-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JM5vmdDZnu8RIKM8NXSV8NIb9z/tTP9hWmG9VdWucGz79rNcIf6VmLkSqPstwGyL iRNiAYj1XOK2CqJW9Zdt/g== 0000905155-96-000009.txt : 19960105 0000905155-96-000009.hdr.sgml : 19960105 ACCESSION NUMBER: 0000905155-96-000009 CONFORMED SUBMISSION TYPE: 10-K CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19960104 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHURCHILL TECHNOLOGY INC CENTRAL INDEX KEY: 0000721233 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 840904172 STATE OF INCORPORATION: CO FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11372 FILM NUMBER: 00000000 BUSINESS ADDRESS: STREET 1: 181 COOPER AVENUE CITY: TONAWANDA STATE: NY ZIP: 14150 BUSINESS PHONE: 7168748696 MAIL ADDRESS: STREET 1: 181 COOPER AVENUE CITY: TONAWANDA STATE: NY ZIP: 14150 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________ FORM 10-KSB (Mark One) [X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended September 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________ to ________ Commission file number 0-11372 CHURCHILL TECHNOLOGY INC. (Name of Small Business Issuer in Its Charter) Colorado 84-0904172 (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 181 Cooper Avenue, Tonawanda, New York 14150 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (716) 874- 8696 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.02 Par Value (Title of Class) Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Stated issuer's revenues for its most recent fiscal year. $878,842 State the aggregate market value of the voting stock held by non- affiliates computed by reference to the price at which such stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. APPLICABLE ONLY TO CORPORATE REGISTRANTS The number of outstanding shares of Common Stock of the Registrant as of December 11, 1995 was 99,930,311. Transitional Small Business Disclosure Format (Check One): Yes___ No X DOCUMENTS INCORPORATED BY REFERENCE Registrant's definitive Proxy Statement to be filed within 120 days of the close of Registrant's fiscal year. Incorporated by Reference in Items 9, 10, 11 and 12 of Part III of this Form 10- KSB. TABLE OF CONTENTS Page PART I Item 1. Business 2 Item 2. Description of Property 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 PART II Item 5. Market for Common Equity and Related Stockholder Matters 5 Item 6. Management's Discussion and Analysis or Plan of Operation 6 Item 7. Financial Statements 10 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 10 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 10 Item 10. Executive Compensation 12 Item 11. Security Ownership of Certain Beneficial Owners and Management 13 Item 12. Certain Relationships and Related Transactions 14 Item 13. Exhibits and Reports on Form 8-K 14 PART I ITEM 1. BUSINESS The Company was organized under the laws of the State of Colorado on March 16, 1983. From its incorporation until mid- 1987, the Company was primarily engaged in the business of providing management and consulting services to affiliates, subsidiaries, and new and existing companies. From 1987 through 1989, the Company essentially limited its activities to the review and reorganization of companies involved in Chapter 11 bankruptcy proceedings. Such activity resulted in the Company acquiring, through plans of reorganization, the assets of three oil and gas companies and their affiliates and an equity position in a fourth. During fiscal 1990, the Company acquired equity positions in two oil and gas companies. In order to facilitate these transactions, the Company incorporated Trans Energy, Inc., a wholly-owned subsidiary. In fiscal 1991, the Company concentrated its efforts in providing to other companies, through synergy of size, cost-effective and efficient comprehensive management services in the areas of engineering, administration, facilities and records management, and oil and gas accounting. In fiscal 1993, the Company merged its wholly-owned subsidiary, Churchill Italy, Inc., into Traiana, Inc., a Florida corporation ("Traiana"). Subsequently, Traiana distributed sixty percent (60%) of the Company's ownership in Traiana to the Company's shareholders. On December 8, 1993, the Company exchanged 2.5 million shares of its Common Stock for ten percent of the issued share capital of Churchill Technology (Isle of Man) Limited ("CTI- IOM"), an Isle of Man company which owned certain intellectual property rights related to a process of manufacturing composite polymeric articles referred to as "biodegradable" plastic. On February 22, 1994, the Company exchanged 28,750,000 shares of its Common Stock to acquire the remaining 90 percent of CTI-IOM. The Company accounted for the transaction as a recapitalization of the Company with CTI-IOM as the accounting acquirer (reverse acquisition). On February 22, 1995, the Company assigned and transferred all of the issued and outstanding capital stock of CTI-IOM to a former officer of CTI-IOM. In exchange, Novon International, Inc., a Delaware corporation, ("Novon") a recently acquired merged company in the business of biodegradable additives and compounds, was assigned all of the intellectual property rights relating to biodegradable plastics. As a condition precedent to the acquisition of CTI-IOM, a separation of the assets of the Company was effected for the benefit of the Churchill shareholders of record as of February 22, 1994 (the "Churchill Record Shareholders"). The Company transferred all of the assets, property, subsidiaries, investments, equity interests, cash, contract rights, royalty rights and other rights owned or held by the Company immediately prior to the closing date (the "Churchill Properties"), excluding the ten percent (10%) of CTI-IOM acquired in December 1993, to Churchill USA, Inc., a wholly-owned subsidiary of Churchill ("CUSA"). CUSA also assumed all liabilities associated with the Churchill Properties. Concurrent with the acquisition of CTI- IOM, the Company assigned 100% of the CUSA Common Stock to a trust (the "CUSA Trust"). Wendy Cribari, former executive officer of the Company, is the trustee under the CUSA Trust (the "Trustee"). The CUSA Trust will hold the CUSA shares until February 2001. The recipients of the total of 31,250,000 shares of the Company's Common Stock issued in the CTI-IOM transaction and any subsequent recipients of newly issued shares have relinquished certain rights to the CUSA shares in favor of Churchill Record Shareholders until February 2001. On December 30, 1994, the Company, CUSA and the Trustee, amended the CUSA Trust Agreement to clarify certain provisions related to the shares and assets of CUSA and contingent consideration to be paid to Churchill Record Shareholders. The Amendment provided for the issuance of Series A Convertible Preferred Stock (the "Convertible Preferred Stock") of the Company to the Trustee to be held in trust until February 2001, at which time the shares of Convertible Preferred Stock will be converted, if possible pursuant to the designated terms of the Convertible Preferred Stock, into shares of the Company's Common Stock and distributed to the Churchill Record Shareholders. The shares of Convertible Preferred Stock are convertible into shares of Common Stock at the end of seven years based upon the fair market value of the net assets of the Company, excluding CUSA, divided by the Average Daily Common Share Value, as defined. See "Description of Capital Stock -- Series A Convertible Preferred Stock." The Company's principal executive offices are located at 181 Cooper Avenue, Tonawanda, New York 14150 and its telephone number is (716) 874-8696. Recent Developments Acquisition and disposition of Stark Industries, Inc./CHC. On December 1, 1994, the Company entered into an agreement to renegotiate and acquire all of the issued and outstanding shares of Stark Industries, Inc., a Michigan corporation ("Stark") whose sole asset is a 54% equity interest in Consolidated Health Corporation of Mississippi, Inc. ("CHC"), a Mississippi corporation for 4.0 million newly issued shares of common stock of the Company and $300,000 cash. On July 13, 1995, the Company sold its 54% interest in CHC for $825,000 cash and preferred convertible stock of the purchaser. Acquisition of Novon. Novon was incorporated in February 1994. In December 1994, Novon acquired biodegradable technology from Warner-Lambert Company for $1,950,000 in cash. This technology included patents, trademarks, copyrights and contract rights. In January 1995, Ecostar International L.P. ("Ecostar L.P."), a limited partnership in the business of biodegradable additives and compounds, merged into Novon, with each of the limited partners receiving a proportionate number of shares of Novon for their interest in Ecostar L.P. On February 10, 1995, the Company completed the acquisition of 100% of the issued and outstanding stock of Novon. The former shareholders of Novon received 11 million restricted shares of the Company's Common Stock. Pursuant to the Agreement and Plan of Merger dated February 10, 1995 among the Company, Novon and Novon Acquisition Corp. (the "Acquisition Agreement"), the Company has agreed to adjust the purchase price in the event that the sixty (60) day average closing bid price of the Company's Common Stock as reported by Nasdaq for the 60-day period preceding the one-year anniversary of the closing is less than $1.00 per share. If such event should occur, the Company has agreed to issue, within 30 days of the one-year anniversary, that number of additional shares of the Company's Common Stock as is necessary so that the aggregate value of all shares of Common Stock issued pursuant to the Acquisition Agreement is equal to $11,000,000, but not to exceed 11,000,000 additional shares. At the time of the Novon acquisition, Robert Downie, the Chairman, Chief Executive Officer, President and Director of the Company was the beneficial owner of 5,432,000 shares of Common Stock of Novon and the President and Director of Novon. Brian Aldous, the Vice President -- Operations of the Company, Graham M. Chapman, the Vice-President -- Technology of the Company, and Richard Meyers, the Vice-President -- Sales of the Company held similar positions with Novon. At the time of the transaction, Mr. Chapman was the beneficial owner of 72,000 shares of Common Stock of Novon See "Business -- Recent Developments." Products Ecostar Technologies. The technologies developed by Ecostar L.P. consist of an array of additive packages whose addition in processing polyethylene, polypropylene and polystyrene degrades such materials to a proven ultimate fate of CO2, water, and biomass. This composition of polymers, starch, chemicals and catalyst systems are specially formulated to provide accelerated bio and photodegradation of plastic products. Such additives provide a complete breakdown of polymers into biodegradable residues. Novon Technologies. The "Novon" technologies, developed by the polymer product division of Warner Lambert consist of a sophisticated grouping of compounds of proven biodegradability. This entirely new polymeric range of materials is designed with the prime objective of being completely biodegradable yet with exceptional performance as plastic. Not only will the Novon specialty polymers extrude and mold like orthodox plastics, they will decompose like paper, leaves, and wood chips, leaving no synthetic or toxic residues. The Novon specialty polymers are an entirely new materials technology for packaging, food service, waste bags and a host of other applications in a variety of industries. Some grades of the Novon polymer disintegrate in water and can be turned into products that are most suited to flushing down the sewer or disposed of at sea. "Novon" is a name established by Warner Lambert and recognized as a product of quality and performance. Management of the Company believes its availability will provide Churchill with commercial growth by continuing the supply of product to the existing market and by meeting the increasing international demand for a host of the Company's degradable products. Vertix Technologies. The Vertix technologies, the original component of the Company, consist of a preferentially soluble family of polymers which radically extends the production possibilities of polyvinyl alcohol (P.V.A). Vertix and its line of products is manufactured using technology based on the co- processing of different grades of polyvinyl alcohols (P.V.A.) from hydrolyzed Polyvinyl acetates, "raw" materials long established in the polymer industry. Vertix combines useful and environmentally beneficial properties of P.V.A. in a proprietary process to produce a laminated film, each layer of which is selected to meet the overall needs in terms of physical and biodegradation properties and is thus "tailored" to a particular product. Major Customers For the year ended September 30, 1995, two customers accounted for 32 percent and 22 percent of total revenues, respectively. As of September 30, 1995, two customers accounted for 48 percent and 10 percent, respectively, of total trade accounts receivable. The loss of any such customers may have a material adverse effect on the Company. Employees At December 11, 1995, the Company had 30 full-time employees. Patents and Patent Applications The Company through Novon, owns the rights to over 350 patents and patent applications worldwide. ITEM 2. DESCRIPTION OF PROPERTY The Company currently leases its administrative and manufacturing facilities, located at 181 Cooper Avenue, Tonawanda, New York. The lease provides for approximately 25,000 square feet at a base annual rent of $105,468. The lease expires in October 1996 and has a five year renewal option. ITEM 3. LEGAL PROCEEDINGS The Division of Enforcement of the Securities and Exchange Commission ("SEC") commenced a private investigation of the Company and others in August 1995 (File No. H-3071), to determine whether, since September 1993, any persons have engaged, are engaged, or are about to engage in violations of the Federal Securities laws. The current management of the Company, which is cooperating with the SEC in the private investigation, cannot at this early stage determine whether any enforcement proceeding may be instituted by the SEC against the Company or others or, if so, whether any such enforcement proceeding would have a material and adverse effect upon the Company, its business or its financial position and condition. The Company's subsidiary Novon, is a defendant in actions involving the interpretation of license agreements relating to its Ecostar technologies. Management and legal counsel for the Company are of the opinion the Plaintiffs do not have the legal capacity to commence the action, and filed a motion for the dismissal of the action in 1993. The actions commenced by two of the three plaintiffs were dismissed. The remaining plaintiff must file an amended claim to continue the actions. To date, there has not been an amended claim filed. Accordingly, based upon the facts known to date, management and legal counsel believe Novon has a meritorious defense to the actions asserted against it and should prevail. Except as set forth above, the Company is not a party to any material litigation and is not aware of any pending or threatened litigation that could have a material adverse effect on it or its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There have been no matters submitted to a vote of security holders during the fiscal year ended September 30, 1995. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of December 7, 1995, the Common Stock is traded on the over-the-counter market. Previously, the Common Stock was traded on The Nasdaq SmallCap Market, trading symbol "CHUR." On December 6, 1995, the Nasdaq Listing Qualifications Committee decided to remove the Company's Common Stock from listing on the Nasdaq SmallCap Market. The following table presents, on a quarterly basis, the high and low bid quotations for the Common Stock as reported by The Nasdaq SmallCap Market for the period from October 1, 1993 through September 30, 1995. Such quotations reflect inter-dealer prices, without retail markup, markdown or commission and do not necessarily represent actual transactions.
Period High Low 1993: October 1 to December 31 7/8 9/32 1994 January 1 to March 31 2 23/32 1/2 April 1 to June 30 2 5/16 31/32 July 1 to September 30 1 5/16 5/8 October 1 to December 31 1 1/2 27/32 1995 January 1 to March 31 1 1/8 6/32 April 1 to June 30 23/32 1/4 July 1 to September 30 21/32 13/32
The number of record holders of the Common Stock as of the close of business on December 11, 1995 was 1,185. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Liquidity and Capital Resources The Company's acquisition strategy resulted in the acquisition of CTI-IOM in February 1994, Stark in December 1994 and Novon in February 1995. The Company has issued a total of 46,250,000 of Common Stock to complete these acquisitions. (In conjunction with the acquisition of Novon, the Company has agreed to provide financing to Novon not to exceed $6.0 million.) This financing will enable Novon to acquire additional manufacturing equipment and capacity. A portion of the financing will be used to satisfy working capital requirements. As of September 30, 1995, an amount of $3,755,923 has been advanced to Novon. On March 28, 1995, the Company entered into a letter of intent to sell its 54% interest in Consolidated Health Corporation of Mississippi, Inc. ("CHC"). The transaction closed on July 13, 1995 and the Company received $825,000 cash and preferred convertible stock of the purchaser. This transaction reflects management intent to exit the health care management industry. The Company has no influence in the management of the issuer of the preferred stock or its subsidiary entity. In October 1994, the Company completed the sale of 1,000,000 shares of common stock which generated net proceeds of approximately $577,000. The proceeds of these sales of Common Stock were used for working capital. In January 1995, the Company completed the offering of $2.25 million in convertible debentures. The net proceeds of $2,025,000 were used to purchase patents, technology and equipment relating to the polymer products division of Warner Lambert. The convertible debentures bear interest at 6% and were due on December 31, 1995. The debentures were convertible at the option of the holder into common shares of the Company at a discount of 25% to the closing bid price on the date of conversion. In the year ended September 30, 1995, holders of the $2.25 million of convertible debentures gave notice to the Company of their demand to convert the debentures. The Company issued 10,487,408 shares upon conversion of the debentures. In May 1995, the Company entered into a private placement agreement with an investment banking firm whereby the Company raised net proceeds of approximately $1.6 million through the issuance of 9,170,140 shares of restricted stock. Additionally, the Company issued 2,100,000 shares valued at $687,500 to the same investment banking firm as payment of investment banking services rendered. During the year ended September 30, 1995, the Company was loaned $3,513,980 from two shareholders. During the year ended September 30, 1995, the Company made payments of $2,913,980 on these shareholder loans. In May 1995, one shareholder agreed to convert loans in the amount of $1,030,000 into 5,493,000 common shares of the Company. The loan was converted at a discount of 25% to the market price of the Company's common stock on the date of conversion. Additionally, the Chief Executive Officer had made loans to Novon prior to its acquisition by the Company. The loans are due on demand and total $175,092 at September 30, 1995. Also, the Chief Executive Officer has personal assets collateralizing loans totalling $450,000 and personal guarantees on loans totalling $2,446,816. In May 1995, the Company settled a ten year consulting contract through the issuance of 1,607,000 shares valued at $450,000. The consulting contract was with a shareholder of the Company whose services would no longer be necessary due to the relocation of activities related to the biodegradable products and patents to Novon. In May 1995, the Company issued 1,000,000 shares valued at $250,000 as severance pay to the former president of the Company. In April 1994, the Board of Directors approved the issuance of 4,350,000 shares of common stock as bonus compensation to the former Chairman of the Board and Chief Executive Officer, all of which have since been issued. The Company entered into an agreement with a financial consulting group to act as its financial advisor with respect to identifying and evaluating various financing opportunities. The financial consulting group will assist the Company in order to raise working capital up to a minimum aggregate value of $10 million, and the Company will pay a fee equal to 10% of the principal amount of financings. Furthermore, the Company agreed to issue to the financial consulting group a total of 6,000,000 shares of common stock. The Company has paid cash commissions of $107,680 through September 30, 1995 pursuant to this agreement. On July 5, 1995, the Company issued 200,000 shares valued at $100,000 in conjunction with commissions due. Additionally, on July 5, 1995, the Company issued 6,000,000 shares valued at $2,389,500 pursuant to this agreement. The Company has recorded $479,334 in stock issuance costs which have been offset against proceeds from sale of Common Stock in private offerings pursuant to this agreement and it has recorded $1,910,166 as unearned consulting fees. In October 1995, the Company entered into an agreement with Discovery Capital, Inc. ("Discovery Capital") for a $1,000,000 private placement of up to 4,000,000 shares of restricted Common Stock of the Company. Each share of stock purchased through this placement includes an option for a period of three years from the date of the agreement to purchase one additional share of Common Stock of the Company at an exercise price of $1.00 per share. To date, the Company has sold 2,180,000 shares for net proceeds of $517,750. Additionally, the Company is committed to pay Discovery Capital a placement fee of ten percent of all capital raised. Fifty percent of the placement fee is to be paid in shares of the Company's restricted Common Stock. The private placement terminates on December 26, 1995, or earlier if determined by Discovery Capital. On December 20, 1995 the Company entered into a modification agreement of the Discovery Capital private placement which extends the option term to four years and revises the exercise price to $0.72 per share. Additionally, the Company has agreed to adjust the total number of shares issued in the private placement if, at the one-year anniversary of the placement, the bid price of the Company's shares is below the original purchase price, up to an aggregate maximum of shares equal to the original number of shares issued. As of December 8, 1995 the Company has sold 2,740,000 shares for net proceeds of $685,000. The Company anticipates that it will satisfy its working capital requirements from a combination of medium term financings, working capital and trade lines of credit and, if necessary, from proceeds of sales of Common Stock. The Company also expects to establish license agreements and joint development partnerships for its technologies in certain geographical and product specific areas. The Company expects these activities will generate additional working capital. However, there can be no assurances that the operations of the Company's subsidiaries will achieve profitability or that additional financing will be available to the Company on terms that will be acceptable to it. Results of Operations The consolidated statement of operations for the year ended September 30, 1995 include the historical results of CTI-IOM using the accounting treatment consistent with a reverse acquisition. Accordingly, the historical statement of operations for CUSA has not been included in the consolidated statement of operations due, in part, to the CUSA investment being recorded on the cost basis. The results of operations of Novon are included from the acquisition date. Additionally, the results of operating for Stark are included as discontinued operations due to the sale of CHC. Year Ended September 30, 1995 and 1994 Revenues During the year ended September 30, 1995, the Company recorded revenues of $878,842 related to sales of its biodegradable and related products. These revenues represent eight months of results of Novon subsequent to the acquisition on February 10, 1995. Expenses During the year ended September 30, 1995, the Company incurred cost of sales of $841,275. The costs of sales relates entirely to raw materials, labor, direct and indirect manufacturing cost, excluding depreciation, associated with the production of Novon's biodegradable additives and compounds and related products. During the year ended September 30, 1995, the Company incurred selling, general and administrative expenses of $3,790,863. Of this total, approximately $2,415,516 related to the operations of the parent company's executive offices which are now integrated into Novon. Included in the year ended September 30, 1995 were several non-recurring items such as $250,000 severance to the former president of the Company, a settlement of a long term consulting contract for $450,000 and payment of investment banking fees of $687,500. All non- recurring items noted above were paid in Common Stock of the Company and did not require cash expenditures. An additional $408,646 was incurred by CTI-IOM in conjunction with its office and activities. In February 1995, the Company closed the offices of CTI-IOM and the operations relating to it will now be operated at the facilities of Novon. The remaining selling, general and administrative expense of $966,701 was incurred by Novon. In conjunction with the sale of CHC, the Company has recorded the results of operations of CHC as discontinued operations. Accordingly, the net loss of CHC for the seven months from acquisition date of December 1, 1994 through July 13, 1995 of $58,770 is recorded as loss from discontinued operations. This net loss was generated on revenues of $2,079,441 and expenses of $2,187,772. Additionally, the Company recorded a loss on disposal of discontinued operations of $2,665,484 to reflect a write-down of its investment in and advances to CHC to its estimated net realizable value. Period Ended September 30, 1994 Compared With the Year Ended September 30, 1993 In the year ended September 30, 1994, the Company recorded a $1,000,000 write-down on its investment in CUSA. The consolidated statement of operations for the period ended September 30, 1994 includes the historical results of CTI- IOM using the accounting treatment consistent with a reverse acquisition. Accordingly, the historical statement of operations for CUSA have not been included in the consolidated statement of operations due, in part, to the CUSA investment being recorded on the cost basis. Additionally, CTI-IOM had no results from operations for the year ended September 30, 1993 and therefore, comparisons between periods are not included. Revenues As of September 30, 1994, no material revenues have been generated by CTI-IOM from the commercialization of the "bio- degradable" plastic patents. Expenses General and administrative expenses were approximately $687,000 for the period ended September 30, 1994. Of this total, approximately $527,000 related to parent company activities such as travel expenses and office expenses. The current fiscal period experienced an increase over normal operating expenses due to the relocation of the corporate offices from Lakewood, Colorado to Delray Beach, Florida. Additionally, travel expense was unusually high due to the activity related to the various acquisitions and the different locations of the officers of the Company. Additionally, CTI-IOM recorded approximately $160,000 in general and administrative expenses related to the operation of its office in the Isle of Man. Salaries and bonus expense was approximately $8,949,000 for the period ended September 30, 1994. Included in this total was a bonus expense of approximately $8,564,000 paid to the Chief Executive Officer in recognition of his role in the recent acquisitions and reorganization of the Company. This bonus was payable in total through the issuance of 4,350,000 newly-issued common shares of the Company. Professional and consulting fees were approximately $1,283,565 for the period ended September 30, 1994. Included in this total was $462,520 for shareholder relations and mergers and acquisitions consulting paid by the issuance of 400,000 common shares in April 1994. Legal and accounting fees, management consulting fees and shareholder relations fees were approximately $312,045 and were incurred in relation to the acquisitions and corporate reorganization. Also included was approximately $509,000 of consulting fees related to consultants involved in the commercialization, production and licensing of the Company's bio-degradable plastics patents. The Company recorded an allowance for notes receivable of approximately $490,000 in the period ended September 30, 1994. In conjunction with the Stark acquisition in April 1994, which was amended in December 1994, the Company made loans of approximately $879,000 to Stark and its subsidiaries and affiliates. A reserve of approximately $340,000 was recorded on these notes receivable. The remaining reserve of $150,000 recorded in the period ended September 30, 1994 relates to loans of approximately $301,000 made to an entity in which the Company owns certain distribution rights. ITEM 7. FINANCIAL STATEMENTS The consolidated financial statements of Churchill Technology Inc. and its subsidiaries are filed as a part of this Annual Report on Form 10-KSB. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements between the Company and its independent accountants on any matter of accounting principles or practices or financial statement disclosure since the Company's inception. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Directors and Executive Officers The current executive officers and directors of the Company are as follows:
Name Age Position _ Robert H. Downie 71 Chairman, Chief Executive Officer, President and Director Gamal Marwan 27 Director Graham M. Chapman 54 Vice President -- Technology Brian Aldous 57 Vice President -- Operations Bertha Mitchell 54 Vice President, Treasurer, Secretary, Chief Financial Officer of Churchill and Director Richard Meyers 44 Vice President -- Sales John J. Stanulonis 49 Vice President -- Marketing
Each director is elected to hold office until the next annual meeting of stockholders and until his successor is elected and qualified. All officers serve at the discretion of the Board of Directors. The following sets forth certain biographical information with respect to the directors and executive officers of the Company. Robert H. Downie is Chairman, Chief Executive Officer, President and Director. Mr. Downie joined the Company in February 1995. Mr. Downie had been President and a Director of Ecostar International, Inc. since its formation in 1989. In 1984, Mr. Downie founded and served as President of International Imaging Materials, Inc. ("IIMAK"), a manufacturer of thermal heat transfer ribbons whose stock is currently traded on the Nasdaq National Market. Mr. Downie is a member of the Board of Trustees of the Rochester Institute of Technology. Member Executive Committee of Board at Webcraft Technologies. Gamal Marwan is a Director of the Company. He is also currently Vice President and a Director of Fima Capital Corporation and the Chairman and Director of Fima Resources Limited, an institutional investment group with offices in Geneva, Switzerland and London, England. Mr. Marwan was previously employed as a Financial Consultant with Merrill Lynch International Bank. He is also a Director of Alpha International Investments Limited, Taz Investment Corporation Limited and Excess Investments Corporation, Ltd. Dr. Graham Chapman has been the Vice President - Technology since September 1995. He also serves as the Chairman of the Technical Committee of the Society of the Plastics Industry's Degradable Plastic Council. Dr. Chapman was previously employed by Ecostar International, Inc. and its predecessor, from 1985 until 1993, where he served in various positions in the research and marketing aspects of the business. Dr. Chapman received his Ph.D. in Organic Chemistry from Cambridge University. Brian Aldous has been the Vice President - Operations of Novon since December 1994 and of the Company since September 1995. Prior to joining the Company, Mr. Aldous was one of the founding officers of IIMAK. From 1983 to 1993, he held Vice President positions in Manufacturing, Engineering and Development at IIMAK. He was responsible for the technology transfer from the licensor in Japan, all manufacturing equipment purchasing and installation, and the design of the initial facility and three expansions. Bertha H. Mitchell is Vice President, Treasurer, Secretary, Chief Financial Officer and a Director. She was previously with Buffalo Ventures Inc., a venture capital firm and with Royal Trust of Toronto, a financial services company. Ms. Mitchell spent over 20 years with Citibank in the corporate finance field with postings in Latin America, the U.S. and Canada. Richard Meyers has been Vice President - Sales of Novon since December 1994 and of the Company since September 1995. He is responsible for international sales as well as the design of totally biodegradable end products. Prior to joining Novon, Mr. Meyers was employed by Ecostar International, Inc. where he served in various positions in sales beginning in 1991. Prior to then, Mr. Meyers worked for Sony Corporation Standard Electronics in marketing and sales of new products. John Stanulosis joined the Company in November 1995 as Vice President -- Marketing and is responsible for business development. He has more than 2.0 years experience in the oil, chemical and environmental services business. Most recently he was employed for six years with Chemical Waste Management as general manager of one of its treatment, storage and disposal facilities. Mr. Stanulosis received his Ph.D. in physical organic chemistry from the University of Delaware. ITEM 10. EXECUTIVE COMPENSATION Summary Compensation Table The following summary compensation table sets forth certain information regarding compensation paid during each of the Company's last three fiscal years to the persons serving as the Company's Chief Executive Officer during the last year. Except as set forth below, no executive officer's salary and bonus exceeded $100,000 during any of the Company's last three fiscal years:
SUMMARY COMPENSATION TABLE Long-Term Compensation Annual Compensation Awards Other Restricted All Name and Principal Fiscal Annual Stock Stock Other Position Year Salary Bonus Compensation Award(s) Options(#) Compensation Robert Downie 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 1995 0 0 0 0 2,000,000 0 1994 $ 3,000 $8,564,003 0 0 0 0 1993 0 0 0 0 0 0
[FN] _______________ (1) Does not include perquisites and other personal benefits where the aggregate value of such compensation to the executive officer is less than 10% of annual salary and bonus. (2) Mr. Downie was elected Chief Executive Officer in May 1995. (3) Mr. Hamilton resigned as Chief Executive Officer in May 1995. (4) Represents the fair market value of an aggregate of 4,350,000 shares of restricted and unrestricted shares of the Company's Common Stock issued to Mr. Hamilton as bonus compensation. Option Grants in Last Fiscal Year The following table sets forth information covering the grant of options to acquire Common Stock in the last year to the persons named in the Summary Compensation Table.
Options % of Total Options Granted Exercise or Expiration Name Granted to Employees in Fiscal Year Base Price/Share Date Robert Downie 2,000,000 50% $ .35 April 18, 1997 Alexander Hamilton 2,000,000 50% $ .35 April 18, 1997
Value of Options at September 30, 1995
Value of Unexercised Shares Number of UnexercisedIn-the-Money O ptions Acquired on Value Options at FY-End(#) FY-End(1) Name Exercise(#)RealizedExercisableUnexercisable Exercisable Unexercisable Robert Downie -0- -0- 2,000,000 - -0- -0- -0- Alexander Hamilton -0- -0- 2,000,000 - -0- -0- -0-
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of September 30, 1995, the beneficial ownership of Common Stock of all directors of the Company, each of the executive officers of the Company named in the Summary Compensation Table, all directors and officers of the Company as a group, and each person who is known to the Company to own beneficially more than 5% of the Company's Common Stock.
Amount of Percent Name and Address of Beneficial Owner Nature of Ownership of Class Robert H. Downie 7,432,000 7.3% 181 Cooper Avenue Tonawanda, New York 14150 Alexander Hamilton 5,450,000 5.3% Riverside One, Heater Road London SW11 4AN England Bertha H. Mitchell -0- - 0- 181 Cooper Avenue Tonawanda, New York 14150 Gamal Marwan 6,363,686 6.2% 181 Cooper Avenue Tonawanda, New York 14150 All executive officers and directors as a group 13,867,686 13.6%
[FN] _____________ (1) Includes stock options which are exercisable to acquire 2,000,000 shares. (2) Such shares are indirectly owned through Fima Capital Corporation Ltd. (3) Includes all shares currently outstanding and those which are not outstanding as of September 30, 1995, but which are subject to issuance upon exercise of stock options. See footnote (1). ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has two demand notes totalling $175,092 payable at September 30, 1995 to Robert Downie. Of that amount, $113,481 bears interest at 8 percent and $61,611 bears interest at 12 percent. Neither notes have payments due in fiscal 1996. ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K (a) The exhibits required to be filed by this report are listed in the Exhibit Index which commences on page 15 hereof. (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the last quarter of the fiscal year ended September 30, 1995. SIGNATURES In accordance with the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHURCHILL TECHNOLOGY INC. Dated: December 28, 1995 Robert H. Downie, Chairman In accordance with the requirements of the Exchange Act, this report is signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name and Capacity Date December 28, 1995 Name: Robert H. Downie Title: Chief Executive Officer and Director December 28, 1995 Name: Bertha H. Mitchell Title: Chief Financial Officer and Accounting Officer and Director December 28, 1995 Name: Gamal Marwan Title: Director
EXHIBIT INDEX Exhibit Page Number Document Number 3.1 Restated Certificate of Incorporation (1) 3.11 Designation of Series A Convertible Preferred (3) 3.2 Bylaws (1) 10.1 Stock Purchase Agreement dated December 1, 1994 (2) between and among the Company, Stark Industries, Inc. and the shareholders of Stark. 10.2 Amendment to CUSA Trust Agreement dated (3) February 16, 1994 between and among the Company, Churchill U.S.A., Inc. and Wendy A. Cribari. 10.3 Agreement and Plan of Merger by and among the (4) Company and Novon Acquisition Corp. and Novon International, Inc. 10.4 Plan and Agreement of Merger by and among Rx Medical Service Corporation and Consolidated Health Corporation of Mississippi, Inc. 21.1 Various Oil and Gas Disclosures of Churchill U.S.A., Inc. 27.1 Financial Data Schedule
____________________________ (1) Filed as exhibit to the Current Report on Form 8-K dated February 27, 1994, which is incorporated by reference herein. (2) Filed as exhibit to the Current Report on Form 8-K dated December 23, 1994, which is incorporated by reference herein. (3) Filed as exhibit to the Annual Report on Form 10-KSB for the year ended September 30, 1994 dated January 13, 1995. (4) Filed as exhibit to the Current Report on Form 8-K dated February 10, 1995, which is incorporated by reference herein. CHURCHILL TECHNOLOGY INC. AND SUBSIDIARIES Index to Consolidated Financial Statements Independent Auditor's Report F-1 - F-2 Consolidated Balance Sheet F-3 - F-4 Consolidated Statements of Operations F-5 Consolidated Statements of Shareholders' Equity F-6 - F-7 Consolidated Statements of Cash Flows F-8 - F-9 Notes to Consolidated Financial Statements F-10 - F-25 Index to Unconsolidated Financial Statements of Wholly Owned Subsidiary Independent Auditor's Report F-27 Consolidated Balance Sheet F-28 - F-29 Consolidated Statements of Operations F-30 Consolidated Statements of Shareholders' Equity F-31 Consolidated Statements of Cash Flows F-32 - F-33 Notes to Consolidated Financial Statements F-34 - F-46 INDEPENDENT AUDITOR'S REPORT Shareholders and Board of Directors Churchill Technology Inc. Tonawanda, New York We have audited the accompanying consolidated balance sheet of Churchill Technology Inc. and subsidiaries (the "Company") as of September 30, 1995 and the related consolidated statements of operations, shareholders' equity and cash flows for the year ended September 30, 1995 and for the period from December 8, 1993 (inception) to September 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of September 30, 1995 and the consolidated results of their operations and their cash flows for the year ended September 30, 1995 and for the period from December 8, 1993 (inception) to September 30, 1994 in conformity with generally accepted accounting principles. Shareholders and Board of Directors Page 2 The accompanying consolidated financial statements have been prepared assuming the Company will continued as a going concern. As discussed in Note B to the consolidated financial statements, the Company has had recurring losses since its inception and has a working capital deficit of $2,529,558 as of September 30, 1995. As a result, the Company requires additional capital and cash flow from operations to meet their obligations when due. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are discussed in Note B. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Mitchell Finley and Company, P.C. Certified Public Accountants December 1, 1995 Denver, Colorado Consolidated Balance Sheet September 30, 1995 ASSETS
CURRENT ASSETS Cash $ 138,293 Accounts receivable - trade, less allowance for doubtful accounts of $27,745 171,146 Interest receivable 4,533 Inventories 222,855 Prepaid expenses 22,531 559,358 PROPERTY AND EQUIPMENT, AT COST Machinery and equipment 1,924,447 Furniture, fixtures and leasehold improvements 101,940 2,026,387 Accumulated depreciation and amortization (182,026) 1,844,361 Equipment under construction 550,758 2,395,119 OTHER ASSETS Investments 6,458,010 Note receivable 150,000 Patents and related technology, net of accumulated amortization of $709,022 10,206,633 Prepaid royalties 104,494 Other assets 60,972 16,980,109 TOTAL ASSETS $19,934,5 86
Consolidated Balance Sheet (Continued) September 30, 1995 LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES Accounts payable - trade $1,015,788 Accrued liabilities 177,334 Notes payable - banks and other 1,022,927 Current portion - long-term debt 697,775 Notes payable - related party 175,092 3,088,916 LONG-TERM DEBT, LESS CURRENT MATURITIES 889,014 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock $1.00 par value; 5,000,000 shares authorized; 1,000,000 Series A shares issued and outstanding; $6,000,000 liquidation preference 1,000,000 Common stock $.02 par value; 200,000,000 shares authorized; 99,830,306 shares issued and 99,348,306 shares outstanding 1,996,607 Additional paid-in capital 35,798,195 Unearned consulting fees (1,910,16 6) Accumulated deficit (20,571,4 46) Cumulative translation adjustment 4,966 16,318,156 Treasury stock, 482,000 shares, at cost (361,500) 15,956,656 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $19,934,5 86
Consolidated Statements of Operations For the Year Ended September 30, 1995 and for the Period from December 8, 1993 (inception) to September 30, 1994
1995 1994 REVENUES Product sales $ 878,842 $ OPERATING EXPENSES Manufacturing 841,275 General and administrative 3,445,014 10,919,439 Research and development 108,599 Marketing and selling 345,849 Depreciation and amortization 919,984 20,138 5,660,721 10,939,577 LOSS FROM OPERATIONS (4,781,879) (10,939,5 77) OTHER EXPENSE (INCOME) Interest expense 223,592 Interest and other income (31,599) (30,849) Impairment of assets 120,958 1,000,000 Bad debt expense 353,937 489,697 666,888 1,458,848 LOSS FROM CONTINUING OPERATIONS (5,448,767) (12,398,4 25) LOSS FROM DISCOUNTED OPERATIONS Loss from discontinued operations 58,770 Loss on disposal of discontinued operations 2,665,484 2,724,254 NET LOSS $ (8,173,021)$ (12 ,398,425) LOSS PER SHARE OF COMMON STOCK Loss from continuing operations $ (.08) $(.35) Net loss $ (.11) $(.35) WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING DURING THE PERIOD 72,049,156 35,606,661
Consolidated Statements of Shareholders' Equity For the Year Ended September 30, 1995 and for the Period from December 8, 1993 (inception) to September 30, 1994
Additional Unearned Cumulative Preferred Stock Common Stock Paid-In Consulting Treasury Accumulated Translation Shares Amount ` Shares Amount Capital Fees Stock Deficit Adjustment ISSUANCE OF COMMON STOCK FOR CASH $ 20,002 $ 2,810 $ $ $ $ RECAPITALIZATION UPON REVERSE ACQUISITION 40,531,544 808,221 6,149,196 ISSUANCE OF SERIES A PREFERRED STOCK 1,000,000 1,000,000 (1,000,000) ISSUANCE OF COMMON STOCK FOR CASH Private offerings, net of stock issuance costs of $262,626 2,371,212 47,424 2,930,364 ISSUANCE OF COMMON STOCK FOR SERVICES Bonus award 2,350,000 47,000 4,579,562 Consulting services 400,000 8,000 454,520 FOREIGN CURRENCY TRANSLATION $ 6,9 93 NET LOSS (12,398,425) BALANCES, SEPTEMBER 30, 1994 1,000,000 $1,000,000 45,672,758 $ 913,455 $13,113,642 (12,398,425) $ 6,993
"See accompanying notes to consolidated financial statements." Consolidated Statements of Shareholders' Equity For the Year Ended September 30, 1995 and for the Period from December 8, 1993 (inception) to September 30, 1994
Additional Unearned Cumulative Preferred Stock Common Stock Paid-In Consulti ng Treasury Accumulated Translation Shares Amount Shares Amount Capital Fees Stock Deficit Adjustment ISSUANCE OF COMMON STOCK FOR CASH Private offerings, net of stock issuance costs of $994,089 10,320,140 206,403 1,455,974 ISSUANCE OF COMMON STOCK FOR SERVICES Bonus Award 2,000,000 40,000 3,897,500 Severance payment 1,000,000 20,000 230,000 Compensation 50,000 1,000 9,828 Investment banking fees 8,000,000 160,000 2,917,000 (1,910,166) ISSUANCE OF COMMON STOCK FOR ACQUISITION Stark Industries, Inc. 4,000,000 80,000 2,895,000 Novon International, Inc. 11,000,000 220,000 8,030,000 (361,500) ISSUANCE OF COMMON STOCK IN EXCHANGE FOR Convertible debt, net of issuance costs of $225,000 10,487,408 209,749 1,815,251 Shareholder loans 5,493,000 109,860 920,140 Accounts payable 200,000 4,000 96,000 ISSUANCE OF COMMON STOCK IN SETTLEMENT OF CONSULTING CONTRACT 1,607,000 32,140 417,860 FOREIGN CURRENCY TRANSLATION (2,027) NET LOSS (8,173,021) BALANCES, SEPTEMBER 30, 19951,000,000 $ 1,000,000 99,830,306 $ 1,996,607 $ 35,798,195 $ (1,910,166) $ (361,500) $ (20,571,446) $ 4,966
Consolidated Statements of Cash Flows For the Year Ended September 30, 1995 and for the Period from December 8, 1993 (inception) to September 30, 1994
1995 1994 OPERATING ACTIVITIES Net loss $ (8,173,021) $(12,398,425) Adjustments to reconcile net loss to net cash used in continuing operations Loss from discontinued operations 58,770 Loss on disposal of discontinued operations 2,665,484 Depreciation and amortization 919,984 20,138 Bad debt expense 353,937 489,697 Common stock issued for compensation and services 1,398,328 9,026,582 Common stock issued for interest expense 30,000 Write off of equipment 34,748 Impairment of assets 120,958 1,000,000 Other 14,985 6,851 Changes in operating assets and liabilities, net effect of business combination: (Increase) in accounts receivable (62,749) (Increase) in interest receivable (4,360) (24,276) (Increase) decrease in advances to related parties 24,772 (24,772) Decrease in prepaid expenses 12,766 (Increase) in inventories (2,013) Increase (decrease) in accounts payable (364,617) 188,346 Increase in accounts payable, related party 27,460 Increase in accrued liabilities 24,037 44,052 NET CASH USED IN OPERATING ACTIVITIES (2,947,991) (1,644,347)
"See accompanying notes to consolidated financial statements." Consolidated Statements of Cash Flows (Continued) For the Year Ended September 30, 1995 and for the Period from December 8, 1993 (inception) to September 30, 1994
INVESTING ACTIVITIES Additions to property and equipment (102,819) (197,066) Payments on notes receivable (136,000) (1,167,008) Acquisition of subsidiary (315,000) Proceeds from sale of subsidiary 825,000 Net cash of acquired company 287,905 Advances to affiliates (2,100,000) Contributions to unconsolidated subsidiary (200,000) Increase in other assets (118,158) NET CASH USED IN INVESTING ACTIVITIES (1,540,914) (1,682,232) FINANCING ACTIVITIES Proceeds from sale of common stock, net of offering costs 2,257,259 2,980,597 Proceeds from notes payable - related parties 3,523,980 400,000 Repayment of notes payable - related parties (3,062,369) Proceeds from convertible debentures, net of debt issue costs 2,025,000 Net proceeds from notes payable (60,620) Repayment on long-term debt (65,955) Repayment on capital lease obligations (44,115) NET CASH PROVIDED BY FINANCING ACTIVITIES 4,573,180 3,380,597 NET INCREASE IN CASH 84,275 54,018 CASH, BEGINNING OF PERIOD 54,018 -0- CASH, END OF PERIOD $ 138,293 $ 54,018
"See accompanying notes to consolidated financial statements." Notes to Consolidated Financial Statements NOTE A - ORGANIZATION Churchill Technology Inc. (the "Company") was organized under the laws of the state of Colorado on March 16, 1983. From its inception until fiscal 1994, the Company was involved in a variety of business activities. In February 1994, the Company acquired a company which had developed a proprietary technology in respect of biodegradable plastics. In February, 1995, the Company acquired a recently merged company, Novon International, Inc. ("Novon") and its wholly-owned subsidiary, Ecostar AG, which is in the business of biodegradable additives and compounds and accordingly, the Company is no longer a development stage company as defined by SFASB No. 7. See Note C. The Company is principally engaged in the development, manufacturing and marketing of additives, compounds and resins which enhance the degradation of plastic products. NOTE B - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The Company had a working capital deficit of $2,529,558 as of September 30, 1995 and has recurring losses since its inception. As a result, the Company's continued existence is dependent upon obtaining additional capital and cash flow from operations to meet its obligations when due. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties. Management's plans with regard to the Company's ability to continue as a going concern include on going negotiations to raise a mix of medium- term mezzanine debt and equity financing, as well as working capital and trade finance lines of credit to support revenue growth. The Company is also negotiating to establish license agreements and joint development partnerships for its technologies in certain geographical and product specific areas. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Translation of Foreign Currencies and Foreign Currency Transactions Assets and liabilities of the Company's foreign subsidiary, Ecostar AG, are translated at the rate of exchange in effect on the balance sheet date; income and expenses, in general, are translated at the average rates of exchange prevailing during the year. Transaction gains and losses as a result of exchange rate changes on transactions denominated in currencies other than the functional currency are included in determining net income for the period incurred. Notes to Consolidated Financial Statements (Continued) NOTE B - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Statements of Cash Flows For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Reclassifications Certain reclassifications have been made to the 1994 financial statements in order for them to conform with the 1995 presentation. Such reclassifications have no impact on the statement of operations. Inventories Inventories primarily consist of raw materials which are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Property and Equipment Depreciation is calculated on the straight- line method over the estimated useful lives of the assets which range from five to ten years. Leasehold improvements are amortized on the straight-line method over the shorter of the lease term or estimated useful life of the asset. Maintenance and repair are expensed as incurred. Major repairs and improvements are capitalized and assets replaced are retired. When property and equipment are retired or otherwise disposed of, the asset and accumulated depreciation or amortization are removed from the accounts and the resulting profit or loss is reflected in the statement of operations. Patents and Related Technology Patents and related technology are amortized on the straight-line method over the estimated economic life of the patents of ten years. These capitalized costs are carried at the lower of amortized cost or net realizable value. Permanent impairments are evaluated periodically based upon expected future discounted cash flows. Unearned Consulting Fees The Company's policy is to recognize unearned consulting fees in the period that the services are provided. Advertising The Company expenses the production costs of advertising the first time the advertising takes place. Research and Development Research and development costs are expensed as incurred. Research and development costs for the periods ended September 30, 1995 and 1994 was $108,599 and $-0-, respectively. Notes to Consolidated Financial Statements (Continued) NOTE B - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Investments Investments are accounted for under the cost method of accounting. The investments are evaluted periodically and carried at the lower of cost or estimated net realizable value. Net Income (Loss) Per Share of Common Stock The net income (loss) per common share is computed based on the weighted-average number of shares outstanding during each period. Common stock equivalents, such as common stock options, are not considered in the earnings per share calculation to the extent their inclusion would be antidilutive. NOTE C - ACQUISITIONS AND DISPOSITIONS Churchill Technology (Isle of Man) Limited On December 8, 1993, the Company exchanged 2.5 million shares of its common stock for ten percent of the issued share capital of Churchill Technology (Isle of Man) Limited ("CTI-IOM"), an Isle of Man company which owns certain intellectual property rights related to a process of manufacturing composite polymeric articles referred to as "biodegradable" plastic. On February 22, 1994, the Company exchanged 28,750,000 shares of its common stock to acquire the remaining 90 percent of CTI-IOM. The Company accounted for the transaction as a recapitalization of CTI-IOM with CTI-IOM as the accounting acquiror (reverse acquisition). Accordingly, the financial statements reflect the net assets and shareholders' equity of CTI-IOM at their historical cost. Additionally, upon application of the appropriate accounting treatment for a reverse acquisition, the historical financial statements prior to the acquisition date of February 22, 1994 are those of CTI-IOM. CTI-IOM was incorporated subsequent to September 30, 1993 and therefore there are no historical comparative financial statements of CTI-IOM prior to its inception. Similarly, as there are no historical comparative financial statements to be presented, no pro forma information for this acquisition is presented. Notes to Consolidated Financial Statements (Continued) NOTE C - ACQUISITIONS AND DISPOSITIONS (Continued) On February 22, 1995, the Company assigned and transferred all of the issued and outstanding capital stock of CTI-IOM to a former officer of CTI-IOM. In exchange, Novon was assigned all of the intellectual property rights relating to "biodegradable" plastics. This transaction reflects management's intent to consolidate and streamline its biodegradable business. CTI-IOM was a development stage company as defined by SFASB No. 7. The Company recorded a $2,958 loss from the sale of CTI-IOM. As a condition precedent to the acquisition of CTI-IOM, the Company transferred all of the assets, property, subsidiaries, investments, equity interests, cash, contract right, royalty rights, and other rights owned or held by the Company immediately prior to the closing date (the "Churchill Properties"), excluding the ten percent of CTI-IOM acquired in December 1993, to a wholly-owned subsidiary of the Company, Churchill USA, Inc., a newly-formed Colorado corporation ("CUSA"). CUSA also assumed all liabilities associated with the Churchill Properties. Concurrent with the acquisition of CTI-IOM, the Company assigned 100 percent of the CUSA common stock to a trust (the "CUSA Trust"). The CUSA Trust will hold the CUSA shares until February, 2001. A former president of the Company is the trustee of the CUSA Trust. Additionally, the Company issued, assigned and deposited with the CUSA Trust 1,000,000 Series A Convertible Preferred Shares for the benefit of the Churchill shareholders of record as of February 22, 1994. As a result of the provisions of the CUSA Trust Agreement, the Company presently lacks significant influence or control over CUSA and, accordingly, its investment in CUSA is accounted for using the cost method. The original cost investment of CUSA was recorded as $7,158,010, representing the historical basis net book value of CUSA. Subsequently, a portion of CUSA's assets were impaired, and the Company reduced the carrying value of its investment in CUSA by $1 million during the period ended September 30, 1994 to reflect management's estimate of net realizable value Stark Industries, Inc. On December 1, 1994, the Company entered into an agreement to negotiate and acquire all of the issued and outstanding shares of Stark Industries, Inc. ("Stark"), a Michigan corporation, whose sole asset is a 54 percent equity interest in Consolidated Health Corporation of Mississippi, Inc. ("CHC"), a Mississippi corporation that operates and manages three hospitals located in Mississippi, in exchange for four million newly issued shares of common stock of the Company and $300,000 in cash. The acquisition was accounted for using the purchase method. Accordingly, the purchase price was allocated to assets acquired based on their estimated fair values. This treatment resulted in $4,110,310 of cost in excess of net assets acquired as of December 1, 1994. Such excess will be amortized on a straight-line basis over an estimated life of seven years. Notes to Consolidated Financial Statements (Continued) NOTE C - ACQUISITIONS AND DISPOSITIONS (Continued) Stark Industries, Inc. (Continued) On July 13, 1995, the Company sold its 54 percent ownership interest in CHC for $825,000 cash and 600,270 shares of preferred convertible stock of the purchaser with a carrying value of $300,000 (Note I). Novon International, Inc. In December 1994, Novon acquired biodegradable technology from Warner-Lambert Company for $1,950,000 in cash. This technology included patents, trademarks, copyrights and contract rights. In January 1995, Ecostar International L.P. ("Ecostar L.P"), a limited partnership in the business of biodegradable additives and compounds, merged into Novon, with each of the limited partners receiving a proportionate number of shares of Novon for their interest in Ecostar, L.P. On February 10, 1995, the Company completed the acquisition of 100 percent of the outstanding capital stock of Novon International, Inc., a privately-held Delaware corporation incorporated in February 1994. The shareholders of Novon received 10,518,000 restricted shares of the Company's common stock. Additionally, the Company contributed 482,000 restricted shares to Novon. Pursuant to the Agreement and Plan of Merger dated February 10, 1995 among the Company, Novon and Novon Acquisition Corp. (the "Acquisition Agreement"), the Company has agreed to adjust the purchase price in the event that the sixty (60) day average closing bid price of the Company's common stock as reported by Nasdaq for the 60-day period preceding the one-year anniversary of the closing is less than $1.00 per share. If such event should occur, the Company has agreed to issue, within 30 days of the one-year anniversary, that number of additional shares of the Company's common stock as is necessary so that the aggregate value of all shares of common stock issued pursuant to the Acquisition Agreement is equal to $11,000,000 up to an aggregate maximum of 11,000,000 additional shares of common stock. Novon manufacturers and markets biodegradable additives and compounds and related products. The acquisition was accounted for as a purchase and, accordingly, the acquired assets and liabilities have been recorded and consolidated at their estimated fair market values at the date of the acquisition as follows: Current assets and current liabilities, net $ (1,924,296) Property and equipment 2,458,131 Patents and related technology10,751,898 Other assets 467,944 Long-term debt, less current maturities (1,197,437) Notes payable, related party (2,306,240) $8,250,000
Notes to Consolidated Financial Statements (Continued) NOTE C - ACQUISITIONS AND DISPOSITIONS (Continued) The results of operations of Novon have been included in the consolidated statement of operations from the date of acquisition. The following table presents the unaudited pro forma results of operations as if the acquisition of Novon had occurred at the beginning of fiscal 1995 and 1994. The pro forma results of Stark are not included due to the sale of CHC. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made as of those dates or of results which may occur in the future.
1995 1994 Operating revenues $ 1,127,195 $ 902,279 Net loss $ (8,944,394) $(14,905,208) Net loss per share $ (.12) $ (.32)
NOTE D - NOTES RECEIVABLE The note receivable of $150,000 is collateralized by a building and represents consideration for the sale of a building, furniture and equipment of the former offices of Churchill. This note bears interest at 8 percent per annum with interest payable quarterly. The note is due and payable in May, 1997. NOTE E - INVESTMENTS Investments at September 30, 1995 consist of the following: Investment in unconsolidated subsidiary (Note C) $ 6,158,010 Investment in preferred convertible stock (Note C) 300,000 $6,458,010 For the periods ended September 30, 1995 and 1994, there are no unrealized holding gains or losses related to the above investments. Notes to Consolidated Financial Statements (Continued) NOTE F - NOTES PAYABLE, BANKS AND OTHER The Company's notes payable to banks and other at September 30, 1995 consist of the following: Secured note payable (a) $397,100 Unsecured revolving loan account (b) 462,927 Note payable - Warner Lambert (c) 162,900 $1,022,927
(a) This note is under an agreement which provides for a maximum borrowing amount of $450,000. As of September 30, 1995, borrowings are restricted to $397,100. Borrowings bear interest at the prime rate plus 1-1/2 percent (10.25 percent) at September 30, 1995. Borrowings are collateralized by accounts receivable and a subordinated interest in machinery and equipment. The note is due on demand. (b) The revolving loan account represents funds drawn on a demand basis (limit of approximately $463,000 at September 30, 1995), with interest at 8.5 percent at September 30, 1995. The loan is reviewed annually by the Lender and the Company for renewal. The next renewal date is on October 20, 1996. (c) This note is under an agreement which provides for quarterly installments of $54,300 through December 31, 1995. As of September 30, 1995, $108,600 is past due. This note is collateralized by machinery and equipment. NOTE G - LONG-TERM DEBT Long-term debt at September 30, 1995 consists of the following:
1995 New York State Job Development Authority (a) $ 1,024,650 Regional Development Corporation (b) 489,485 Capital lease obligations (Note H) 72,654 Total long-term debt 1,586,789 Less current installments 697,775 Long-term debt, excluding current installments $ 889,014
Notes to Consolidated Financial Statements (Continued) NOTE G - LONG-TERM DEBT (Continued) (a) On December 1, 1995, the Company entered into a loan modification agreement with the lender. The lender deferred the accrued interest due under the loan until November 1999, the maturity of the loan. Monthly principal payments of $17,985 plus interest commence January 1, 1996. Interest is at the prime rate (8.75 percent at September 30, 1995). (b) The loan bears interest at 8 percent and is payable in monthly installments of $10,416, plus interest through June 1996. The Company's loan obligation requires that the Company pay principal and interest as due. The Company is required, among other things, to comply with certain reporting requirements. At September 30, 1995, the Company was either in compliance with these provisions or obtained applicable waivers. As of September 30, 1995, the Company is not current with $145,824 of principal and, therefore, the Company has classified the loan as current. Currently, the Company is in the process of renegotiating the terms of this loan. Substantially, all of the Company's assets are pledged as collateral for borrowings. In addition, the President of the Company has personal assets collateralizing loans totalling $450,000 and personal guarantees on loans totalling $2,446,816. The aggregate maturities of long-term debt for each of the five years subsequent to September 30, 1995 are as follows: 1996 $697,775, 1997 $232,708, 1998 $225,158, 1999 $431,148, 2000 $-0-, and thereafter $-0-. NOTE H - LEASED ASSETS AND LEASE COMMITMENTS A summary of the Company's assets under capital leases follows:
1995 Equipment $ 205,999 Less accumulated amortization 17,914 Net assets under capital leases $ 188,085 Amortization expense was $17,914 for 1995.
Notes to Consolidated Financial Statements (Continued) NOTE H - LEASED ASSETS AND LEASE COMMITMENTS (Continued) At September 30, 1995, minimum payments dues under the Company's noncancellable capital and operating leases are as follows:
Capital Operating Year Leases Lease 1996 $ 52,311 $ 105,468 1997 19,245 1998 9,885 Total minimum lease payments 81,441 $ 105,468 Less interest inputed from 6% to 21% 8,787 Present value of net minimum lease payments $ 72,654
Interest expense related to capital leases amounted to $8,124 in 1995. The Company has the option to renew the noncancellable operating lease for an additional five-year term. Rent expense under all operating leases was $74,567 and $20,151 in 1995 and 1994, respectively. NOTE I - DISCONTINUED OPERATIONS As discussed in Note C, the Company sold its 54 percent interest in CHC. This transaction reflects management's intent to exit the health care management industry. The Company has recorded a loss on disposal of the segment of $2,665, 484. The following is a summary of the operations of the discontinued business segment for the period from December 1, 1994 (acquisition date) to July 13, 1995 (disposal date). Revenues $2,079,441 Operating expenses 2,058,461 Other expenses 129,311 Loss from operations (108,331) Minority interest 49,561 Net loss $(58,770)
Notes to Consolidated Financial Statements (Continued) NOTE J - SUPPLEMENTAL DATA TO CONSOLIDATED STATEMENTS OF CASH FLOW Excluded from the consolidated statements of cash flows for 1995 and 1994 were the effects of certain noncash investing and financing activities as follows:
1995 1994 Issuance of common stock for acquisition of Stark Industries, Inc. $2,975,000 Issuance of common stock for acquisition of Novon International, Inc $8,250,000 Conversion of convertible debentures to equity $2,250,000 Conversion of shareholders' loan to equity $ 1,000,000 Conversion of accounts payable to equity $ 100,000 Issuance of common stock for accrued bonus $3,937,500 Issuance of common stock for unearned consulting fees $1,910,166 Issuance of common stock for offering costs $ 479,334 Sale of office building, related furniture and equipment for note receivable $150,000 Increase in accounts payable in connection with additions to patents $ 163,757 Equipment acquired through a capital lease obligation $ 16,890 Issuance of common stock for investment in unconsolidated subsidiary $6,957,417
Cash paid for interest in the periods ended September 30, 1995 and 1994 was $112,380 and $-0-, respectively. Notes to Consolidated Financial Statements (Continued) NOTE K - INCOME TAXES The Company had no income tax provision and no income taxes were paid for the period ending September 30, 1995 and 1994. Net deferred tax assets applicable to temporary differences, net operating loss and capital loss carryforwards are:
1995 1994 Investment in CTI-IOM $ $100,000 Investments and notes receivable 200,000 300,000 Basis in common stock issued for services 800,000 800,000 Capital loss carryforwards 100,000 Net operating loss carryforwards 2,500,000 1,100,000 Basis in patents and technology (1,560,000) Total deferred tax assets 2,040,000 2,300,000 Valuation allowance (2,040,000) (2,300,000) Net deferred tax assets $ -0- $ -0-
During the year ended September 30, 1995, the Company's valuation allowance for net deferred tax assets decreased by $260,000. As of September 30, 1995, the Company had net operating loss carryforwards and capital loss carryforward of approximately $12,400,000 and $400,000, respectively. These loss carryforwards are available for deduction from future taxable income, subject to rules and regulations of the Internal Revenue Service that may reduce or eliminate their utilization. If not used, the net operating loss carryforwards will expire in 2010, and the capital loss carryforward will expire in 2000. Notes to Consolidated Financial Statements (Continued) NOTE L - PREFERRED STOCK, COMMON STOCK, COMMON STOCK OPTIONS Preferred Stock During fiscal 1994, the Company issued 1,000,000 Series A Convertible Preferred Shares ("Series A Shares"). The Series A Shares were issued to the CUSA Trustee in accordance with the Amended CUSA Trust Agreement dated December 30, 1994. The Series A Shares are non-voting shares, are redeemable at the option of the Company up to $5.00 per share and have a liquidation preference of $6.0 million. The Trustee shall hold the Series A Shares in trust for a period of seven calendar years until the expiration of the term of the CUSA Trust Agreement, at which time the Series A Shares are entitled to conversion into common stock of the Company. The conversion of the Series A Shares will be based on a formula that divides the Series A Designated Value, as defined, by the Average Daily Common Share Value, as defined. The Series A Designated Value is computed as the difference between $25,000,000 and the fair market value of the Company's assets less the cost basis of such assets at the expiration of the term of the CUSA Trust. However, the Series A Designated Value cannot be less than $2,823,000. The Average Daily Common Share Value is the average closing bid price of the Company's common stock for a period of one year prior to the expiration of the term of the CUSA Trust. In no event shall the conversion shares as computed exceed 20 percent of the issued and outstanding common shares of the Company on the date of conversion. Common Stock Issued for Services During fiscal 1994, 400,000 shares of the Company's common stock were issued in exchange for services valued at $462,520. During fiscal 1995, the Company settled a ten-year consulting contract through the issuance of 1,607,000 shares valued at $450,000. During fiscal 1995, the Company issued 1,000,000 shares valued at $250,000 as severance pay to the former president of the Company and 50,000 shares valued at $10,828 as compensation to a former employee of the Company. In April 1994, the Board of Directors approved the issuance of 4,350,000 shares of common stock, of which 2,350,000 shares were issued as of April 30, 1994, as bonus compensation to the former Chairman of the Board and Chief Executive Officer. The remaining 2 million shares were issued in October 1994. During fiscal 1995, the Company issued 2,000,000 shares valued at $687,500 to an investment banking firm as payment of services rendered. In addition, on July 5, 1995, the Company issued 6,200,000 shares valued at $2,489,500 pursuant to an agreement with a financial consulting group to act as its financial advisor. As of September 30, 1995, the Company has recorded $479,334 in stock issuance costs which have been offset against proceeds from sale of common stock in private offerings in the accompanying statement of shareholders' equity pursuant to this agreement, and it has recorded $1,910,166 as unearned consulting fees. Notes to Consolidated Financial Statements (Continued) NOTE L - PREFERRED STOCK, COMMON STOCK, COMMON STOCK OPTIONS (Continued) Common Stock for Convertible Debt In January 1995, the Company completed the offering of $2.25 million in convertible debentures. The convertible debentures bore interest at six percent and were due on December 31, 1995. The debentures were convertible at the option of the holder into common shares of the Company at a discount of 25 percent to the closing bid price on the date of conversion. In the twelve months ended September 30, 1995 holders of the $2.25 million of convertible debentures gave notice to the Company of their demand to convert the debentures. The Company issued 10,487,408 shares upon conversion of the debentures. Common Stock for Shareholder Loans In May 1995, one shareholder agreed to convert loans including accrued interest, in the amount of $1,030,000 into 5,493,000 common shares of the Company. The loan was converted at a discount of 25 percent to the market price of the Company's common stock on the date of conversion. Common Stock for Accounts Payable In July 1995, the Company converted $100,000 in accounts payable into 200,000 common shares of the Company. Common Stock Options During fiscal 1988, the Company's Board of Directors and shareholders approved an Incentive Stock Option Plan and a Nonstatutory Stock Option Plan. The stock subject to the options granted under both plans shall be either shares of the Company's authorized but unissued shares of common stock, $.02 par value, or shares of common stock reacquired by the Company. The Company has reserved 1,600,000 and 200,000 shares for the Nonstatutory and Incentive Stock Option Plans, respectively, the maximum number of shares, subject to any provisions for stock splits or dividends, or any other provisions outlined in each plan. Notes to Consolidated Financial Statements (Continued) NOTE L - PREFERRED STOCK, COMMON STOCK, COMMON STOCK OPTIONS (Continued) Information with respect to stock options under these two plans are as follows:
Incentive Nonstatutory Exercise Stock Exercise Stock Price Option Plan Price Option Plan Balances, September 30, 1993 $.40-$.94 140,000 $.89-$.94 120,000 Granted, 1994 $.3125 50,000$.3125-$1.00 620,000 Expired, 1994 Exercised, 1994 $.34 (50,000) $.59 (212,500) Balances, September 30, 1994$40-$.94 140,000 $ .89-$1.00 527,500 Expired $.94 (17,500) Balanced, September 30, 1995$40-$.94 140,000 $ .89-$1.00 510,000
Nonstatutory Stock Option Plan During fiscal 1994, options to purchase 120,000 and 500,000 shares were granted under the Nonstatutory Stock Option Plan, at exercise prices of $.3125 and $1.00 per share, respectively. The option to purchase 120,000 shares at $.3125 was converted to a stock award resulting in compensation expense of $97,500. The option to purchase 500,000 shares expires in January 2004. Also, during fiscal 1994, options to purchase 92,500 shares were converted to stock awards resulting in compensation expense of $75,156. Of the options granted prior to fiscal 1994, options to purchase 17,500 shares expired in May 1995 and options to purchase 10,000 shares expire in January 1998. Incentive Stock Option Plan During fiscal 1994, options to purchase 50,000 shares under the Incentive Stock Option Plan were granted at exercise prices of $.3125 per share. These options were converted to stock award resulting in compensation expense of $40,625. The remaining options expire between May 1998 and May 2000. Notes to Consolidated Financial Statements (Continued) Other Stock Options During fiscal 1995, the Company granted options to its president and a shareholder each to purchase 2,000,000 shares of the Company's common stock at an exercise price of $.35 per share. These options expire April, 1997. NOTE M - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS Employment Agreements In previous years, the Company had entered into employment agreements with its former presidents. The agreements provided, among other things, that upon termination of their employment, the Company would repurchase all of the Company's common stock owned by the employee at a per share cost of the preceding 90-day average bid price. As of September 30, 1995, the Company would be obligated to purchase approximately 187,500 shares of common stock held by its former presidents under the terms of their employment agreements. Commitment to CUSA The Company, pursuant to the terms of an agreement between the Company and CUSA, is committed to pay to CUSA $325,000 of proceeds received by the Company from options exercised under an Employee Option Program registered pursuant to Form S-8 Registration Statement. As of the date of this filing, no such options have been exercised. Licensing Agreements The Company has entered into certain patent and technology licensing agreements which provide for the payment of royalty fees. The Company will pay royalty fees ranging from two percent to five percent on certain net sales through the later of the life of the related patents or December 31, 2000. Contingencies The Company's subsidiary Novon, is a defendant in actions involving the interpretation of license agreements. Management and legal counsel for the Company are of the opinion the Plaintiffs do not have the legal capacity to commence the action, and filed a motion for the dismissal of the action in 1993. The actions commenced by two of the three plaintiffs were dismissed. The remaining plaintiff must file an amended claim to continue the actions. To date, there has not been an amended claim filed. Accordingly, based upon the facts known to date, management and legal counsel believe Novon has a meritorious defense to the actions asserted against it and should prevail. No provision for any liability that may result from the actions has been recognized in the accompanying financial statements. The Securities and Exchange Commission ("SEC") commenced a private investigation of the Company and others in August 1995 to determine whether, since September 1993, there has been any violations of the provisions of the Federal Securities law. The current management Notes to Consolidated Financial Statements (Continued) of the Company is cooperating fully with the SEC and cannot at this stage form any opinion with respect to the effect of such an investigation. Notes Payables - Related Party The Company has two demand notes payable at September 30, 1995 totaling $175,092. Of that amount, $113,481 bears interest at 8 percent and $61,611 bears interest at 12 percent. Neither notes have payments due in fiscal 1996. Consulting Fees and Reimbursable Expenses Consulting fees and reimbursable expenses of $130,608 and $92,657 and $180,234 and $261,532, respectively were paid by the Company to a stockholder of the Company for the periods ended September 30, 1995 and 1994, respectively. In May, 1995 the Company settled this consulting contract through issuance of 1,607,000 shares of its common stock valued at $450,000. The consulting agreement was with a shareholder of the Company whose services would no longer be necessary due to the relocation of activities related to the biodegradable products and patents of Novon. NOTE N - SIGNIFICANT CUSTOMERS For the year ended September 30, 1995, two customers accounted for 32 percent and 22 percent of total revenues, respectively. As of September 30, 1995 two customers accounted for 48 percent and 10 percent, respectively of total trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial conditions but does not require collateral to support customer receivables. NOTE O - FOURTH QUARTER DATA During the fourth quarter of fiscal 1995, the Company made the following adjustments which are considered material to the financial statements taken as whole: Under valuation of unearned consulting fees $1,910,166 Over valuation of stock issued for services $1,000,516 NOTE P - SUBSEQUENT EVENTS Subsequent to September 30, 1995, the Company entered into an agreement with an investment banking firm for a $1,000,000 private placement of equity of up to 4,000,000 shares of restricted stock. Each share of stock purchased through this placement includes an option for a period of three years from the date of the agreement to purchase one additional share of common stock of the Company at an exercise price of $1.00 per share. To date, the Company has sold 2,180,000 shares for net proceeds of $517,750. Additionally, the Company is committed to pay the investment banking firm a placement fee of ten percent of all capital raised. Fifty percent of the placement fee is to be paid in shares of the Company's restricted common stock. This private placement terminates on December 26, 1995, or earlier if determined by the investment banking firm. Effective December 7, 1995, the Company's common stock was delisted from The Nasdaq Smallcap Market and began trading in the Over the Counter Market. AUDITED FINANCIAL STATEMENTS CHURCHILL U.S.A., INC. YEAR ENDED SEPTEMBER 30, 1995 INDEPENDENT AUDITOR'S REPORT Shareholder, Board of Directors and Trustee Churchill U.S.A., Inc. Lakewood, Colorado We have audited the accompanying consolidated balance sheet of Churchill U.S.A., Inc., a wholly-owned subsidiary of Churchill Technology Inc., and subsidiaries as of September 30, 1995 and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended September 30, 1995 and 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Churchill U.S.A., Inc. and subsidiaries as of September 30, 1995 and the results of their operations and their cash flows for the years ended September 30, 1995 and 1994 in conformity with generally accepted accounting principles. Mitchell Finley and Company, P.C. Certified Public Accountants November 16, 1995 Denver, Colorado Consolidated Balance Sheet September 30, 1995 ASSETS CURRENT ASSETS Cash and cash equivalents $621,515 Accounts receivable: Oil and gas sales 51,848 Joint interest owners, net of allowance for doubtful accounts of $76,195 4,140 Limited partners 15,193 Related parties 48,458 741,154 PROPERTY AND EQUIPMENT, AT COST Oil and gas properties (full cost method used for oil and gas properties) 4,836,954 Office furniture and equipment 25,684 4,862,638 Less accumulated depletion and depreciation (2,131,386) 2,731,252 OTHER ASSETS Investments 318,376 Note receivable, related party 24,465 Deposits and other 7,473 350,314 TOTAL ASSETS $3,822,720
"See accompanying notes to consolidated financial statements." Consolidated Balance Sheet (Continued) September 30, 1995 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable $124,873 Accounts payable, joint interest owners 154,675 Accrued vacation payable 20,973 Accrued expenses 28,025 Accounts payable to bankruptcy creditors 28,125 356,671 LONG-TERM DEBT 10,286 ACCOUNTS PAYABLE TO BANKRUPTCY CREDITORS, NONCURRENT 36,458 MINORITY INTEREST 18,079 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock _ $.02 par value; 10,000,000 shares authorized; no shares issued or outstanding _ Common stock _ $.001 par value; 20,000,000 shares authorized; 9,301,546 shares issued and outstanding 9,302 Non-voting common stock _ $.001 par value; 10,000,000 shares authorized; no shares issued or outstanding _ Additional paid-in capital 10,009,673 Accumulated deficit (6,617,749) 3,401,226 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,822,720
Consolidated Statements of Operations For the Years Ended September 30, 1995 and 1994
1995 1994 REVENUE Oil and gas sales $ 317,915 $450,081 Management fee income from related party 382,945 483,997 Overhead income 67,265 113,717 Gain on extinguishment of debt _ 60,038 Gain on sale of trading securities _ 52,500 Unrealized holding gain on trading securities _ 28,050 Interest income 22,918 24,513 Other 10,293 23,391 801,336 1,236,287 COSTS AND EXPENSES Lease operating expenses 194,361 315,167 Depletion, depreciation and amortization 117,663 130,284 General and administrative 638,397 750,928 Direct cost of mergers and acquisitions _ 371,115 Loss on investments 42,046 3,629,230 Bad debt expense, related party _ 105,868 992,467 5,302,592 NET LOSS BEFORE MINORITY INTERESTS (191,131) (4,066,305) MINORITY INTERESTS IN LOSS OF SUBSIDIARIES 66,360 57,615 NET LOSS $ (124,771) $(4,008,690) PER SHARE DATA Net loss per common share $ (.01) $ (.43) WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING DURING THE YEAR 9,301,546 9,225,536
Consolidated Statements of Shareholders' Equity For the Years Ended September 30, 1995 and 1994
Additional Common Stock Paid- In Accumulated Valuation Shares Amount Capital Deficit Allowance BALANCES, SEPTEMBER 30, 1993 8,980,999 $ 8,981 $9,545,595 $(2,484,288) $ (7,911) CAPITAL CONTRIBUTION _ _ 200,000 _ _ ISSUANCE OF COMMON STOCK For cash 25,000 25 17,975 _ _ For services 315,488 315 246,084 _ _ COMMON SHARES CANCELLED AND RETIRED AT NO COST (19,941) (19) 19 _ _ REDUCTION OF VALUATION ALLOWANCE _ _ _ _ 7,911 NET LOSS _ _ _ (4,008,690) _ BALANCES, SEPTEMBER 30, 1994 9,301,546 9,302 10,009,673 (6,492,978) _ NET LOSS _ _ _ (124,771) _ BALANCES, SEPTEMBER 30, 1995 9,301,546 $ 9,302 $10,009,673 $(6,617,749) $_
Consolidated Statements of Cash Flows For the Years Ended September 30, 1995 and 1994
1995 1994 OPERATING ACTIVITIES Net loss $ (124,771) $(4,008,690) Adjustments to reconcile net loss to net cash used in operating activities Gain on extinguishment of debt _ (60,038) (Gain) loss on sale of trading securities 42,046 (52,500) Unrealized holding gain on trading securities _ (28,050) Depreciation, depletion and amortization 117,636 130,284 Issuance of common stock for services _ 246,399 Minority interests in net loss of subsidiaries (66,360) (57,615) Loss on investments _ 3,621,319 Reduction of valuation allowance, investment in available-for-sale securities _ 7,911 Changes in operating assets and liabilities Decrease in accounts receivable 23,745 58,665 Decrease in note receivable, related party _ 185,343 Decrease in other current assets _ 4,726 Decrease in accounts payable (19,843) (207,145) Increase (decrease) in deferred revenue (40,000) 40,000 Increase (decrease) in accrued liabilities (8,760) 5,010 NET CASH USED IN OPERATING ACTIVITIES (76,307) (114,381) INVESTING ACTIVITIES Additions to property and equipment (35,555) (29,522) Proceeds from the sale of property and equipment 7,177 1,404 Advance to related party (24,465) _ Decrease in restricted cash _ 25,000 Proceeds from sale of trading securities 107,683 155,821 Acquisition of investment in affiliate _ (207,694) Dispositions of investments _ 1,286 Decrease in deposits _ 10,154 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ 54,840 $ (43,551)
"See accompanying notes to consolidated financial statements." For the Years Ended September 30, 1995 and 1994 Consolidated Statements of Cash Flows (Continued)
1995 1994 FINANCING ACTIVITIES Capital contribution _ 200,000 Repayments of debenture obligations _ (25,833) Repayments of accounts payable to bankruptcy creditors (22,500) (41,087) Proceeds from issuance of common stock _ 18,000 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (22,500) 151,080 DECREASE IN CASH AND CASH EQUIVALENTS (43,967) (6,852) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 665,482 672,334 CASH AND CASH EQUIVALENTS, END OF YEAR $ 621,515 $665,482
"See accompanying notes to consolidated financial statements." Notes to Consolidated Financial Statements NOTE A _ ORGANIZATION Churchill U.S.A., Inc. was incorporated on January 18, 1994 under the laws of the State of Colorado. Churchill U.S.A., Inc. and subsidiaries (the Company) is a wholly-owned subsidiary of Churchill Technology Inc. (the Parent). On February 16, 1994, the Parent transferred all its assets, liabilities, and operations to the Company. As a result, the Company assumed the prior activities of the Parent, which was principally engaged in the acquisition and operation of oil and gas properties. The transfer was accounted for in a manner similar to a pooling of interests and, accordingly, the Company's financial statements are presented using the Parent's historical costs and historical results of operations for periods prior to February 16, 1994. All references to the Company prior to February 16, 1994 relate to activities of the Parent. NOTE B _ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation _ The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries, KTP Energy, Inc., Churchill Energy, Inc. and Trans Energy, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. The equity method of accounting is used for investments in affiliates over which the Company exercises significant influence that are 20 percent to 50 percent owned. Significant intercompany transactions with affiliates accounted for under the equity method, if any, have been eliminated and the Company's share of net earning (or losses) included as a separate item in the consolidated statement of operations. Cash and Cash Equivalents _ The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Oil and Gas Properties and Depletion _ The Company accounts for oil and gas properties using the "full cost" method. Under this method, all costs associated with property acquisition, exploration and development activities are capitalized. Oil and gas properties are depleted using the units-of- production method based on the ratio of current period production to estimated proved oil and gas reserves expressed in physical units, with oil and gas converted to a common unit of measurement based upon their approximate relative energy content. Gains or losses from the sale or abandonment of oil and gas properties are charged or credited to the full cost pool, unless such adjustments from the sale of oil and gas properties would significantly alter the relationship between capitalized costs and proved oil and gas reserves. Notes to Consolidated Financial Statements (Continued) Capitalized costs less related accumulated depletion and deferred income taxes may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves; (2) the cost of properties not being amortized, if any; (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; and (4) any income tax effects related to differences in the book and tax basis of oil and gas properties. Investments _ The Company uses the specific identification method to identify the cost of its investments for purposes of computing realized gains or losses. Office Furniture and Equipment _ The Company depreciates office furniture and equipment over their estimated useful lives (five years) using accelerated methods. Net Income (Loss) Per Share of Common Stock _ The net income (loss) per common share is computed based on the weighted-average number of shares outstanding during each year. Common stock equivalents, such as convertible subordinated debentures, common stock options and warrants, are not considered in the earnings per share calculation to the extent their inclusion would be antidilutive. NOTE C _ SUPPLEMENTAL DATA TO CONSOLIDATED STATEMENTS OF CASH FLOWS During the years ended September 30, 1995 and 1994, the Company paid interest of $2,626 and $5,824, respectively. Excluded from the consolidated statements of cash flows for the years ended September 30, 1995 and 1994 were the effects of certain noncash investing and financing activities as follows: During the year ended September 30, 1995, the Company transferred $104,516 in certain oil and gas properties from its recorded basis in the full cost pool to Investment in CSV Holdings, Inc. (Note I). NOTE D _ OIL AND GAS PROPERTIES (UNAUDITED) Aggregate Capitalized Costs _ The following presents the Company's aggregate capitalized costs and the aggregate corresponding accumulated depletion relating to oil and gas properties as of September 30, 1995: Notes to Consolidated Financial Statements (Continued) Unproved oil and gas properties$ -0- Proved oil and gas properties 4,836,954 4,836,954 Accumulated depletion (2,106,410) Net capitalized costs $2,730,544
NOTE D _ OIL AND GAS PROPERTIES (UNAUDITED)(Continued) The Company's share of equity method investees' net capitalized costs $ 1,492,377 Costs Incurred _ The Company's costs incurred in oil and gas property acquisition, exploration and development activities, whether capitalized or expensed, for the years ended September 30, 1995 and 1994 are as follows:
1995 1994 Acquisition of properties Unproved $ -0- $ -0- Proved -0- 10,000 Exploration costs -0- -0- Development costs 53,472 52,647 $ 53,472 $ 62,647 Depletion, depreciation and amortization of oil and gas properties $ 116,562 $ 124,728 Depletion, depreciation and amortization of oil and gas properties per equivalent mcf of production $ .53 $ .46 The Company's share of equity method investees' costs incurred in oil and gas property development $ 39,800 $ 185,358
Notes to Consolidated Financial Statements (Continued) Oil and Gas Reserve Data _ The reserve information presented below is based upon reports prepared by independent petroleum engineers. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are those expected to be recovered through existing wells with existing equipment and operating methods. Presented below is a summary of the changes in estimated net proved, developed and undeveloped oil and gas reserves of the Company, all of which are located in the United States, for the years ended September 30, 1995 and 1994. NOTE D _ OIL AND GAS PROPERTIES (UNAUDITED)(Continued)
1995 1994 Oil (bbl) Gas (mcf) Oil (bbl) Gas(mcf) Proved reserves, beginning of year 829,631 4,594,601 562,839 5,642,727 Purchase of minerals in place -0- -0- -0- - -0- Extensions, discoveries and other additions 2,681 177,225 170,131 545,596 Revisions of previous estimates 5,069 237,706 110,545 (1,374,297) Production (8,536) (169,545) (13,270) ( 194,134) Sale of minerals in place (463,602) -0- (614) ( 25,291) Proved reserves, end of year 365,243 4,839,987 829,631 4,594,601 Proved undeveloped reserves, end of year 134,391 92,233 134,391 279,900 Proved developed reserves, end of year 230,852 4,747,754 695,240 4,314,701 Total proved reserves 365,243 4,839,987 829,631 4,594,601 The Company's proportional interest in reserves of investees accounted for by the equity method, end of year 569,826 1,732,500 310,607 1,733,970
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves _ Statement of Financial Accounting Standards No. 69, "Disclosures About Oil and Gas Producing Activities," prescribes guidelines for computing a standardized measure of future net cash flows and changes therein relating to estimated proved reserves. The Company has followed these guidelines, which are briefly discussed herein. Future cash inflows and future production are determined by applying year end prices and costs to the estimated quantities of proved oil and gas reserves in which the Company has a mineral interest. Estimated future income taxes are computed using year-end statutory income tax rates, adjusted for permanent differences. The resulting future net cash flows are reduced to present value amounts by applying an annual discount factor. The assumptions used to compute the standardized measure are those prescribed by the Financial Accounting Standards Board and, as such, do not necessarily reflect the Company's expectations of actual revenues to be derived from those reserves nor their present worth. NOTE D _ OIL AND GAS PROPERTIES (UNAUDITED)(Continued) The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computations, since these estimates are the basis for the valuation process. Standardized Measure of Discounted Future Net Cash Flows for the years ended September 30, 1995 and 1994 are as follows:
1995 1994 Future cash inflows $12,326,837 $ 18,275,554 Future production and development costs (4,606,024) (7,059,402) Future net cash flows 7,720,813 11,216,152 Annual discount for estimated timing of cash flows (3,310,622) (4,542,542) Standardized measure of discounted future net cash flows $4,410,191 $6,673,610 The Company's share of equity method investees' standardized measure of discounted future net cash flows $2,193,639 $2,452,713
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves (Continued) _ The principal sources of change in the standardized measure of discounted future net cash flows for the years ended September 30, 1995 and 1994 are as follows:
1995 1994 Balances, beginning of year $6,673,610 $6,029,311 Purchase of minerals in place -0- -0- Sales of oil and gas produced, net of production costs (164,417) (134,914) Net changes in prices and production costs (3,699,367) 1,237,613 Extensions and discoveries, net of production costs 266,838 1,479,970 Sale of minerals in place (1,855,284) (32,270) Revisions of previous quantity estimates 3,246,260 (1,674,755) Accretion of discount (261,110) (76,588) Net changes in future development costs 203,661 (154,757) Net change in income taxes _ _
Notes to Consolidated Financial Statements (Continued) NOTE D _ OIL AND GAS PROPERTIES (UNAUDITED) (Continued) Balances, end of year $4,410,191 $6,673,610 NOTE E _ INCOME TAXES At September 30, 1995, the Company had available net operating loss carryforwards of approximately $2,200,000, depletion carryforwards of approximately $976,000, and investment tax credit carryforwards of approximately $70,000. The net operating loss and investment tax credit carryforwards expire in various amounts through 2010 and 2002, respectively. The depletion carryforwards may be carried forward indefinitely. These carryforwards are subject to various limitations imposed by the rules and regulations of the Internal Revenue Service. As of September 30, 1995 and 1994, the components of deferred taxes are as follows:
1995 1994 Oil and gas and other properties, net $ (419,946) $ (460,901) Net operating loss carryforwards 440,559 348,877 Percentage depletion carryforward 195,266 183,725 Investment tax credit carryforward 68,972 68,972 Charitable contributions carryforward 631 631 285,482 141,304 Valuation allowance (285,482) (141,304) Net deferred taxes $ -0- $ -0-
NOTE F _ ACCOUNTS PAYABLE TO BANKRUPTCY CREDITORS Accounts payable, bankruptcy creditors as of September 30, 1995 is summarized as follows: Payable to taxing authorities in quarterly installments of $5,625, noninterest-bearing $64,583 Less current portion 28,125 Accounts payable, bankruptcy creditors noncurrent $ 36,458 Notes to Consolidated Financial Statements (Continued) NOTE G _ COMMON STOCK During fiscal 1994, 52,988 shares of the Company's common stock were issued in exchange for services valued at $33,118. Also during fiscal 1994, options to purchase 262,500 shares of common stock, granted under stock option plans of the Parent, were converted to stock awards resulting in compensation expense of $213,281. During fiscal 1994, the Company issued 25,000 shares of its common stock at $.72 per share, under the terms of the Form S-8 Registration Statement filed by the Company dated March 3, 1993, as amended June 15, 1993. NOTE H _ COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS Operating Leases _ The Company currently leases its office space under a five- year noncancellable lease, which includes monthly rent escalating to a maximum of $5,413 prior to its December 31, 1996 termination. Future minimum rental payments required under operating leases, which have initial or remaining noncancellable lease terms in excess of one year as of September 30, 1995, are as follows: 1996 $ 64,191 1997 16,239 $ 80,430
Rent expense for the years ended September 30, 1995 and 1994 was $78,929 and $52,793, respectively. Service and Operations Agreement _ Caspen Oil, Inc. (Caspen), an entity in which the Company has a 25 percent equity interest, entered into a Management and Operations Agreement (the Agreement) with the Parent which was terminated on March 31, 1994 and replaced by a Service and Operations Agreement (the Service Agreement) between Summit Overseas Exploration, Inc., a wholly-owned subsidiary of Caspen, and the Company, in effect through July 31, 1997. Under the terms of the terminated Agreement, the Company provided financial and operational management to Caspen, general corporate legal services, personnel and office space necessary for the operations of Caspen for $45,000 per month. Under the Service Agreement, the Company provides the same services, management, personnel and office space for actual costs plus ten percent, revised to five percent effective June, 1995, (the Costs), up to the computed average of the preceding three months amount. Notes to Consolidated Financial Statements (Continued) Any costs in excess of the computed average of the preceding three months amount are borne by the Company. Amounts charged under the agreements for fiscal 1995 and 1994 were $382,945 and $483,997, respectively. NOTE H _ COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (Continued) Note receivable, related party _ In connection with the investment in CSV Holdings, Inc. (CSV) (Note I), the Company advanced $24,465 to CSV under a promissory note dated December 1, 1994, with principal and interest, at six percent, due in full December 1, 1998. NOTE I _ INVESTMENTS CSV Holdings, Inc. _ Pursuant to an agreement dated September 20, 1994, and finalized on December 1, 1994, between the Company, Summit Overseas Exploration, Inc., a related party, and the Villiers Group plc, a public limited company organized under the laws of Northern Ireland, each party agreed to capitalize a newly formed company, CSV, a Colorado corporation, for the purpose of administering certain oil and gas lease holdings (the Nukern lease) of each to maximize the value of the lease. To this end, each party transferred its respective working interest in the Nukern lease to CSV as its share of the capitalization, along with a pari-passu working capital loan to cover the estimated projected maintenance costs of the Nukern lease through fiscal 1995. Of this, the Company transferred its 24.47% working interest for which it received 28.3% of the common stock of CSV and a production loan of $1,116,477. Principal and interest, at six percent per annum, on the production note are payable beginning January 1, 1997, in quarterly installments equal to 25 percent of the net production revenue from the Company's working interest in the Nukern lease during each calendar quarter. Due to the contingent nature of the production note, the Company has not recorded this amount and will recognize principal and interest payments as received. Accordingly, the Company transferred $104,516 from oil and gas property to investment status, and recorded a note receivable in the amount of $24,465. CSV has had minimal operations subsequent to acquiring the properties, accordingly, the Company has no equity adjustment to its investment through September 30, 1995. Villiers Group plc _ At September 30, 1993, the Company owned 1,600,000 shares of Villiers Group plc (Villiers), valued at $225,000 and classified as available-for-sale securities under SFAS No. 115. Villiers is a public limited company organized under the laws of Northern Ireland and traded on the London Stock Exchange. During 1994, the Company sold 750,000 of its Villiers shares for $155,821, recognizing a gain on the sale of $52,500. As a result of the sale, the classification of the Company's investment in Villiers changed to that of trading securities, a current asset. During fiscal 1994, there was no gain Notes to Consolidated Financial Statements (Contined) NOTE I _ INVESTMENTS (Continued) or loss included in earnings as a result of the transfer of securities from the available-for-sale category into the trading category. Included in fiscal 1994 earnings is an unrealized holding gain of $28,050 on the Company's investment in Villiers. During fiscal 1995, the Company sold the remainder of its Villiers shares for $107,683, recognizing a loss on the sale of $42,046. Caspen Oil, Inc. _ The Company owns 25 percent of the common stock of Caspen Oil, Inc., through its wholly-owned subsidiary, Trans Energy, Inc., as well as 300,000 shares of Caspen Oil, Inc. Series C preferred stock and rights to a royalty agreement between Caspen Oil, Inc. and a third party. As a result of recording its proportional share of Caspen Oil, Inc. losses, the Company has a zero basis in Caspen Oil, Inc. and has suspended recording their proportional shares of earnings or losses under the equity method. The Series C Preferred Shares are senior only to Caspen Oil, Inc.'s common stock; earn dividends equal to those paid to Caspen Oil, Inc.'s common shareholders; are convertible to common stock at the option of the holder at the rate of one Series C Preferred Share to one common share between August 1, 1997 and August 1, 2002; and, on August 1, 2002, any outstanding Series C Preferred shares are terminated and converted to one common share. Under the royalty agreement, the Company is entitled to 10 percent of net revenues, as defined by the royalty agreement, generated by certain assets owned by Caspen Oil, Inc. As of September 30, 1995, no revenues have been generated under the royalty agreement. During 1994, the Company, through its wholly-owned subsidiary, Trans Energy, Inc., acquired a 35 percent interest (207,694 shares) in the Series A preferred stock of Caspen Oil, Inc., for $207,694. The Series A preferred stock earns cumulative dividends at the rate of $1.80 per share; is convertible into Caspen Oil, Inc. common stock at the rate of 1.132 shares of common stock for each share of preferred stock; and is redeemable at any time at the option of Caspen Oil, Inc. for $20 per share. Traiana, Inc. _ During January 1993, Churchill Italy, Inc., a wholly-owned subsidiary of the Company, was merged into Traiana, Inc. (Traiana), a corporation incorporated on January 19, 1993, with Traiana being the surviving corporation. Traiana issued 2,936,330 shares of its $.0001 par value common stock in exchange for all of the issued and outstanding shares of common stock of Churchill Italy, Inc. As part of a corporate spin-off of Traiana, Traiana distributed 1,761,798 of the Company's shares of Traiana on a pro rata basis to its shareholders. The Company retained a 40 percent interest in Traiana. During July 1993, Photees, Inc., a public company, issued 5,872,460 shares of its $.0001 par value common stock to acquire all of the issued and outstanding common shares of Traiana. Thereafter, the separate corporate existence of Traiana ceased. As a result, the Company had a 36 percent investment in Photees, Inc. (Photees) at September 30, 1993. Notes to Consolidated Financial Statements (Continued) NOTE I _ INVESTMENTS (Continued) Under the terms of a voting trust agreement, the Company vested the voting power of its common shares of Traiana through December 31, 2000 in a voting trustee, thereby relinquishing its ability to exercise significant influence over Traiana. The voting trust provisions carried over to the Photees common shares which replaced the Traiana common shares. As such, the Company's investment in Photees was accounted for under the cost method of accounting at September 30, 1993. On June 2, 1994, the merger between Photees and Traiana was declared null and void. As a result, the Company's investment reverted to the common stock of Traiana with voting power vested in the voting trustee. The common stock of Traiana does not presently trade on a listed exchange and due to the uncertainty of the time frame in which the Italian assets can be developed into income producing properties, the costs involved therewith, and disputed encumbrances, the Company fully impaired its investment in Traiana during fiscal 1994. Accordingly, the Company's investment in Traiana, recorded at zero, was reduced to net vrealizable value by the recording during fiscal 1994 of a loss on investment of $3,621,319. NOTE J _ EMPLOYEE BENEFIT PLAN During fiscal 1994, the Company adopted a profit sharing plan (the Plan), which is a defined contribution plan available for all employees who work over 1,000 hours during any fiscal year ending September 30. Within the terms of the Plan, the Company has the option to contribute up to 15 percent of qualified individuals' annual earned compensation. An employee vests according to the Plan's vesting schedule and is fully vested upon completing five years of service. The Company's management determines the Plan contribution by year end and funds the contribution after the fiscal year end. Management contributed $13,800 and $15,000 for the years ended September 30, 1995 and 1994, respectively. EX-10.4 2 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 Certifi cates. 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 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. 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. 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 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 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 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. 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. 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] (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: "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 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"). 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; (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; (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. 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. 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. 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 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. 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, 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. 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. 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. (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 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 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). 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, 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. 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. 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
CHC Shareholder/Optioneee Amount 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
(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 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:
CHC Amount Shareholder/Optionee 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
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 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. 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 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 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. 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, 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. 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. 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, 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): 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. 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 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. 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 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 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 LIST OF APPENDICES Number Description 1.2 Attributes of Rx Medical Preferred Stock 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 EX-21.1 3 EXHIBIT 21.1 VARIOUS OIL AND GAS DISCLOSURES OF CHURCHILL U.S.A., INC. 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:
SUBSIDIARIES Name Equity Ownership KTP Energy, Inc. ("KTP") 82.30% Churchill Energy, Inc. ("CEI") 80.21% Trans Energy, Inc. ("TRANS") 100.00%
EQUITY INTERESTS Name Equity Ownership Caspen Oil, Inc. 25.00% CSV Holdings, Inc. ("CSV") 28.30%
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 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 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 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 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.
Proved Reserves Oil (Bbls) Gas (Mcf) Estimated quantity September 30, 365,243 4,839,987 1995 Estimated quantity September 30, 829,631 4,594,601 1994
Developed and Undeveloped Reserves Developed Undeveloped Total 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
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 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.
Year Ended Year Ended September 30, September 30, 1995 1994 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
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.
Productive Wells Gross Net Oil Gas Oil Gas BPO APO BPO APO September 30, 1995 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
[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 [CAPTION] Developed Acreage Table September 30, 1995 Company/ Interest State Working % Net Revenue % Developed Acres BPO APO BPO APO Gross > > 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
[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 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:
Productive Company/State Interest (%) Wells Acreage Gas 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
Mineral Royalty Interests Company Productive Net County/State Interest (%) Wells Acreage Gas 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
[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 5. Undeveloped Acreage. The following tables set forth at September 30, 1995, the Company's leasehold interests in undeveloped acreage.
Working Interests Working Expiration Interest Acreage Dates Gross Net 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%
Overriding Royalty Interests ORRI Acreage Expiration Intere Gross Dates st 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%
Mineral Royalty Interests Acreage Owned Net Gross CUSA: 12,326 1,019 Colorado CEI: 80 80 Colorado
[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 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.
Fiscal Year Ended Fiscal Year Ended September 30, 1995 September 30, 1994 Explora Develop Explora Develop tory ment tory ment Total Gross 0 3 2 12 Wells: Recompleted 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
[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 -----END PRIVACY-ENHANCED MESSAGE-----