,455,175)
CASH FLOWS FROM FINANCING ACTIVITIES 1,517,411 3,846,927
EFFECT OF EXCHANGE RATE CHANGES ON CASH 12,481
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (59,246) 124,350
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD 138,293 54,018
___________ ___________
CASH AND CASH EQUIVALENTS
END OF PERIOD $ 79,047 $ 178,368
___________ ___________
</TABLE>
<PAGE>
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Period Ended March 31, 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
BALANCE-9/30/95 1,000,000 $1,000,000 99,830,306 $1,996,607
ISSUANCE OF
COMMON STOCK
FOR CASH
Private offerings,
net of stock iss.
costs of $71,240 16,877,000 337,540
ISSUANCE OF COMMON
STOCK FOR SERVICES
Investment Banking
Fee 2,100,000 42,000
ISSUANCE OF COMMON
STOCK FOR ACQUIS.
Novon Int. Inc. 11,000,000 220,000
COMMON STOCK RETIRED (12,515,000) (250,300)
FOR WARRANTS SUBJECT
TO REPURCHASE FOREIGN
CURR.TRANS.
NET LOSS
BALANCE - 3/31/961,000,000$ 1,000,000 117,292,306$ 2,345,847
</TABLE>
<PAGE>
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Period Ended March 31, 1996 (Continued)
<TABLE>
<CAPTION>
Unearned
Add. Paid in Consulting Treasury
Capital Fees Stock
<S> <C> <C> <C>
BALANCE-9/30/95 $35,798,195 (1,910,166) $(361,500)
ISSUANCE OF COMMON STOCK
FOR CASH
Private offerings, net of
stock issuance costs
of $36,990 1,013,210
ISSUANCE OF COMMON STOCK
FOR SERVICES
Investment Banking Fee 192,400
ISSUANCE OF COMMON STOCK
FOR ACQUISITION
Novon International Inc.
COMMON STOCK RETIRED FOR
WARRANTS SUBJECT TO
REPURCHASE (1,241,300) (77,120)
FOREIGN CURR. TRANSLATION
NET LOSS
BALANCE-3/31/96$ 37,302,505 (1,910,166)$ (438,620)
</TABLE>
<PAGE>
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Period Ended March 31, 1996 (Continued)
<TABLE>
<CAPTION>
Cummulative
Accumulated Translation
Deficit Adjustment
<S> <C> <C>
BALANCE-9/30/95 $20,571,446)$ 4,966
ISSUANCE OF COMMON STOCK
FOR CASH
Private offerings, net of
stock issuance costs
of $36,990
ISSUANCE OF COMMON STOCK
FOR SERVICES
Investment Banking Fee
ISSUANCE OF COMMON STOCK
FOR ACQUISITION
Novon International Inc.
COMMON STOCK RETIRED FOR
WARRANTS SUBJECT TO
REPURCHASE
FOREIGN CURR. TRANSL. 11,020
NET LOSS ( 2,527,454)
BALANCE-3/31/96 $(23,098,900) $15,986
*See accompanying notes to consolidated financial statements.*
</TABLE>
<PAGE>
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - UNAUDITED FINANCIAL STATEMENTS
The interim financial information furnished herein was prepared from the
books and records of Churchill Technology Inc. and its subsidiaries (the
"Company") as of March 31, 1996 and for the period then ended, without
audit; however, such information reflects all adjustments which are, in the
opinion of management, necessary to a fair presentation of financial
position and of the statements of operations and cash flows for the interim
period presented. Management feels that the adjustments made during the
current operating period were of a normal, recurring nature.
The interim financial information of the Company includes the results and
accounts of its wholly-owned subsidiary, Churchill Technology (Isle of Man)
Limited ("CTI-IOM") for the six months ended March 31, 1995, after giving
effect to a reverse acquisition as described in Note C-Acquisitions. As a
result of the provisions of the purchase agreement of CTI-IOM, the
Company's wholly-owned subsidiary, Churchill USA, Inc., will be accounted
for on the cost method. The interim financial information of the Company
also includes the results and accounts of its wholly-owned subsidiary,
Novon International, Inc. ("Novon") from the acquisition date of February
10, 1995 as described in Note C -Acquisitions.
The interim financial information furnished herein should be read in
conjunction with the financial statements included in this report and the
financial statements and notes contained in the Company's annual report on
Form 10-KSB for the fiscal year ended September 30, 1995.
The interim financial information presented is not necessarily indicative
of the results from operations expected for the full fiscal year.
NOTE B - SUPPLEMENTAL DATA TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Excluded from the consolidated statements of cash flows for the periods
ended March 31, 1996 and 1995 were the effects of certain non-cash
investing and financing activities as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Issuance of common stock for investment
banking fees $234,400
Issuance of warrants for the return of
shares $1,471,600
Issuance of common stock for acquis.
of Stark Industries Inc. $2,975,000
Issuance of common stock for
acquis. of Novon International
Inc. $1,760,000 $8,250,000
Conversion of convertible
debentures to equity $1,675,000
</TABLE>
Cash paid for interest or income taxes in periods ended March 31, 1996 and
1995 was $94,995 and $0 respectively.
<PAGE>
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 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 CTI-IOM with CTI-IOM as the accounting acquirer
(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.
On February 22, 1995, the Company sold all of the issued and outstanding
capital stock of CTI-IOM to a former employee of CTI-IOM. The former
employee was an officer and director of the Company and its wholly owned
subsidiary, CTI-IOM. In exchange, the Company retained all of the CTI-
IOM's intellectual property rights relating to "biodegradable" plastics.
The Company assigned and transferred all intellectual property rights to
Novon. 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 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 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.
<PAGE>
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE C - ACQUISITIONS AND DISPOSITIONS (Continued)
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 net book value of CUSA as of February 22, 1994. During
June 1994, a portion of CUSA's assets were impaired. CUSA recorded a loss
on investment of $3,621,319. The impairment of CUSA's assets affected the
Company's carrying value of its investment in CUSA. 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. Even though CUSA's net book value as of September 30,
1994 declined by more than $1 million, management is of the opinion that
its investment in CUSA had only declined by $1 million when considering the
fair value of CUSA's net assets as of September 30, 1994. The Company
determined CUSA's fair value of net assets based on discounted future net
cash flows from CUSA's oil and gas reserves.
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 was 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 $315,000 in
cash less $100,000 in liabilities assumed. The acquisition was accounted
for as a purchase. Accordingly, the $3,190,000 purchase price was
allocated to assets acquired based on their estimated fair values. This
treatment resulted in $2,835,301 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.
On July 13, 1995, the Company sold its 54 percent ownership interest in CHC
for $825,000 cash and 600,217 shares of preferred convertible stock of the
purchaser with a carrying value of $300,000. The Company continues to hold
100 percent of the issued and outstanding common stock of Stark, which is
currently inactive.
Novon International, Inc. - Novon International, Inc. ("Novon"), a
privately-held Delaware corporation, was incorporated in February 1994. In
December 1994, prior to the acquisition, the Company loaned Novon,
$2,000,000 in exchange for a promissory note. These funds were used to
acquire biodegradable technology from Warner-Lambert Company for $1,950,000
in cash. This technology included patents, trademarks, copyrights and
contract rights. Prior to December 1994, Novon had no prior business
operations.
Ecostar International, L.P. ("Ecostar") was organized under the provisions
of the Amended and Restated Agreement of Limited Partnership dated January
1, 1992. Ecostar and its subsidiaries are referred to herein as "the
Partnership". Since its inception in 1991, Ecostar has been engaged in the
development, manufacture and marketing of biodegradable additives and
compounds. Ecostar's operating history includes establishment of research
and manufacturing operations with modest sales both in the United States
and overseas.
<PAGE>
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE C - ACQUISITIONS AND DISPOSITIONS (Continued)
On January 20, 1995, the Partnership was merged into Novon with each of the
limited partners receiving a proportionate number of shares of Novon for
their interest in the Partnership. The merger was accounted for as a
pooling of interests.
On February 10, 1995, the Company completed the acquisition of 100 percent
of the outstanding capital stock of Novon. 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 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 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. The
acquisition was accounted for as a purchase. The one-year anniversary
occurred on February 10, 1996 and the Company issued 10,518,000 shares of
common stock, with registration rights, to the former Novon shareholders.
Additionally, the Company contributed 482,000 restricted shares to Novon.
This transaction is reflected in an upwards adjustment to the value of the
intellectual property and shareholders equity of $1,760,000.
Accordingly, the $8,250,000 purchase price was allocated to the assets and
liabilities acquired based on their estimated fair values at the date of
the acquisition as follows:
<TABLE>
<S> <C>
Current assets and liabilities (net) $(1,924,296)
Property and equipment 2,458,131
Patents and related technology 10,751,898
Other assets 467,944
Long-term debt, less current maturities (1,197,437)
Notes payable, Churchill Technology Inc. (2,306,240)
$8,250,000
</TABLE>
The results of operations of Novon have been included in the consolidated
statement of operations from the date of acquisition. Patents and related
technology are amortized on the straight-line method over the estimated ten-
year life of the acquired patents and related technology.
NOTE D - CONTINGENCIES
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
<PAGE>
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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.
Management believes that an adverse decision could have a material impact
on the operations of the Company. 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 of the
Company is cooperating fully with the SEC and cannot at this stage form any
opinion with respect to the effect, if any, of such an investigation on the
Company's accompanying financial statements.
NOTE E - STOCKHOLDERS EQUITY
Common Stock Issued for Cash - In October 1995, the Company entered into an
agreement with Discovery Capital, Inc. for a $1,000,000 private placement
of up to 4,000,000 shares of restricted common stock of the Company. The
Company sold 2,740,000 shares for net proceeds of $650,750. In March 1996,
the Company entered into an agreement with Fima Capital Corporation, Ltd.,
to place 50,000,000 shares of common stock at a minimum price of $0.05 per
share. During March 1996, the Company has received net proceeds of
$700,000 from the sale of 14,000,000 shares of common stock.
Common Stock Issued for Services - In October 1995, the Company issued
100,000 shares valued at $34,400 as payment for services rendered to an
investment banking firm. In March 1996, the Company issued 2,000,000
shares of its common stock valued at $200,000 pursuant to an investment
banking and financial consulting agreement with Fima Capital Corporation,
Ltd. The shares had a market price of $0.25 per share at the date of
issuance.
Additional Share Issuance - 11,000,000 shares of the Company's common stock
were issued, with registration rights pursuant to the Novon Acquisition
Agreement discussed in Note C. The shares had a market price of $0.16 per
share at the date of issuance.
Acquisition of Shares - In January 1996, the Company completed agreements
with shareholders and former officers of the Company for the return of
12,515,000 shares of common stock. In exchange, the Company issued
7,458,000 two-year warrants valued at $0.20 each.
NOTE F - SUBSEQUENT EVENTS
Issuance of shares for Working Capital and Acquisition of Assets
In March 1996, the Company entered into an agreement with Fima Capital to
issue up to 50,000,000 shares, at a minimum price of $0.05, to raise
working capital and funds for certain asset acquisitions. The agreement
calls for an initial issuance of 30,000,000 shares of which 25,000,000 will
be placed with two major investors, the President of the Company and the
father of a director of the Company. 5,000,000 shares of common stock will
be put into an Employee Stock Purchase Plan. The remaining
<PAGE>
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE F - SUBSEQUENT EVENTS (Continued)
20,000,000 will be purchased by Fima Capital and a group of private
investors. As of May 1, 1996, 37,256,600 shares have been sold with net
proceeds to the Company of $1,862,830.
CUSA oil and gas assets
With the concurrence of the Trustee, the Company is negotiating the sale of
the CUSA oil and gas assets and to date has received one offer for these
assets. The offer is conditional on due diligence and, if accepted, is not
expected to close until late in fiscal year 1996.
Acquisition of Royalty Stream, Patent, and Trademarks for Japan, Australia
and New Zealand
The Company recently completed the acquisition of patents, trademarks, and
a stream of royalties from licenses for the manufacturing and distribution
of Novon Specialty polymers in Japan, Australia and New Zealand and for
biodegradable loosefill used in packaging, for a purchase price of
$1,188,818. The Company also entered into a new license agreement for the
manufacture and distribution of its biodegradable technology in Australia
and New Zealand.
<PAGE>
CHURCHILL TECHNOLOGY INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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 57,250,000 shares 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 March 31, 1996, an
amount of $5,156,791 has been advanced to Novon.
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 in the
purchase of patents, technology and equipment relating to the polymer
products division of Warner-Lambert. The convertible debentures bore
interest at 6% and were due on December 31, 1995. The debentures were
convertible at the option of the holder into shares of Common Stock of the
Company at a discount of 39% 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.
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 600,270 shares of preferred convertible stock of the
purchaser, Rx Medical Services Inc. ("RxMedical") . This transaction
reflects management's intent to exit the health care management industry.
The Company has no influence in the management of Rx Medical or its
subsidiary.
In March 1995, 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 is assisting the Company 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 financing. 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 March 31, 1996, 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 the sale of Common
<PAGE>
CHURCHILL TECHNOLOGY INC.
Stock in private offerings pursuant to this agreement and it has recorded
$1,910,166 as unearned consulting fees.
In May 1995, the Company entered into a private placement agreement with
H.J. Meyers & Company ("HJ Meyers") 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 2,000,000 shares valued
at $687,500 to H.J. Meyers as payment of investment banking services
rendered.
During the year ended September 30, 1995, the Company was loaned $3,523,980
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. In January 1996, this shareholder returned 5,583,000
shares to the Company in exchange for 5,583,000 warrants exercisable until
January 31, 1998 to purchase one share of the Company's Common Stock at
$0.60 each. Such warrants carry a put to the Company at $0.20 per share of
common stock, exercisable during the ten day period prior to the maturity
date at the option of the holder of the warrant.
Additionally, Robert Downie, the Chairman, President and Chief Executive
Officer of the Company made loans to Novon. The loans are due on demand
and total $246,301 at March 31, 1996. Of this amount, $109,690 bears
interest at 8% and $136,611 bears interest at 12% as of March 31, 1996.
The notes have no payments due in 1996. Also, Mr. Downie has personal
assets collateralizing Company loans totaling $397,100 and personal
guarantees on Company loans totaling $1,499,249 at March 31, 1996. In
January 1996, the wife of the President loaned an additional $162,900,
which carries a 15% interest rate and matures May 31, 1996. Additionally,
Fima Capital loaned the Company $200,000 at no interest and no stated
maturity date to be paid from future fundings.
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 January 1996, this shareholder returned
2,107,000 shares to the Company in exchange for 500,000 warrants
exercisable until January 31, 1998 to purchase one share of the Company's
Common Stock at $0.60 each, and which carry a put to the Company at $0.20
per share of common stock, exercisable during the ten day period prior to
the maturity date at the option of the holder of the warrant.
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 January 1996, the
former president of the Company returned 975,000 shares to the Company in
exchange for 975,000 warrants exercisable until January 31, 1998 to
purchase one share of the Company's Common Stock at the lesser of $0.60
each or at 20% discount
<PAGE>
CHURCHILL TECHNOLOGY INC.
from the Company's bid price at the date of the exercise. The warrants
carry a put to the Company at $0.20 per share of common stock, exercisable
during the ten day period prior to the maturity date, at the option of the
holder of the warrant.
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 included 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. In December 1995, the agreement was modified by extending
the exercise period of the option to four years and decreasing the
exercise price to $0.72. In addition the Company has agreed to adjust the
purchase price of the shares at the end of one year to the issue price of
$0.25 by issuing additional shares with a limit of one additional share per
share issued. The Company sold 2,740,000 shares for net proceeds of
$650,750. The Company paid Discovery Capital a placement fee of ten
percent of all capital raised. Fifty percent of the placement fee was paid
in shares of the Company's restricted Common Stock. The private placement
closed on December 26, 1995. The Company issued the shares of common stock
in connection with this private placement during January, 1996.
In January 1996, 3,450,000 shares were returned by the former Chairman of
the Board and Executive Officer at no cost to the Company. These shares
were part of a bonus compensation approved by the Board of Directors in
April 1994.
In March 1996, the Company entered into an agreement with Fima Capital to
place 50,000,000 shares of Common Stock at a minimum price of $0.05 per
share. At May 1, 1996, the Company has received net proceeds of $1,862,830
from the sale of 37,256,600 shares of Common Stock.
The Company and its principal subsidiary Novon have working capital
deficiencies, net deficit and losses in recent and current periods.
Working capital deficiencies were $2,986,210 at March 31, 1996. These
conditions raise substantial doubt about the Company's ability to continue
as a going concern. The Company's strategic and business plans include the
start-up of a new production line for its Novon and Aqua-Novon products
currently under way and significant investment in marketing and working
capital for these products. The Company's forecasts show losses and a
negative liquidity position that will continue to accrue until such time as
sales volumes are significantly higher. The Company expects to reach cash
positive operations on a running rate basis within the next twelve
months, while profit and loss break-even will take a few months longer.
There can be no assurances that unanticipated problems will not develop
which will negatively impact the execution of its strategic and business
plans or that acceptance of its products in the market will be sufficient
to attain the required sales levels to reach positive liquidity or
operational break-even.
<PAGE>
CHURCHILL TECHNOLOGY INC.
Results of Operations
Three Months Ended March 31, 1996 and 1995
The consolidated statement of operations for the three months ended March
31, 1996 include the results of operations of Novon only. The consolidated
statement of operations for the three months ended March 31, 1995 include
the results of operations of Novon and Stark from the acquisition date, and
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. In conjunction with the sale of CHC, the operations for CHC are
included as discontinued operations.
Revenues
During the quarter ended March 31, 1996, the Company recorded revenues of
$325,379 as compared to $226,419 in the quarter ended March 31, 1995. These
revenues are a result of sales of its biodegradable and related products
and include $26,548 in royalty income from the licensing of its technology.
Revenues for the quarter ended March 31, 1995 represent two months of
results of Novon, subsequent to the acquisition.
Expenses
Manufacturing expenses were $348,222 compared with $196,750 in the
comparable period in 1995. Manufacturing expenses include raw materials,
direct and indirect manufacturing costs, excluding depreciation, associated
with the production of biodegradable additives, compounds and related
products. Manufacturing costs in 1996 include costs associated with a new
production line for the manufacture of Novon compounds which is in the
process of commissioning and is not yet in commercial production.
For the quarter ended March 31, 1996, general and administrative expenses
were $726,808, which represents an increase of $259,091 from the comparable
quarter in 1995. The increase is attributable primarily to investment
banking fees of approximately $234,000 which was paid through the issuance
of shares of common stock.
Marketing and selling expenses for the quarter ended March 31, 1996 were
$110,955, an increase of approximately $24,900 from 1995. These expenses
are expected to increase in the future as the Company continues to develop
the biodegradable market for its products. Research and development
expenses increased by $24,762 compared with the same period a year ago.
This increase is associated with development activities at Novon.
Depreciation and amortization expense increased by $247,064 compared to
the same period a year ago. This increase is associated with increases in
equipment and intellectual property associated with the operations of
Novon.
<PAGE>
CHURCHILL TECHNOLOGY INC.
There was no impairment of assets in the quarter ended March 31, 1996
compared to a $118,000 impairment recorded in the same quarter ended March
31, 1995. Bad debt expense was $36,643 compared to $187,310 in the
comparable period.
In conjunction with the sale of CHC, the Company recorded the results of
operations of CHC as discontinued operations. Accordingly the net loss for
the three months ended March 31, 1995 was $1,216,597. This compares with
no losses from discontinued operations in the quarter ended March 31, 1996.
Six Months Ended March 31, 1996 and 1995
Revenues
During the six months ended March 31, 1996, the Company recorded revenues
of $542,617 as compared to $226,419 for the six months ended March 31,
1995. These revenues are a result of sales of its biodegradable and
related products and include $26,548 in royalty income from the licensing
of its technology.
Expenses
During the six months ended March 31, 1996, manufacturing expenses were
$596,412 compared to $196,750 a year ago. Manufacturing expenses include
raw materials, labor, direct and indirect manufacturing costs, excluding
depreciation, associated with the production of biodegradable additives,
compounds and related products. Manufacturing expenses for the period
ended March 31, 1995 represents two months of results of Novon subsequent
to the acquisition.
During the six months ended March 31, 1996, the Company incurred general
and administrative expenses of $1,199,313 which compare with $1,048,745
incurred during the six months ended March 31, 1995. Included in the total
for the 1996 quarter are investment banking fees of $234,400 which were
paid by the issuance of shares of common stock in the Company. Expenses
related to the operations of the parent company's executive offices' were
$463,237 as compared to $509,513 for the six months ended March 31, 1995.
This decrease is primarily due to the consolidation of corporate activities
at the Novon facilities.
Marketing and selling expenses for the six months ended March 31, 1996
increased by $171,819 compared to a year ago. The increase is expected as
the Company continues to develop the biodegradable market for its products.
Research and development expenses increased by $84,279 compared to a year
ago as Novon continues its development activities.
Depreciation and amortization expense increased by $524,870 compared to a
year ago. This increase is associated with increases in equipment and
intellectual property associated with the Novon operations.
<PAGE>
CHURCHILL TECHNOLOGY INC.
In conjunction with the sale of CHC, the Company recorded the results of
operations of CHC as discontinued operations. Accordingly the net loss for
the six months ended March 31, 1995 was $1,165,000. This compares with no
losses from discontinued operations in the six months ended March 31, 1996.
Cash Flows
During the six months ended March 31, 1996, the Company's primary sources
of liquidity were cash provided by the issuance of common stock and
proceeds from notes payable.
Cash Flows from Operating Activities:
Net cash required in operating activities consists of net losses adjusted
for certain non-cash income and expense items and changes in working
capital. Non-cash income and expenses include items such as depreciation,
amortization and common stock issued for services. Working capital
consists primarily of accounts receivable, inventories and current
liabilities.
Net cash required in operating activities decreased for the six months
ended March 31, 1996 compared to the same period a year ago primarily as a
result of a decrease in net losses.
Cash Flows from Investing Activities
Net cash used in investing activities decreased by $2,094,871 for the six
months ended March 31, 1996 compared to a year ago. Significant cash uses
in the six months ended March 31, 1995 included a $2.1 million advance to
Novon used primarily to purchase the intellectual property from Warner-
Lambert and $315,000 in cash used to acquire Stark. Additions to property
and equipment totaled $1,776 for the six months ended March 31, 1995
compared to $360,304 for the period ended March 31, 1996. The increase in
cash used for property and equipment related to the installation of the
Novon production line.
Cash Flows from Financing Activities
The Company's primary source of liquidity for the six months ended March
31, 1996 was provided by the sale of common stock, which generated net
proceeds of $1,350,750. During the six months ended March 31, 1995 cash
was provided by the sale of common stock, the issuance of convertible
debentures and proceeds from related party notes payable. Any funding
requirements for operating cash and capital expenditures in excess of cash
generated from future operations will be supplemented by the issuance of
common stock, trade finance lines of credit and medium-term financings.
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description
10.1 Remuneration for Services Agreement between the Company and
Fima Capital Corporation dated January 10, 1996.
10.2 Agreement by and between Churchill Technology Inc. and Fima
Capital Corporation Ltd. dated March 15, 1996.
27. Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated January 16, 1996
reporting the execution of the Remuneration for Services Agreement between
the Company and Fima Capital Corporation Ltd. Dated January 10, 1996.
The Company filed a current report on Form 8-K dated March 20, 1996
reporting the execution of the agreement by and between Churchill
Technology Inc. and Fima Capital Corporation Ltd. dated March 15, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHURCHILL TECHNOLOGY INC.
Date: May 16, 1996 /s/Bertha H. Mitchell
__________________________ ___________________________________
Bertha H. Mitchell
Chief Financial and Accounting
Officer
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