<PAGE> 1
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 June 30, 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)
<TABLE>
<S> <C>
Colorado 84-0904172
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
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 July 25, 1996, the Registrant had 144,819,086 shares of Common Stock
outstanding.
Traditional Small Business Disclosure Format (check one): Yes X No__
=======================================================================
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CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
FORM 10-QSB QUARTERLY REPORT
Quarter ended June 30, 1996
INDEX
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . 3 - 4
June 30, 1996
Consolidated Statements of Operations . . . . . . . . . . . . 5
Three and Nine Months Ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows . . . . . . . . . . . . 6
Nine Months Ended June 30, 1996 and 1995
Consolidated Statement of Shareholders' Equity . . . . . . . . 7
Nine Months Ended June 30, 1996
Notes to Consolidated Financial Statements . . . . . . . . . . 8-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 14-19
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 20
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
2
<PAGE> 3
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited)
June 30, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 52,489
Accounts receivable - trade, less allowance for doubtful
accounts of $71,772 252,804
Other receivables 13,594
Interest receivable 4,534
Inventories 240,741
Prepaid expenses 17,767
-------------
581,929
PROPERTY AND EQUIPMENT, AT COST
Machinery and equipment 2,829,496
Furniture, fixtures and leasehold improvements 145,340
-------------
2,974,836
Accumulated depreciation and amortization (414,628)
-------------
2,560,208
OTHER ASSETS
Investments 6,458,010
Note receivable 150,000
Patents and related technology,
net of accumulated amortization of $ 1,932,738 12,167,777
Prepaid royalties 101,008
Other assets 72,471
-------------
18,949,266
-------------
TOTAL ASSETS $ 22,091,403
=============
</TABLE>
"SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS."
3
<PAGE> 4
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited) (Continued)
June 30, 1996
<TABLE>
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 1,587,286
Accrued liabilities 310,540
Notes payable - banks and other 832,752
Current portion - long-term debt 440,138
Notes payable - related party 613,237
-------------
3,783,953
LONG-TERM DEBT, LESS CURRENT MATURITIES 1,029,432
-------------
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;
143,723,086 shares issued and 142,759,086 shares outstanding 2,874,462
Additional paid-in capital 38,209,560
Unearned consulting fees (1,910,166)
Accumulated deficit (23,976,730)
Cumulative translation adjustment 27,912
-------------
16,225,038
Treasury stock, 964,000 shares, at cost (438,620)
-------------
15,786,418
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 22,091,403
=============
</TABLE>
"SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS"
4
<PAGE> 5
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Periods Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended June 30 Nine Months Ended June 30
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Product Sales $ 355,144 $ 313,704 $ 871,213 $ 540,122
Royalty Income 69,185 95,733
--------------- --------------- ---------------- ---------------
424,329 313,704 966,946 540,122
--------------- --------------- ---------------- ---------------
OPERATING EXPENSES
Manufacturing 319,101 431,554 915,513 628,304
General and administrative 339,664 2,263,012 1,538,983 3,115,600
Research and development 103,860 38,025 214,130 64,016
Marketing and selling 88,068 148,357 345,901 234,371
Depreciation and amortization 432,091 245,035 1,200,540 492,472
Impairment of assets - - 118,000
Bad debt expense 9,423 46,066 187,310
Other - 416
--------------- --------------- ---------------- ---------------
1,292,207 3,125,983 4,261,133 4,840,489
--------------- --------------- ---------------- ---------------
LOSS FROM OPERATIONS (867,878) (2,812,279) (3,294,187) (4,300,367)
OTHER EXPENSE (INCOME)
Interest expense 59,872 36,864 179,772 138,606
Interest and other income (49,926) 612 (68,675) (95,447)
--------------- --------------- ---------------- ---------------
9,946 37,476 111,097 43,159
--------------- --------------- ---------------- ---------------
LOSS FROM CONTINUING
OPERATIONS (877,824) (2,849,755) (3,405,284)) (4,343,526)
--------------- --------------- ---------------- ---------------
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS
Income (Loss) from discontinued
operations - - - 36,346
Loss on disposal of discontinued
operations - - - (2,476,346)
--------------- --------------- ---------------- ---------------
(2,440,000)
--------------- --------------- ---------------- ---------------
NET LOSS $ (877,824) $ (2,849,755) $ (3,405,284) $ (6,783,526)
=============== =============== ================ ===============
LOSS PER SHARE OF COMMON
STOCK
Loss from continuing operations $ (.01) $ (.03) $ (.03) $ (.07)
Net loss $ (.01) $ (.03) $ (.03) $ (.11)
WEIGHTED-AVERAGE NUMBER 138,070,993 81,684,714 111,796,957 63,546,760
OF COMMON SHARES OUT-
STANDING DURING THE PERIOD
</TABLE>
"SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS"
5
<PAGE> 6
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE PERIODS ENDED JUNE 30, 1995 AND 1996
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<CAPTION>
Nine Months Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (1,386,524) $ (2,110,078)
CASH FLOWS FROM INVESTING ACTIVITIES (1,637,065) (2,532,094)
CASH FLOWS FROM FINANCING ACTIVITIES 2,916,169 4,952,738
EFFECT OF EXCHANGE RATE CHANGES ON CASH 21,616 -
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (85,804) 310,566
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 138,293 54,018
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 52,489 $ 364,584
============= =============
</TABLE>
"SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS."
6
<PAGE> 7
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Period Ended June 30, 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Unearned
------------------------ ---------------------------- Paid-In Consulting
Shares Amount Shares Amount Capital Fees
--------- ------------ ------------ ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1995 1,000,000 $ 1,000,000 99,830,306 $ 1,996,607 $ 35,798,195 $ (1,910,166)
ISSUANCE OF COMMON STOCK FOR CASH
Private offerings, net of stock
issuance costs of $113,682
43,307,780 866,155 1,920,265
ISSUANCE OF COMMON STOCK
FOR SERVICES
Investment Banking Fee 2,100,000 42,000 192,400
ISSUANCE OF COMMON STOCK
FOR ACQUISITION
Novon International Inc. 11,000,000 220,000 1,540,000
COMMON STOCK RETIRED FOR
WARRANTS SUBJECT TO
REPURCHASE (12,515,000) (250,300) (1,241,300)
FOREIGN CURR. TRANSLATION
NET LOSS
--------- ---------------------------------------------------------------------------
BALANCE - June 30, 1996 1,000,000 $ 1,000,000 143,723,086 $ 2,874,462 $ 38,209,560 $ (1,910,166)
========= ============ ============ ============ ============= ==============
</TABLE>
<TABLE>
<CAPTION>
Cummulative
Treasury Accumulated Translation
Stock Deficit Adjustment
------------- --------------- -----------
<S> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1995 $ (361,500) $ (20,571,446) $ 4,966
ISSUANCE OF COMMON STOCK FOR CASH
Private offerings, net of stock
issuance costs of $113,682
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 (77,120)
FOREIGN CURR. TRANSLATION 22,946
NET LOSS (3,405,284)
---------------------------------------------
BALANCE - June 30, 1996 $ (438,620) $ (23,976,730) $ 27,912
============= =============== ===========
</TABLE>
"See accompanying notes to consolidated financial statements."
7
<PAGE> 8
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 June 30, 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 nine months ended June 30, 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
June 30, 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 $ 687,500
Issuance of warrants for the return of shares $ 1,491,600
Issuance of common stock for acquisitions
of Stark Industries Inc.. $ 2,975,000
Issuance of common stock for acquisitions of
Novon International Inc. $ 1,760,000 $ 8,250,000
Conversion of convertible debentures to equity $ 2,250,000
Issuance of common stock for offering costs $ 61,359
Conversion of shareholders' loan to equity $ 1,030,000
</TABLE>
8
<PAGE> 9
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash paid for interest or income taxes in periods ended June 30, 1996 and 1995
was $138,944 and $0 respectively.
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
9
<PAGE> 10
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - ACQUISITIONS AND DISPOSITIONS (CONTINUED)
(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 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.
10
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CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - ACQUISITIONS AND DISPOSITIONS (CONTINUED)
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.
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.
11
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CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
NOTE D - CONTINGENCIES
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.
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. 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
12
<PAGE> 13
CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - STOCKHOLDERS' EQUITY (CONTINUED)
and issued 137,000 shares as payment for 50% of the placement fee. 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. As of June 30, 1996, the Company had received net proceeds of
$2,135,670 from the sale of 40,213,904 shares of common stock and issued
216,876 shares valued at $27,109 as payment for commissions.
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
Sale of Preferred Stock-RX Medical - In July 1996, the Company sold its
investment in RX Medical consisting of 600,217 shares of that company's Series
A Preferred Stock for $450,000. The shares had a carrying value of $300,000.
13
<PAGE> 14
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.) 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 June 30,
1996, an amount of $6,564,641 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 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 the sale of Common
14
<PAGE> 15
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
$250,337 at June 30, 1996. Of this amount, $106,726 bears interest at 8% and
$143,611 bears interest at 12% as of June 30, 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 $1,469,570
at June 30, 1996. In January 1996, the wife of the President loaned an
additional $162,900, which carries a 15% interest rate and matures December 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
15
<PAGE> 16
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
July 25, 1996, the Company has received proceeds of $2,293,183 less issuance
costs of $72,582 from the sale of 41,332,304 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 $3,271,024 at June 30, 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(R) and Aqua-Novon(R) 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.
16
<PAGE> 17
CHURCHILL TECHNOLOGY INC.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 and 1995
The consolidated statement of operations for the three months ended June 30,
1996 include the results of operations of Novon only. The consolidated
statement of operations for the three months ended June 30, 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 June 30, 1996, the Company recorded revenues of
$355,329 as compared to $313,704 in the quarter ended June 30, 1995. These
revenues are a result of sales of its biodegradable and related products and
include $185 in royalty income from the licensing of its technology.
Expenses
Manufacturing expenses were $319,101 compared with $431,554 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(R) compounds which is in the process of
commissioning and is not yet in commercial production.
For the quarter ended June 30, 1996, general and administrative expenses were
$339,667, which represents a decrease of $1,923,345 from the comparable quarter
in 1995. The decrease is attributable to several non-recurring items recorded
in the quarter ended June 30, 1995. The items include $250,000 severance to
the former president of the Company, settlement of a long term consulting
contract for $450,000 and payment of an investment banking fee of $687,500.
All non-recurring items were paid in common stock of the Company. In February
1995, the Company closed the offices of CTI-IOM which further attributed to
decreases in the quarer ended June 30, 1996. Overall general and
administrative expenses continue to decrease as the Company recognizes the
benefits of consolidating corporate activities at the Novon facility.
Marketing and selling expenses for the quarter ended June 30, 1996 were
$88,068, a decrease of approximately $60,000 from the comparable quarter in
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 $65,835 compared with the same period a year
ago. This increase is associated with ongoing development activities at Novon.
17
<PAGE> 18
CHURCHILL TECHNOLOGY INC.
Depreciation and amortization expense increased by $187,056 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.
Nine Months Ended June 30, 1996 and 1995
Revenues
During the nine months ended June 30, 1996, the Company recorded revenues of
$897,946 as compared to $540,122 for the nine months ended June 30, 1995.
These revenues are a result of sales of its biodegradable and related products
and include $26,733 in royalty income from the licensing of its technology.
Expenses
During the nine months ended June 30, 1996, manufacturing expenses were
$915,513 compared to $628,304 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
June 30, 1995 represents five months of results of Novon subsequent to the
acquisition.
During the nine months ended June 30, 1996, the Company incurred general and
administrative expenses of $1,538,986 which represents a decrease of $1,576,617
from the comparable period in 1995. The decrease is due to 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 an investment banking fee of $687,500. All non-recurring items were
paid in common stock of the Company. An additional decrease of $368,253
occurred in conjunction with CTI-IOM office and activities. In Februrary,
1995, the Company closed the offices of CTI-IOM. The decrease is offset by an
increase of general and administrative expenses of approximately $582,000
incurred by Novon in conjunction with its office and activities. This increase
represents nine months of activity compared to five months of activity of Novon
subsequent to the acquisition on February 10, 1995.
Marketing and selling expenses for the nine months ended June 30, 1996
increased by $111,530 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 $150,114 compared to a year ago
as Novon continues its development activities.
Depreciation and amortization expense increased by $708,068 compared to a year
ago. This increase is associated with increases in equipment and intellectual
property associated with the Novon operations.
18
<PAGE> 19
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
nine months ended June 30, 1995 was $2,440,000. This compares with no losses
from discontinued operations in the nine months ended June 30, 1996.
Cash Flows
During the nine months ended June 30, 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 used in operating activities was $1,386,524 for the nine months ended
June 30, 1996 compared to $2,110,078 the same period a year ago. This is
primarily a result of a decrease in net losses.
Cash Flows from Investing Activities
Net cash used in investing activities decreased by $895,029 for the nine months
ended June 30, 1996 compared to a year ago. Significant cash uses in the nine
months ended June 30, 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 $48,567 for the nine months ended June 30, 1995 compared to $400,967
for the period ended June 30, 1996. The increase in cash used for property and
equipment related to the installation of the Novon production line. Additions
to patents totaled $1,236,098 for the nine months ended June 30, 1996. Of this
total, $1,188,818 represents the acquisition of the royalty stream, patents and
trademarks for Japan, Australia and New Zealand from Warner-Lambert.
Cash Flows from Financing Activities
The Company's primary source of liquidity for the nine months ended June 30,
1996 was provided by the sale of common stock, which generated net proceeds of
$2,786,420. During the nine months ended June 30, 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.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
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.
</TABLE>
(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.
20
<PAGE> 21
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 8/13/96 /s/
------------------------------- ---------------------------------
Bertha H. Mitchell
Chief Financial and Accounting
Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 52,489
<SECURITIES> 0
<RECEIVABLES> 270,932
<ALLOWANCES> 71,772
<INVENTORY> 240,741
<CURRENT-ASSETS> 581,929
<PP&E> 2,974,836
<DEPRECIATION> (414,628)
<TOTAL-ASSETS> 22,091,403
<CURRENT-LIABILITIES> 3,783,953
<BONDS> 0
0
1,000,000
<COMMON> 2,874,461
<OTHER-SE> 11,911,956
<TOTAL-LIABILITY-AND-EQUITY> 22,091,403
<SALES> 871,213
<TOTAL-REVENUES> 966,946
<CGS> 915,513
<TOTAL-COSTS> 1,261,414
<OTHER-EXPENSES> 2,953,656
<LOSS-PROVISION> 46,066
<INTEREST-EXPENSE> 179,772
<INCOME-PRETAX> (3,405,284)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,405,284)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,405,284)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
</TABLE>
