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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
CPC OF AMERICA, INC.
(Name of Small Business Issuer in its charter)
Nevada 11-3320709
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1133 Fourth Street
Suite 200
Sarasota, Florida 34236
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE 941-906-9546
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SECURITIES TO BE REGISTERED UNDER SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
None N/A
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.0005 par value
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(TITLE OF CLASS)
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All share information in this Registration Statement has been adjusted to
reflect the Company's 2-for-1 forward split of its outstanding shares of Common
Stock effective as of June 17, 1998.
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
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CPC of America, Inc. (the "Company") was formed under the laws of the State
of Nevada on April 11, 1996 and was established to operate in three primary
health care areas. First, the Company intends to manufacture and distribute
external counterpulsation devices for the treatment of coronary artery disease.
The Company intends to provide counterpulsation treatment through Company-owned
and joint-venture clinical facilities. Second, the Company intends to acquire
existing management service organizations ("MSO"s) to provide management
assistance and other services to specialty medical groups, including those in
the cardiology field. Finally, the Company will enter into joint ventures with
third-parties, called "co-sourcing" arrangements, to provide cardiology services
and support to hospitals, health maintenance organizations ("HMO"s), preferred
provider organizations ("PPO"s), and other physician groups. As of the date of
this Registration Statement, the Company has completed design of a
counterpulsation unit and has submitted this unit to the FDA for 510(k)
premarket notification clearance. As of the date of this Registration Statement,
the Company has not acquired any MSOs or established any cardiology co-sourcing
relationships, however, and as described further below, the Company has recently
(i) entered into a letter of intent to acquire a MSO currently serving physician
practices in two western states, and (ii) formed a joint venture which will
provide managed health care and related practice management in the area of
cardiology disease management.
The Company's operations to date have consisted of the design and
development of its counterpulsation unit and the raising of capital. Between
March 1997 and February 1998, the Company conducted a private placement of units
("Units") of its securities, each Unit consisting of 20,000 shares of the
Company's $.0005 par value common stock ("Common Stock") and common stock
purchase warrants ("Unit Warrants") entitling its holders to purchase up to
40,000 shares of Common Stock at an exercise price of $1.75 per share. The Unit
Warrants are exercisable at any time commencing on February 10, 1999 and
expiring on December 31, 2000. All sales of Units in the private placement were
made pursuant to Rule 504 under the Securities Act of 1933. In that offering,
the Company sold 34 Units at a price of $29,000 per Unit for the gross proceeds
of $986,000. Proceeds from the sale of the Units were applied towards the
development of the Company's counterpulsation units and towards working capital.
On August 14, 1998, the Company and Partner Provider Health, Inc. ("PPH"),
a company engaged in the business of providing specialized support services to
regional organizations of health care providers, organized a Delaware limited
liability company under the name HeartMed, LLC ("HeartMed"). HeartMed has been
organized to provide managed health care and related practice management in the
area of cardiology disease management. PPH shall be the managing member of
HeartMed. PPH and the Company will share in both the capitalization of HeartMed
and its profits, losses and distributions on a 51/49% basis.
On June 3, 1998, the Company entered into a Letter of Intent with CarePoint
Network, Inc., a Utah corporation ("CarePoint"). Based in Salt Lake City, Utah,
CarePoint is an MSO currently serving physician practices in two western states.
Prior to the closing of its acquisition by the Company, CarePoint intends to
acquire RGL Medical Services, LLC, a Utah limited liability corporation. Both
of these companies provide MSO services including marketing and practice
development, practice financial management, accounts receivable management,
strategic business planning, office operations, purchasing and inventory
control, transcriptions services, human resources management, education,
training and seminars, radiology services and alliance and network development.
Pursuant to the terms of the Letter of Intent, the Company shall acquire all of
the issued and outstanding capital stock of CarePoint. The total purchase price
for the capital stock of CarePoint shall be $3,140,000, which shall consist of
$2,482,000 in cash and $658,000 worth of the Company's Common Stock. As of the
date of this Registration Statement, the Company is seeking financing
commitments sufficient to fund its required cash payment of $2,482,000, however
there are no commitments as of the date of this Registration Statement and there
can be no assurance that the Company will be able to obtain the necessary
financing to close its acquisition of CarePoint.
On June 17, 1998, the Company effected a two-for-one split of the
outstanding shares of its Common Stock and, at the same time, effected a change
in the par value of the Common Stock from $.001 per share to $.0005 per share.
All share information set forth in this Registration Statement gives effect to
the split and change in par value as of June 17, 1998.
The Company has elected to voluntarily file this Registration Statement,
and thereby subject itself to the periodic reporting requirement under the
Securities Exchange Act of 1934 ("1934 Act"), in order to provide an adequate
and continuous stream of information to those persons involved in the public
trading of the Company's securities, including investors, stockbrokers, market
analysts and financial advisers. In the event that the Company's periodic
reporting obligations under the 1934 Act cease for any reason, the Company
expects to continue to distribute to shareholders annual and quarterly reports,
including annual audited consolidated financial statements, in forms
substantially similar to those required under the 1934 Act.
The Company's executive offices are located at 1133 Fourth Street, Suite
200, Sarasota, Florida 34236; telephone number (941) 906-9546.
Business of the Issuer
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GENERAL
The Company intends to operate in three primary health care areas. First,
the Company will manufacture and distribute external counterpulsation devices
for the treatment of coronary artery disease. Counterpulsation is a non-
invasive, atraumatic and non-toxic treatment of certain coronary disease states.
This technique offers advantages over invasive treatment in terms of ease, risk
and expense to the patient seeking relief from the symptoms of coronary artery
narrowing. The Company initially intends to provide counterpulsation treatment
through Company-owned and joint-venture clinical facilities.
Second, the Company intends through the acquisition of existing MSOs, to
establish MSOs that will provide a wide range of professional and administrative
services, including accounts receivable systems and collections, negotiations of
and participation under managed care contracts, financial services, including
payroll, bonus and
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pension plan management and financial reporting, medical information management
services, marketing and business development, and executive management and
support. Each client of the MSO will be able to contract for any or all of these
services. The Company's MSOs will also assist cardiology groups with purchasing,
financing and upgrading equipment and other technical services. The Company will
work with contracted facilities to audit and assess technology needs, uncover
cost-reduction opportunities, consolidate overlapping service contracts, and
craft and implement a multi-year strategic plan to anticipate changes in capital
requirements.
Third, the Company will enter into joint ventures with third-parties,
called "co-sourcing" arrangements, to provide cardiology services and support to
hospitals, HMOs, PPOs, and other physician groups. A typical cardiology co-
sourcing arrangement will partner the professional assistance of the Company or
a related MSO with third-party technological and equipment resources to offer
clients a complete array of cardiology services. The Company believes that
through these co-sourcing arrangements, the Company can supply hospitals and
other medical service providers with more efficient and cost-effective
cardiology services.
BACKGROUND
Coronary Artery Disease and Treatment
Coronary artery disease is the most common cause of death in industrial
nations. The coronary arteries serve the heart with oxygen and other nutrients.
The progressive narrowing of these coronary arteries by increasing layers of
fatty atherosclerotic plaque leads to heart attacks, brain failure and
eventually death. It is estimated that coronary artery disease causes 700,000
deaths per year in the United States, approximately one-third of all mortality.
The cost of coronary disease is great in terms of treatment expense, loss of
earnings and productivity and incalculable in terms of pain, suffering and
limited lifestyles.
Over 1.5 million people in the United States each year now undergo invasive
intravascular analysis for coronary artery narrowing by the technique of
angiography or through artery bypass surgery. Coronary angioplasty is an
invasive process whereby a small balloon attached to a catheter is inserted into
a clogged artery. The balloon is then inflated to compress plaque and to open
the narrowed artery. The estimated cost per successfully-treated patient using
the angioplasty method approaches $16,000 and many patients fail multiple
attempts at angioplasty. Coronary artery bypass surgery involves supplementing
the original arteries on the surface of the heart with additional conduits, or
bypasses, which carry the blood around areas of blockage or narrowing. These
bypasses or detours are frequently created by using veins harvested from the
patient's leg or arteries harvested from the chest wall. This invasive procedure
requires more lengthy hospitalization than angioplasty, carries a higher risk of
complications, and can cost up to $50,000 per patient. Many bypass conduits
close in the years following surgery requiring a return to medications,
angioplasty, or repeat bypass attempts. There were at least 450,000 bypasses
performed in the United States in 1996.
Counterpulsation Technology
Counterpulsation is significantly less invasive than both angioplasty and
artery bypass surgery and is designed to reduce the need for these more
complicated and costly procedures. Counterpulsation involves the rhythmic
inflation and deflation of sets of balloons or cuffs, wrapped around the muscles
of the calves, thighs and buttocks. Inflation and deflation occurs in a
sequential manner, progressing from the calves to the lower and upper thighs and
then to the buttocks. The sequence of cuff inflation and deflation compresses
the vascular beds and is timed to the beating of the patient's own heart through
synchronization with the patient's electrocardiogram, so that increased blood
flow and pressure will reach the coronary vessels during diastole, at the time
of lowest intracardiac resistance. Each deflation of the series of cuffs, which
occurs just before the heart squeezes, reduces the pressure against which the
heart must pump, allowing it to eject blood more efficiently and completely.
Each inflation of the series of cuffs allows the circulation to receive an
additional pressurized pulsation, which propels blood into the heart's own
coronary arteries with increased efficiency and force during a time when the
heart is normally resting between beats. The combination of increased ease of
work during the contraction phase and increased blood flow during the relaxation
phase of the cardiac cycle is designed to eliminate or reduce angina.
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Patients are typically treated with counterpulsation therapy during 35 one-
hour outpatient visits or sessions, spanning four to seven weeks. During their
treatments, the patients remain outside the hospital and are free to pursue work
and other scheduled activities. Treatment success is observed by relief of
symptoms, possible reduction in medication, increased exercise capacity on the
treadmill, and elimination of areas of poor cardiac circulation. A course of
counterpulsation treatments, with a total cost of $10,000 or less, compares
favorably with the higher risk, expense, pain, and lost productivity time
associated with the invasive angioplasty and coronary bypass procedures.
A 1992 study by doctors at Stony Brook University in New York showed that
external-counterpulsation eliminated or reduced angina in over 80% of patients
studied. In that study, doctors tested the clinical efficacy and tolerability
of external-counterpulsation in 18 patients with incapacitating chronic angina.
In all patients, treatment with external-counterpulsation was associated with a
substantial improvement in symptoms, with more than 80% reporting a complete
absence of symptoms while performing their usual activities. In addition,
Thalium-201 stress testing (performed for the same exercise duration before and
after external-counterpulsation treatment) showed complete resolution of
ischemic defects in 12 patients (67%), a decrease in the area of ischemia in two
(11%), and no change in four (22%). Thus, 14 patients (78%) had a reduction in
myocardial ischemia as assessed by Thalium-201 imaging. In addition, stress
test results using a treadmill showed a significant increase in exercise
duration following external-counterpulsation treatment. The Company had no
involvement with the above-mentioned study.
Three years following the initial study, data from 17 of the original 18
patients was studied, including 13 of the 14 patients who had previously shown a
reduction in myocardial ischemia. One of these 13 patients suffered a
myocardial infarction, and another underwent a revascularization procedure
during the intervening period. Of the remaining 11 patients, all remained free
of limiting angina.
Management Service Organizations
Health care in the United States historically has been delivered by a
fragmented system of health care providers, including hospitals, individual
physicians and small groups of specialists and primary care physicians. The
American Medical Association reports that approximately 565,000 physicians are
actively involved in patient care in the United States, with a growing number
participating in multi-specialty or single-specialty groups. Expenditures
directly attributable to physicians are estimated at $246 billion, and national
health care spending has been estimated by the Health Care Financing
Administration to be in excess of $1 trillion in 1995.
The focus on cost containment has placed many sole medical practitioners,
small to mid-sized physician groups and single specialty group practices at a
significant disadvantage because they typically have high operating costs
relative to revenue and little purchasing power with vendors of supplies. These
physician practices often lack the capital to purchase new clinical equipment
and technologies, such as information systems, necessary to enter into
sophisticated risk sharing contracts with payors. Additionally, these
physicians generally have neither formal ties with other providers nor the
ability to offer coordinated care across a variety of specialties, thus reducing
their ability to compete with larger medical care providers.
Concerns over the cost of health care has resulted in the rapid growth of
managed care in the past several years. As markets evolve from traditional fee-
for-service medicine to managed care, HMOs and health care providers confront
market pressures to provide high-quality health care in a cost-effective manner.
Employer groups have begun to bargain collectively in an effort to reduce
premiums and to bring about greater accountability of HMOs and providers with
respect to accessibility, choice of providers, quality of care and other matters
that are fundamental to consumer satisfaction.
Given these changes in the health care systems, many payors and their
intermediaries, including governmental entities and HMOs, are looking to outside
providers of physician management services to develop and maintain quality
outcome management programs and patient care data.
Cardiology Co-Sourcing
As a result of managed care and cost-containment programs, hospitals and
other medical care providers that have turned to MSOs and outsourcing techniques
frequently establish and maintain contracts with numerous service providers in
order to purchase equipment and manage physicians, as well as for administrative
and other non-medical support needs. However, the third-party manager or
outsourcing firm's profitability is independent of the medical care provider;
thus, conflict often occurs in this paradigm between managers and outsourcers
who focus solely on practice profitability and care providers who must be
responsive to the quality of care given to patients.
In an effort to bridge the gap between the practice of medicine and the
methods of cost-containment and efficiency, medical care providers have turned
to a relationship called co-sourcing. In a typical cardiology co-sourcing
arrangement, an MSO or other service provider creates a joint venture with a
particular medical care facility, such as a hospital, clinic or private
practice, which will provide cardiology care to the particular provider's
patients. The joint venture will own and operate various aspects of the
cardiology practice, depending on the level of the co-sourcing relationship.
Professional co-sourcing requires the managing entity to be responsible for
attracting, employing and retaining qualified cardiology physicians and
professional support staff. In a technological co-sourcing relationship, the
management entity owns, purchases, maintains and upgrades the cardiology lab
equipment. A global co-sourcing arrangement combines both technical and
professional assistance. Thus, the key
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element present in the co-sourcing relationship is cooperation between the care
manager and the care provider and the sharing of both the overall
responsibilities and results of the practice.
The primary benefits of co-sourcing relationships are similar to those
sought after by other traditional methods of medical cost-containment: to lessen
the costs of providing medical care, to increase profitability of the care
provider and to increase the quality of the care generally. By utilizing the
MSOs resources, health care providers are able to lower operating costs and
spread the cost of providing medical care to other parties. Depending on the
co-sourcing relationship utilized, the practice could also reduce or eliminate
the need for additional investments in fixed infrastructure and equipment, as
well as additional personnel needed to perform administrative functions such as
billing, payroll, accounts receivable collection and other similar tasks. The
overall objective is to allocate limited practice resources to the related goals
of providing quality medical care and generating additional practice revenues.
However, the significant difference between co-sourcing and traditional
outsourcing and other practice management systems is that the medical practice
or hospital avoids the adversarial relationships that can develop between care
providers and MSO's or equipment suppliers. Because the MSO and the practice
share both the costs of and, where permitted by applicable law, the revenues
generated from the practice, the success or failure of the entire venture is
equally dependent upon the ability of the MSO and the practice to work together.
Thus, both sides have an interest in cooperating with one another to ensure that
the practice is efficient and quality-driven at the same time.
COUNTERPULSATION TECHNOLOGY MARKET (1)
The target market for counterpulsation technology is vast. There are a
reported 3.5 million people in the United States suffering from angina pectoris,
with approximately another 500,000 diagnosed each year. Cardiovascular disease
claimed 930,477 lives in 1990, representing 43% of all deaths. Approximately 7
million people are alive today who have a history of heart attack, angina
pectoris or chest pain. This year, as many as 1,500,000 Americans are expected
to have a heart attack, approximately 450,000 of which will die as a result of
the heart attack. An estimated 450,000 coronary bypass procedures were
performed in 1995. Of the current population of approximately 260 million
people in the United States approximately 70 million people suffer from some
form of cardiovascular disease.
PRODUCTS AND SERVICES
Counterpulsation Technology
The Company has designed and subject to FDA approval, intends to
manufacture and market a counterpulsation device under the name CPCA 2000, as
well as a mobile version of its counterpulsation device under the name CPCA
2000M. (See "Government Regulation and Supervision" for a more detailed
discussion of the FDA approval process.) Distribution of the CPCA 2000 and CPCA
2000M will be conducted through joint ventures between the Company's sales
groups and health care providers. In addition, joint-venture treatment centers
will be organized and linked via an MSO which will provide central management
services.
Management Service Organizations
The Company's goal is to position itself as a cardiology and specialty
practice management company. The Company intends to assist medical care
facilities in realizing immediate cost-savings and developing strategic
technology plans. The Company will work with the administration of each medical
center to audit and assess technology needs, uncover cost-reduction
opportunities, consolidate overlapping service contracts, and craft and
implement a multi-year strategic plan to anticipate changes in capital
requirements. Through technology management services, the Company believes it
will be able to determine a hospital's true cost of maintaining, servicing and
acquiring clinical technology. This knowledge will lead to immediate cost-
savings and the development of a "road map" for the future which can help
facilities reduce operating expense budgets and accurately assess their current
and future technology needs.
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(1) Statistics included herein are derived from information published by the
American Heart Association and the American College of Cardiology.
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The Company's strategy is to acquire an existing MSO, using outside
financing to fund the acquisition. The MSO will be designed to own, operate
and/or manage the technical and professional aspects of a hospital's or
practice's cardiology services. The MSO would manage various aspects of these
services, including billing and accounts receivable, collection, managed care
contracts, human resources and payroll services. The MSO would also provide
pension and benefits expertise, equipment and technical expertise, information
management and, if applicable, growth management and executive support. By
rendering these support and management functions, the Company believes that it
will enable physicians to spend a higher proportion of their time with patients,
thereby improving patient care and enhancing revenue.
Although the Company's strategy is to acquire an existing MSO, there can be
no assurances that the Company will be able to find a suitable candidate for
acquisition. The Company intends to seek financing for the acquisitions of MSO
from both private and institutional investors and lenders. The Company currently
has no commitments from any investors or lenders for the provision of
acquisition financing and there can be no assurance that the Company will be
able to obtain acquisition financing in the future as the need arises.
The Company has entered into a Letter of Intent with CarePoint Network,
Inc., a Utah corporation ("CarePoint"). CarePoint is an existing MSO with
operations in two western states with slated expansion into three additional
western states. Prior to the closing of its acquisition by the Company,
CarePoint intends to acquire RGL Medical Services, LLC, a Utah limited liability
corporation. Both these companies provide MSO services including marketing and
practice development, practice financial management, accounts receivable
management, strategic business planning, office operations, purchasing and
inventory control, transcriptions services, human resources management,
education, training and seminars, radiology services and alliance and network
development. Under the terms of the Letter of Intent, the Company will acquire
all of the capital stock of CarePoint in return for the Company's payment of
$3,140,000, which shall consist of $2,482,000 in cash and $658,000 worth of the
Company's Common Stock. As of the date of this Registration Statement, the
Company is seeking financing commitments sufficient to fund its required cash
payment of $2,482,000, however there are no commitments as of the date of this
Registration Statement and there can be no assurance that the Company will be
able to obtain the necessary financing to close its acquisition of CarePoint.
Cardiology Co-Sourcing
The Company's initial strategy is to seek only professional co-sourcing
relationships through joint ventures with existing health care providers. In
establishing these relationships, the Company anticipates creating joint
ventures with hospitals, HMOs, PPOs or other care providers which offer or seek
to offer cardiology care and related services. The Company and the care
providers will divide the cost of establishing and/or maintaining a location,
professional and support staff, billing services and other functions as may be
agreed upon by the parties. In return, where permitted by applicable law, the
Company will receive a portion of the care provider's revenue from cardiology
services. The Company's co-sourcing venture may elect to utilize the resources
of the Company's MSO subsidiary to assist the hospital or practice in meeting
its professional and administrative needs.
On August 14, 1998, the Company and Partner Provider Health Inc. ("PPH"), a
national specialty care carve-out company that helps HMOs and other managed care
organizations deliver cost effective health care, organized a Delaware limited
liability company under the name HeartMed, LLC ("HeartMed"). HeartMed has been
organized to provide coronary disease management through cost efficient clinical
pathways in managed care populations. PPH will be the Managing Member of
HeartMed and will have exclusive control over its day-to-day operations. The
Company will be primarily responsible for clinical protocols advisement and
product development support. PPH and HeartMed have entered into a Management
Service Agreement ("MSA") pursuant to which PPH will be responsible for managing
and administering HeartMed's non-medical business operations including
HeartMed's network development, product development, marketing and sales,
managed care contracting, claims processing and customer service, medical
management and risk management, and accounting. As compensation for PPH's
services under the MSA, PPH shall receive fifteen percent (15%) of the gross
receipt from all of HeartMed's risk and non-risk payor contracts. HeartMed
intends to commence marketing of it carve-out services to HMOs and other payers
in Florida by the fall of this year. PPH and the Company will share in both the
capitalization of HeartMed as well as in its profits, losses and distributions
on a 51/49 basis.
MARKETING AND DISTRIBUTION
The Company intends to engage third parties, through original equipment
manufacturing ("OEM") relationships, to manufacture the CPCA 2000 and the CPCA
2000M under the Company's own label. The Company intends to commence marketing
and distribution of its counterpulsation unit by establishing relationships with
key providers and referring physicians across the nation, in geographically
strategic locations. Potential joint venture partners would include selected
community and university hospitals, private practice cardiology groups, managed
care organizations including HMOs, diagnostic imaging centers, cardiac
rehabilitation centers, and preventive cardiology centers.
Distribution and marketing of the units will be accomplished through joint
ventures between the Company's sales groups and clinics and institutions that
will be purchasing its units. The Company's strategy is to sell one or more of
its counterpulsation units to physicians, clinics and hospitals, with the
Company receiving revenues from the proceeds of the sale as well as from
licensing fees. The Company anticipates that it will need to employ
approximately 10 full-time employees to develop and enhance the Company's sales,
marketing and distribution efforts. The Company intends to grow its
distributorship network through:
. Major cardiology groups
. HMO groups
. Major payor groups and insurance companies
. Other existing diagnostic and therapeutic companies and centers
. Co-sourcing relationships with major hospital chains
GOVERNMENT REGULATION AND SUPERVISION
Counterpulsation Technology
Clinical testing, manufacture and sale of the CPCA 2000 and CPCA 2000M is
subject to regulation by numerous governmental authorities, principally the FDA
and corresponding state and foreign regulatory agencies. The Company has
completed initial bench trials of its CPCA 2000 and intends to submit a
premarket notification with the FDA. The Company believes that it will obtain
FDA clearance to market the CPCA 2000 as a Class III medical device within six
months of the submission of its application. Pursuant to the federal Food, Drug
and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates
the clinical testing, manufacturing, labeling, distribution and promotion of
medical devices. Under the Medical Device Act of 1976, all medical devices are
classified by the FDA into one of three classes, called Class I, II, or III, on
the basis of the controls deemed necessary by the FDA to reasonably ensure their
safety and
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effectiveness. Class I devices are subject only to general controls (e.g.,
labeling, premarket notification and adherence to Good Manufacturing Practices
("GMP"). Class II devices are subject to general controls and performance
standards established by the FDA, including postmarket surveillance, patient
registries and FDA guidelines. Class III devices must receive premarket approval
by the FDA to ensure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable devices, or new devices which have been found
not to be substantially equivalent to legally marketed devices). Both the CPCA
2000 and the CPCA 2000M are considered by the FDA to be a Class III device.
Before a new medical device can be introduced to the market, the
manufacturer generally must obtain FDA clearance through either a "510(k)
premarket notification" or through a premarket approval application ("PMA").
Although Class III devices normally require FDA clearance through the PMA
process, because counterpulsation devices are already on the market, newer
versions, similar to the CPCA 2000, have been permitted to be marketed pursuant
to the 510(k) premarket notification procedure. However, there is no assurance
that the Company will continue to be eligible to utilize the 510(k) premarket
notification process in the future or that the FDA will not in the future
require the Company to submit a PMA, which would be a more costly, lengthy and
uncertain approval process.
Generally, 510(k) premarket notification clearance will be granted if the
submitted information establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or Class II medical device, or to a
preamendment Class III medical device for which the FDA has not called for PMAs.
The FDA has recently been requiring a more rigorous demonstration of substantial
equivalence than in the past, for example, by more frequently requiring clinical
data. It generally can take from four to 12 months or longer from submission to
obtain 510(k) premarket clearance. The FDA may determine that a proposed device
is not substantially equivalent to a legally marketed device or that additional
data is needed before a substantial equivalence determination can be made. A
"not substantially equivalent" determination, or a request for additional data,
could delay the market introduction of new products that fall into this category
and could have a material adverse effect on the Company's business, financial
condition and results of operations. For any of the Company's devices that are
cleared through the 510(k) process, modifications or enhancements that could
significantly affect the safety or effectiveness of the device or that
constitute a major change to the intended use of the device will require a new
510(k) submission. There can be no assurance that the Company will obtain 510(k)
premarket clearance within the above time frames, if at all, for any of the
devices for which it may file a 510(k).
Further, once FDA approval is obtained, the CPCA 2000 will be subject to
pervasive and continuing regulation by the FDA, including various record keeping
requirements and the requirement to report adverse experiences with the use of
the device. The Company is also subject to inspection on a routine basis for
compliance with the FDA's GMP regulations. These regulations impose certain
procedural and documentation requirements upon the Company with respect to
manufacturing and quality assurance activities. The FDA has recently finalized
changes to GMP requirements that, among other things, add requirements for
purchasing and pro-production design controls and maintenance of service
records, which changes may therefore increase the cost of compliance.
The Company has completed initial bench trials of its CPCA 2000 and intends
to submit a premarket notification with the FDA. The Company believes that it
will obtain FDA clearance to market the CPCA 2000 as a Class III medical device
within six months of the submission of its application. There can be no
assurance that the Company will be able to obtain necessary regulatory approvals
or clearances on a timely basis or at all, and delays in receipt of or failure
to receive such approvals, the loss of previously received approvals, or failure
to comply with existing or future regulatory requirements would have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, there are federal and state laws which regulate the financial
relationships between manufacturers of medical devices and hospitals, physicians
and other potential purchasers of medical devices. The federal Medicare and
Medicaid anti-kickback statute prohibits financial relationships designed to
induce the purchase, or arranging for or recommending the purchase, of items or
services for which payment may be made under Medicare, Medicaid, or other
federally funded state health care programs. The anti-kickback statute contains
exceptions for, among other things, properly reported discounts and compensation
for bona fide employees. In addition, federal regulations establish certain
"safe harbors" from liability under the anti-kickback statute, including further
refinements of the exceptions for discounts and employee compensation. The
Company's future practices, in some cases, may not meet all of the criteria for
a safe harbor from anti-kickback law liability. Other provisions of state and
federal law provide civil and/or criminal penalties for presenting or causing to
be presented for payment claims
-6-
<PAGE>
that are fraudulent or for items or services that were not provided as claimed.
Because of the breadth of the statutory provisions described above, it is
possible that some of the Company's business practices could be subject to
scrutiny and challenge under one or more such laws. Such a challenge could have
a material adverse effect on the business, financial condition and results of
operations of the Company.
Management Service Organizations and Cardiology Co-Sourcing
Various state and federal laws regulate the relationship between providers
of health care services, physicians and other clinical services. As a business
in the health care industry, the Company will be subject to these laws and
regulations. Moreover, as a result of the Company's intention to provide both
physician practice management services and medical support services, the Company
may be the subject of more stringent review by the regulatory authorities. As a
result, there can be no assurance that a review of the Company's or the
affiliated physicians' businesses by courts or regulatory authorities will not
result in a determination that could adversely affect the operations of the
Company or the affiliated physicians.
The laws of many states prohibit business corporations such as the Company
from practicing medicine as well as managing physicians. In those states where
the Company intends to manage physicians, it intends to establish operations
which it believes will be in material compliance with applicable laws. The
Company will not exercise any influence or control over the practice of medicine
by the physicians with whom it will manage. Accordingly, the Company believes
that once it begins to provide practice management and medical support services,
it will not be in violation of applicable state laws relating to the practice of
medicine. The laws in most states regarding the corporate practice of medicine
have been subjected to limited judicial and regulatory interpretation and,
therefore, no assurances can be given that the Company's activities will be
found to be in compliance, if challenged. In addition to prohibiting the
practice of medicine, numerous states prohibit entities like the Company from
engaging in certain health care related activities, such as fee-splitting with
physicians.
There are state and federal statutes imposing substantial penalties,
including civil and criminal fines and imprisonment, on health care providers
that fraudulently or wrongfully bill governmental or other third party payors
for health care services. The federal law prohibiting false billings allows a
private person to bring a civil action in the name of the United States
government for violations of its provisions. The Company believes it will be in
material compliance with such laws, but there can be no assurances that the
Company's activities, once commenced, will not be challenged or scrutinized by
governmental authorities. Moreover, technical Medicare and other reimbursement
rules affect the structure of physician billing arrangements. The Company
believes it will be in material compliance with such regulations, but upon
review, regulatory authorities could conclude otherwise, and in such event, the
Company may have to modify its relationship with its affiliated physician
groups. Noncompliance with such regulations may adversely affect the operations
of the Company and subject it and such physician groups to penalties and
additional costs.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Amendments," prohibit the offer, payment, solicitation or receipt
of any form of remuneration either in return for the referral of Medicare or
state health program patients or patient care opportunities, or in return for
the recommendation, arrangement, purchase, lease or order of items or services
that are covered by Medicare or state health programs. The Anti-Kickback
Amendments are broad in scope and have been broadly interpreted by courts in
many jurisdictions. Read literally, the statute places at risk many otherwise
legitimate business arrangements, potentially subjecting such arrangements to
lengthy, expensive investigations and prosecutions initiated by federal and
state governmental officials. In particular, the Office of the Inspector General
of the U.S. Department of Health and Human Services has expressed concern that
the acquisition of physician practices by entities in a position to receive
referrals from such physicians in conjunction with the physicians' continued
practice in affiliation with the purchaser could violate the Anti-Kickback
Amendments.
In July 1991, in part to address concerns regarding the Anti-Kickback
Amendments, the federal government published regulations that provide
exceptions, or "safe harbors," for certain transactions that will be deemed not
to violate the Anti-Kickback Amendments. Among the safe harbors included in the
regulations were provisions relating to the sale of physician practices,
management and personal services agreements and employee relationships.
Additional safe harbors were published in September 1993 offering protections
under the Anti-Kickback
-7-
<PAGE>
Amendments to eight new activities, including referrals within group practices
consisting of active investors. Although the Company believes that it is not in
violation of the Anti-Kickback Amendments, some of its operations do not fit
within any of the existing or proposed safe harbors.
The Company believes that, although it intends to receive remuneration
under management services agreements, it does not intend to be in a position to
make or influence the referral of patients or services reimbursed under
government programs to the physician groups. In certain states, the Company will
be a separate provider of Medicare or state health program reimbursed services.
To the extent the Company is deemed by state or federal authorities to be either
a referral source or a separate provider under its management services
agreements, the financial arrangement under these agreements could be subject to
prosecution under the Anti-Kickback Amendments. Violation of the Anti-Kickback
Amendments is a felony, punishable by fines up to $25,000 per violation and
imprisonment for up to five years. In addition, the Department of Health and
Human Services may impose civil penalties, including the exclusion of violators
from participation in Medicare or state health programs.
Significant prohibitions against physician referrals were enacted, subject
to certain exemptions, by Congress in the Omnibus Budget Reconciliation Act of
1993. These prohibitions, commonly known as "Stark II," amended prior physician
self-referral legislation known as "Stark I" by dramatically enlarging the field
of physician-owned or physician-interested entities to which the referral
prohibitions apply. Effective January 1, 1995 and subject to certain exemptions,
Stark II prohibits a physician or a member of his immediate family from
referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment interest
or with which the physician has entered into a compensation arrangement,
including the physician's own group practice. The designated health services
include the provisions of radiology and other diagnostic services, radiation
therapy services, physical and occupational therapy services, durable medical
equipment, parenteral and enteral nutrients, certain equipment and supplies,
prosthetics, orthotics, outpatient prescription drugs, home health services and
inpatient and outpatient hospital services. The penalties for violating Stark II
include a prohibition on Medicaid and Medicare reimbursement and civil
penalties. A physician's ownership of publicly traded securities of a
corporation with equity exceeding $75 million as of the end of its most recent
fiscal year is not deemed to constitute an ownership or investment interest in
that corporation under Stark II.
Many states have adopted similar prohibitions against payments intended to
induce referrals of Medicaid and other third party payor patients. The State of
Florida, for instance, enacted the Patient Self-Referral Act in April 1992 that
severely restricts patient referrals for certain services, prohibits mark-ups of
certain procedures, requires disclosure of ownership in a business to which
patients are referred and places other regulations on health care providers. The
Company believes it is likely that other states will adopt similar legislation.
Accordingly, operations in various jurisdictions may require the Company to
comply with such jurisdictions' regulations, which could lead to structural and
organizational modifications of the Company's relationships with physician
groups. Such changes, if any, could have an adverse effect on the Company.
Today, much of the revenue received by practices, and, in turn, by MSOs, is
derived from payments made by government sponsored health care programs
(principally, Medicare and Medicaid). As a result, any change in reimbursement
regulations, policies, practices, interpretations or statutes could adversely
affect the intended operations of the Company. Congress passed a fiscal year
1995 budget resolution that calls for reductions in the rate of spending
increases over the next seven years of $270 billion in the Medicare program and
$182 billion in the Medicaid program. Through the Medicare program, the federal
government has implemented a resource-based relative value scale ("RBRVS")
payment methodology for physician services. RBRVS is a fee schedule that, except
for certain geographical and other adjustments, pays similarly situated
physicians the same amount for the same services. The RBRVS is adjusted each
year and is subject to increases or decreases at the discretion of Congress. The
implementation of RBRVS may result in reductions in payment rates for procedures
provided by physicians which may be managed by the Company. RBRVS-type payment
systems have also been adopted by certain private third party payors and may
become a predominant payment methodology. A broader implementation of such
programs would reduce payments by private third party payors and could
indirectly reduce the Company's operating margins to the extent that the cost of
providing management services related to such procedures could not be
proportionately reduced. To the extent the Company's costs increase, the Company
may not be able to recover such cost increases from government reimbursement
programs. In addition, because of cost-containment measures and market changes
in nongovernmental insurance plans, the Company may not be able to shift cost
increases to
-8-
<PAGE>
nongovernmental payors. The Company may experience over time a reduction in per
patient Medicare revenue received by certain of the physician groups which the
Company intends to manage; however, the Company does not believe such reductions
would, if experienced, result in a material adverse effect on the Company.
In addition to current governmental regulation, the Clinton administration
and several members of Congress have proposed legislation for comprehensive
reforms affecting the payment for and availability of health care services.
Aspects of certain of such health care proposals, such as reductions in Medicare
and Medicaid payments, if adopted, could adversely affect the Company. Other
aspects of such proposals, such as universal health insurance coverage and
coverage of certain previously uncovered services, could have a positive impact
on the Company's business. It is not possible at this time to predict what, if
any, reforms will be adopted by Congress or state legislatures, or when such
reforms would be adopted and implemented. As health care reform progresses and
the regulatory environment accommodates reform, it is likely that changes in
state and federal regulations will necessitate modifications to the Company's
agreements and operations. While the Company believes it will be able to
restructure in accordance with applicable laws and regulations, the Company
cannot be assured that such restructuring in all cases will be possible or
profitable.
COMPETITION
Counterpulsation Technology
At present, the Company is aware of only two other companies that are
currently producing and marketing or intending to market a counterpulsation
device similar to the CPCA 2000: Vasomedical, Inc. and Cardiomedics, an
affiliate of Trimedyne, Inc. The Company believes that these competitors'
involvement in the market at present is limited and that the market in general
for counterpulsation devices has largely been untapped. Management of the
Company estimates that counterpulsation therapy is presently used to treat only
a small percentage of all patients with coronary artery diseases.
The Company may also face limited competition from physicians and treatment
centers currently utilizing counterpulsation technology. There can be no
assurance that the Company will be able to compete initially or on a continual
basis with companies that are currently marketing counterpulsation devices or
those that presently seek to enter into the counterpulsation device market. The
inability of the Company to compete in the counterpulsation market would have a
material adverse effect on the Company.
The Company anticipates that the CPCA 2000 will also indirectly compete
with more mainstream cardiology treatment techniques, such as angiography,
coronary angioplasty, coronary artery bypass surgery and medication. While
counterpulsation does not replace the need for these services in all cases, a
percentage of coronary artery disease can be successfully treated using an
alternative to invasive procedures, such as counterpulsation treatment.
Management Service Organizations
The Company competes with numerous companies that provide practice
management through MSOs, including Mediphys, Phycor, Phymatrix Corp., Equimed,
Inc., U.S. Diagnostics Labs, Insight Health Services Corp., InPhynet Medical
Management, Inc., and other regional and national public and private companies.
These companies typically offer either technical, professional or global MSO
services to general, specialty and sub-specialty clinical services. As managed
care pressures force consolidation of technical and professional inpatient and
outpatient services, the market for MSOs is growing rapidly. Recently, however,
this growth trend has created the need for companies to provide specialty
practices, such as cardiology, radiology and oncology practices, with technical
and professional management services. However, even the larger MSOs, such as
Phycor, currently manage only a small fraction of all of the specialty practices
and independent practice associations in the U.S. The Company believes that the
current level of competition will allow the Company to pursue opportunities to
form or acquire MSOs to provide specialty practice management services on a
regional or national basis that will complement the Company's sales and
distribution of its counterpulsation devices.
-9-
<PAGE>
Cardiology Co-Sourcing
There are currently a limited number of public and private companies who
provide cardiology co-sourcing services, including Vivra and Raytel. However,
other companies have utilized the co-sourcing concept in other areas, such as
food service, pharmacies, emergency rooms, radiation therapy, oncology, physical
therapy, dialysis, laboratory services and surgical services. Some of these
companies include Marriott, Sodexho, Cardinal, Equimed, Inc., Dynecare and
National Surgery Centers. Many of these companies have established co-sourcing
relationships with hospitals as a point of service partner.
Other companies have specialized in developing radiology co-sourcing
relationships that are similar to cardiology co-sourcing arrangements, including
Siemens Medical, Kings Medical, HealthSouth, U.S. Diagnostics Labs and Insight
Health Services Corp. These relationships also provide technical inpatient and
outpatient services, as well as professional and employee services, through the
joint ownership and operation of the radiology practice. The Company believes
that co-sourcing will be a growing trend in managed health care and that it has
or will be able to establish the resources, management and relationships to
become the leader in cardiology co-sourcing.
PATENTS AND TRADEMARKS
At present, the Company has submitted applications to patent the CPCA 2000
and its counterpulsation technology and has already received a trademark on the
name "CPCA 2000." The Company's ability to compete successfully depends, in
part, on its ability to protect the proprietary technology contained in its
products. The Company will rely upon a combination of patent, trade secret,
copyright and trademark laws, together with non-disclosure agreements, to
establish and protect proprietary rights in its counterpulsation devices and
other technology, as well as its trade names and other similar property. The
Company also intends to enter into confidentiality and/or license agreements
with its employees, manufacturers, distributors, customers and suppliers, and
will limit access to and distribution of its proprietary information. If and
when implemented, these measures will only afford the Company limited
protection, as there can be no assurance that any steps taken by the Company to
protect these proprietary rights will be adequate to prevent misappropriation of
its technology or the independent development by others of similar technology.
In addition, although the Company believes that there currently are no
infringement claims against the Company and no grounds for the assertion of such
claims, the cost of responding to any such assertion could be significant.
CUSTOMERS
Counterpulsation Technology
At present, the Company has not begun marketing or producing the CPCA 2000
or the CPCA 2000M, as the Company is prohibited from doing so until receiving
clearance from the FDA.
Management Service Organizations.
At present, the Company currently has not established any MSO
relationships. When and if such relationships are established, however, the
Company's MSO-related revenues will be primarily generated from contract
services and patient services. Contract services revenues are generally earned
from services billed to a hospital or other health care providers which include:
(i) fee-for-service arrangements in which revenues are based upon a contractual
rate per procedure, (ii) equipment rental in which revenues are generally based
upon a fixed monthly rental, and (iii) management fees. Patient service revenues
are services billed directly to patients or third party payors (generally
managed care organizations and commercial insurance carriers).
The Company's MSO operations will be principally dependent on its ability
(either directly or indirectly through its hospital customers) to attract
referrals from physicians and other health care providers representing a variety
of specialties. The Company's eligibility to provide service in response to a
referral will often be dependent on the existence of a contractual arrangement
with the referred patient's insurance carrier (primarily if the insurance is
provided by a managed care organization). Managed care contracting has become
very competitive and
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<PAGE>
reimbursement schedules are nearing Medicare reimbursement levels. A decline in
referrals and/or reimbursement rates would adversely affect the Company's
revenues and profits.
Cardiology Co-Sourcing
The Company currently has not established any cardiology co-sourcing
relationships. However, the Company will seek to target physician groups,
diagnostic services and therapeutic services. The Company's strategy is to
develop a customer base on a local, regional and national basis for complete
cardiology services and to seek out hospital chains on a global basis to provide
them with inpatient and outpatient cardiology services.
RESEARCH AND DEVELOPMENT
Since inception, the Company's research and development expenses have
amounted to approximately $450,000. These expenditures have included the design
and development of both the CPCA 2000 and the CPCA 2000M, as well as the
submission of both of these units to the FDA for approval. At present, none of
these research and development expenses have been borne by customers as the
Company has not begun to market or sell its products and services.
EMPLOYEES
As of the date of this Registration Statement, the Company and its
subsidiaries employed two persons consisting of its two executive officers.
Neither of these employees are represented by a union or subject to a collective
bargaining agreement. The Company has not experienced a work stoppage and the
Company believes that its relationship with its employees is good.
LITIGATION
In June 1998, the Company was named as a defendant in a lawsuit brought by
Charles M. O'Rourke, the Company's former attorney, in the United States
District Court for the Eastern District of New York. The lawsuit also named as
defendants Rod Shipman, Chief Executive Officer of the Company, and Dr. Richard
Rubin, a former officer and director of the Company. The lawsuit alleges that
Mr. O'Rourke performed various legal services for the Company for which he was
to receive as payment both shares of Common Stock and options to purchase shares
of Common Stock. The complaint alleges that the Company deprived Mr. O'Rourke
of the value of his shares by refusing to allow Mr. O'Rourke to sell his shares
under Rule 144 of the 1933 Act. Mr. O'Rourke alleges causes of action for
breach of contract, fraud, breach of fiduciary duty, conversion, unjust
enrichment and for declaratory and injunctive relief. Mr. O'Rourke seeks
damages in an amount in excess of $966,000.
The Company has filed an answer and a counterclaim against Mr. O'Rourke,
seeking the return of both the shares of Common Stock and the options on the
grounds that Mr. O'Rourke failed to provide adequate consideration for the
securities. The Company intends to vigorously defend against Mr. O'Rourke's
allegations and prosecute its counterclaim. The Company believes that a
determination of the lawsuit adverse to the Company will not have a materially
adverse effect on the financial condition or operations of the Company.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
To date, the Company's activities have included the market analysis and
development of its counterpulsation units and the raising of initial working
capital. The Company has developed and prepared for market both the CPCA 2000
and the CPCA 2000M, a mobile version of the Company's stand-alone
counterpulsation unit. Both units have been submitted for FDA 510(k) approval.
The Company has financed its activities to date through the sale of its
securities. See "Item 4, Part II - "Recent Sales of Unregistered Securities"
for a description of the Company's sale of shares of its securities since
inception. The Company intends to commence commercial operations in the fourth
quarter of 1998, subject to FDA approval of its counterpulsation units, and, in
the opinion of management, has sufficient cash resources in order to sustain its
operations throughout the fiscal year of 1998.
Over the next 12 months, following FDA approval of its counterpulsation
units, the Company intends to make the counterpulsation technology available
through a delivery system of company-owned and joint-ventured facilities. Each
facility will provide two or more counterpulsation units to provide patients
with easy access to treatment. Potential joint-venture partners include
community and university hospitals, private practice groups, managed care
organizations, including HMOs, diagnostic imaging centers and preventive
cardiology centers. Staffing would include a cardiologist who will review the
patient's history from the referring physician, examine the patient and
formulate the counterpulsation treatment plan. In addition, specially trained
nurses will be present in the center to monitor each patient's treatment. The
Company intends to attract patients from referrals from physicians, insurance
carriers, HMOs and hospitals, as well as self-referred patients. The facilities
will not offer full service long-term cardiology management in an attempt to
avoid competition with cardiologists, surgeons and hospitals.
Year 2000
- ---------
The Company utilizes computer software programs and operating systems,
including applications used in operating the CPCA 2000 and various
administrative and billing functions. To the extent the Company's software
applications contain source codes that are unable to appropriately interpret the
upcoming calendar year 2000, some level of modification, or even replacement of
such applications, may be necessary. The Company intends to perform an audit of
its computer systems to assess the scope of the Company's risks and bring its
applications into compliance. Because the Company has not yet commenced its
Year 2000 audit, it is currently unable to make a reasonable estimate of the
costs associated with Year 2000 compliance. Accordingly, no assurance can be
given that any or all of the Company's or third party systems are or will be
Year 2000 compliant or that the costs required to address the Year 2000 issue or
that the impact of the Company's failure to achieve substantial Year 2000
compliance will not have a material adverse effect on the Company's business,
financial condition or results of operations.
This registration statement contains forward-looking statements that are
based on the Company's beliefs as well as assumptions made by and information
currently available to the Company. When used in this registration statement,
the words "believe," "expect," "anticipate," "estimate" and similar expressions
are intended to identify forward-looking statements. Such statements are
subject to certain risks, uncertainties and assumptions, including, without
limitation, the Company's recent commencement of commercial operations and the
risks and uncertainties concerning the acceptance of its services and products
by its potential customers; the Company's present financial condition and the
risks and uncertainties concerning the availability of additional capital as and
when required; technological changes; increased competition; and general
economic conditions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated, or projected. The
Company cautions potential investors not to place undue reliance on any such
forward-looking statements all of which speak only as of the date made.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's executive offices are located in Sarasota, Florida and
consist of approximately 1,000 square feet which the Company rents on a month to
month basis.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the shares of Common Stock as of July 31, 1998 by (i)
each person who is known by the Company to be the beneficial owner of more than
five percent (5%) of the issued and outstanding shares of Common Stock, (ii)
each of the Company's directors and executive officers and (iii) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OWNED
------------------ ----------------
<S> <C> <C>
Rod A. Shipman(1)(2) 1,392,000 25.4%
Dr. Richard E. Rubin(1) 496,666 11.6%
William C. Lievense(1) 40,000 (3)
CTM Group, Inc.(4)(5) 1,900,000 34.7%
Leslie J. Kessler(6)(7) 2,000,000 37.9%
All officers and directors as a group 5,782,000 75.4%
</TABLE>
_______________
(1) Address is 1133 Fourth Street, Suite 200, Sarasota, Florida 34236.
(2) Includes options granted to Mr. Shipman to purchase 1,200,000 shares of
Common Stock. Does not include options to purchase 1,800,000 shares of
Common Stock, which are subject to vesting.
(3) Less than one percent.
(4) Address is 1350 East Flamingo, #800, Las Vegas, Nevada 89119.
(5) Includes options to purchase 1,200,000 shares of Common Stock. Does not
include options to purchase 1,800,000 shares of Common Stock, which are
subject to vesting.
(6) Address is 11 Hedgerow Lane, Jericho, New York 11753.
(7) Includes an option to purchase 1,000,000 shares of Common Stock.
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<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Set forth below are the directors and officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------- --------------- -----------------------------
<S> <C> <C>
Rod A. Shipman 47 President, Secretary and Director
Rafe Cohen 41 Treasurer and Director
William C. Lievense 50 Director
</TABLE>
Mr. Shipman has been the President, Chief Executive Officer and Secretary
of the Company since January 1997 and has been a director of the Company since
its inception in May 1996. Mr. Shipman has over 19 years of experience in the
medical industry. Since August 1994, Mr. Shipman has been the President and
Chief Executive Officer of R.A. Shipman & Associates, L.L.C., a health care
consulting firm. From January 1993 to July 1994 he served as Senior Vice
President and Chief Operating Officer of MRI Medical Diagnostics, a Colorado
corporation that provided imaging and nuclear medical services and operated a
senior retirement facility. Mr. Shipman also served as a director of that
company from May 1993 to June 1994. From January 1991 to September 1992, Mr.
Shipman served as the President and Chief Operating Officer of Southern
California Imaging Services, a private mobile diagnostic imaging and service
company. From 1978 to 1990 he served in various positions including Business
Manager, Controller, Account Executive and District Manager with Philips Medical
Systems, CGR Medical Systems, ADAC Laboratories and Picker, all medical imaging
companies. Mr. Shipman received a Bachelor of Science degree in Business
Administration from Pepperdine University in Malibu, California and a Masters
degree in Public and Health Care Administration from the University of San
Francisco in San Francisco, California.
Mr. Cohen has served as treasurer and as a director of the Company since
June 1998. Mr. Cohen is a certified public accountant and has owned and managed
his own accounting practice since 1974. Mr. Cohen received a Masters Degree in
Business Taxation from the University of Southern California in 1976 and a
Masters Degree in Finance from UCLA in 1972.
Mr. Lievense has served as a director of the Company since October 1996.
He has approximately 25 years of experience in the medical industry. Since
1993, Mr. Lievense has been the President and Chief Executive Officer of
Columbia/Doctors Hospital of Sarasota, Florida, and its predecessor, Galen
Health Care Corporation. Mr. Lievense has worked for Humana, Inc., a nationwide
owner and operator of hospitals and healthcare facilities, for 20 years, serving
as its Vice President and Assistant Regional Manager from 1988 to 1993. He also
worked for American Inhalation Representatives, Inc., a respiratory services
company in Birmingham, Alabama. Mr. Lievense received a Bachelor of Arts degree
in Sociology from Alma College in Alma, Michigan and received a Masters degree
in Business Administration from the University of Louisville, Kentucky.
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<PAGE>
KEY CONSULTANT TO THE COMPANY
The CTM Group, Inc., a Nevada corporation has a consulting contract to
provide strategic planning services to the Company. Mr. Paul Shabty is primarily
responsible for services to be provided by CTM Group, Inc. to the Company under
the consulting contract. Mr. Shabty's wife, Deborah Shabty, is the owner and
principal officer of CTM Group, Inc. Mr. Shabty is a founder of the Company and
served as its President, Treasurer and Chairman of the Board from April 1996 to
January 1997. Mr. Shabty is also a member of the Board of Trustees of
Columbia/Doctors Hospital of Sarasota, Florida, and is a director of both TD
Technologies, Inc., a private engineering and software company, and Advanced
Technologies Management Corporation, a medical software and management company.
Mr. Shabty has been involved in the medical and manufacturing industries since
1970. He was the founder, Chairman of the Board and Chief Executive Officer of
Medical Clinic Unlimited, Inc., which specialized in both the provision of
outpatient dialysis services and the manufacturing of medical devices, equipment
and supplies. Medical Clinic Unlimited, Inc. had gross sales of approximately
$120 million in 1988. From October 1993 to September 1994, Mr. Shabty served as
Executive Vice President of U.S. Diagnostic Labs, Inc., a physician practice
management provider specializing in diagnostic imaging centers. In 1994, Mr.
Shabty was convicted on a 1988 federal grand jury indictment of one count of
mail fraud, and received one year of probation and a fine of $500. The
indictment did not relate to the business of Medical Clinic Unlimited. Mr.
Shabty received a Bachelor of Arts degree in Accounting from the University of
Tel Aviv. He has also attended the London School of Economics and the Executive
M.B.A. Program at the Harvard Business School.
ITEM 6. EXECUTIVE COMPENSATION
Cash Compensation of Executive Officers. The following table sets forth
the cash compensation paid by the Company to its Chief Executive Officer and to
all other executive officers for services rendered during the fiscal year ended
December 31, 1997 and from inception (April 11, 1996) to December 31, 1996.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION/(1)/ LONG-TERM COMPENSATION
--------------------------------- ----------------------------
COMMON SHARES
RESTRICTED UNDERLYING ALL OTHER
OTHER ANNUAL STOCK OPTIONS GRANTED COMPEN-
NAME AND POSITION YEAR SALARY BONUS COMPENSATION AWARDS ($) (# SHARES) SATION
- --------------------------- ------- ------- ------ -------------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Rod A. Shipman, President 1997 $ -0- -0- -0- -0- -0- -0-
and Secretary(2) 1996 -0- -0- -0- -0- 1,000,000 -0-
Richard E. Rubin, Senior 1997 $ -0- -0- -0- -0- -0- -0-
Executive Vice President and 1996 -0- -0- -0- -0- 1,000,000 -0-
Treasurer(3)
</TABLE>
_______________
(1) To date, the Company has not paid salaries to either of its executive
officers. The Company intends to begin paying salaries to its executive
officers at such time as it commences revenue producing operations.
(2) On April 23, 1998, Mr. Shipman entered into an Employment Agreement with
the Company pursuant to which he will receive an annual salary of $120,000.
In addition, Mr. Shipman received options to purchase 2,000,000 shares of
Common Stock at an exercise price of $2.50 per share, of which options to
purchase 200,000 are immediately exercisable and options to purchase
200,000 shares vest and first become exercisable on each of the next nine
anniversaries of the date of grant. The options expire on April 22, 2008.
The Employment Agreement is for a term of ten years.
(3) Dr. Rubin served as an officer and a director of the Company through June
2, 1998.
-15-
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED IN-THE-
UNDERLYING MONEY
UNEXERCISED OPTIONS/SARS AT
OPTIONS/SARS AT FY-END ($)
FY-END (#)
SHARES ACQUIRED ON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- --------------------------- --------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Rod A. Shipman -0- -0- 1,000,000 325,000
President and Secretary
Richard E. Rubin, 26,666 8,666
Senior Executive Vice President
and Treasurer(1)
</TABLE>
________________
(1) Dr. Rubin served as an officer and a director of the Company through June
2, 1998.
Compensation of Directors. At the present time, directors receive no
compensation for serving as directors of the Company, however the Company may in
the future begin to compensate its non-officer directors. All directors receive
reimbursement for out-of-pocket expenses in attending Board of Directors
meetings. From time to time the Company may engage certain members of the Board
of Directors to perform services on behalf of the Company and will compensate
such persons for the services which they perform.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In January 1997, the board of directors of the Company authorized the
Company to enter into a consulting agreement ("Consulting Agreement") with the
CTM Group, Inc., a Nevada corporation ("CTM Group"). The CTM Group is the
beneficial owner of greater than five percent (5%) of the issued and outstanding
Common Stock of the Company. In addition, CTM Group is controlled by Deborah
Shabty, the wife of Paul Shabty, a former officer and director of the Company.
Pursuant to the terms of the Consulting Agreement, CTM Group received fees of
$5,000 per month in exchange for consulting services rendered on behalf of the
Company. In November 1997, the consulting fees payable to CTM Group were
increased to $8,000 per month. The Consulting Agreement is for a term of five
years with an option on the part of the Company to renew for an additional five
year period.
On April 23, 1998, the CTM Group and the Company amended the Consulting
Agreement. Pursuant to the amended Consulting Agreement, the CTM Group shall
receive consulting fees in the amount of $120,000 per year. In addition, the CTM
Group received options to purchase 2,000,000 shares of Common Stock at an
exercise price of $2.50 per share, of which options to purchase 200,000 are
immediately exercisable and options to purchase 200,000 shares vest and first
become exercisable on each of the next nine anniversaries of the date of grant.
The options expire on April 22, 2008. The amended Consulting Agreement is for a
term of ten years.
The Company intends to conduct all related party transactions involving the
Company on terms no less favorable than could be obtained from unaffiliated
parties and intends to have all related party transactions approved by a
majority of the independent and disinterested members of the Company's board of
directors.
ITEM 8. DESCRIPTION OF SECURITIES.
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock,
$.0005 par value, of which, as of July 31, 1998, 4,270,666 shares were issued
and outstanding and beneficially held by approximately 50 stockholders. Holders
of shares of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders generally. The approval of proposals submitted
to stockholders at a meeting other than for the election of directors requires
the favorable vote of a majority of the shares voting, except in the case of
certain fundamental matters (such as certain amendments to the Articles of
Incorporation, and certain mergers and reorganizations), in which case Nevada
law and the Company's Bylaws require the favorable vote of at least a majority
of all outstanding shares. The election of directors requires only a plurality
vote. Stockholders are entitled to receive such dividends as may be declared
from time to time by the Board of Directors out of funds legally available
therefor, and in the event of liquidation, dissolution or winding up of the
Company to share ratably in all assets remaining after payment of liabilities.
The holders of shares of Common Stock have no preemptive, conversion,
subscription or cumulative voting rights.
-16-
<PAGE>
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock,
$.001 par value ("Preferred Stock"), none of which is issued or outstanding.
The Company's Board of Directors is authorized to issue from time to time,
without shareholder authorization, in one or more designated series or classes,
any or all of the authorized but unissued shares of Preferred Stock with such
dividend, redemption, conversion and exchange provisions as may be provided in
the particular series. Any series of Preferred Stock may possess voting,
dividend, liquidation and redemption rights superior to that of the Common
Stock. The rights of the holders of Common Stock will be subject to and may be
adversely affected by the rights of the holders of any Preferred Stock that may
be issued in the future. Issuance of a new series of Preferred Stock, while
providing desirable flexibility in connection with possible acquisition and
other corporate purposes, could make it more difficult for a third party to
acquire, or discourage a third party from acquiring, a majority of the
outstanding voting stock of the Company.
PART II
ITEM 1 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
The Company's Common Stock has been listed on the OTC Bulletin Board under
the symbol "CPCF" since February 18, 1998. From February 18, 1998 through July
31, 1998, the high and low bid prices were $16.00 and $1.37, respectively. The
high and low bid information stated above reflects inter-dealer prices, without
retail mark-up, mark-down or commission and may not reflect actual prices. The
Company considers its common stock to be thinly traded and that any reported bid
or sale prices may not be a true market-based valuation of the Common Stock.
As of July 31, 1998, there were approximately 50 record holders of the
Company's Common Stock.
The Company has not paid any cash dividends since its inception and does
not contemplate paying dividends in the foreseeable future. It is anticipated
that earnings, if any, will be retained for the operation of the Company's
business.
ITEM 2. LEGAL PROCEEDINGS.
There are no pending legal proceedings to which the Company is a party or
to which the property interests of the Company are subject.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Inapplicable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
During the last three years the Company sold unregistered shares of its
Common Stock in the following transactions:
A. In May 1996, the Company sold to its eight founders 2,400,000 shares
of Common Stock for $.0005 cash per share and 300,000 shares of Common Stock for
a $150 note receivable. There was no underwriter involved in this issuance.
The issuance was conducted pursuant to Section 4(2) under the Securities Act of
1933 ("1933 Act").
B. In May 1996, the Company issued to five of its founders options to
purchase up to a total of 4,200,000 shares of Common Stock, at an exercise price
of $1.125 to $1.25 per share. The options are immediately exercisable and expire
in May 2006. The Company also issued to one of its founders an option to
purchase up to 200,000 shares of Common Stock at an exercise price of $1.175 per
share. The option expired unexercised on
-17-
<PAGE>
January 31, 1997. There was no underwriter involved in these issuances. The
issuances were conducted pursuant to Section 4(2) of the 1933 Act.
C. In September 1996, the Company issued 100,000 shares of Common Stock
to one of its founders for $5,000. There was no underwriter involved in the
issuance. The issuance was conducted pursuant to Section 4(2) of the 1933 Act.
D. In October 1996, the Company issued a total of 760,000 shares of
Common Stock to related parties in payment of $38,000 in consulting fees for
services rendered in 1996. The Company also granted to one individual options
to purchase up to 20,000 shares of Common Stock at an exercise price of $1.25
per share. The options are immediately exercisable and expire on May 2, 2006.
There was no underwriter involved in this issuance. The issuance was conducted
pursuant to Section 4(2) of the 1933 Act.
E. In December 1996, the Company issued 4,000 shares of Common Stock to
one individual in consideration of legal services rendered on behalf of the
Company. There was no underwriter involved in this issuance. The issuance was
conducted pursuant to Section 4(2) of the 1933 Act.
F. From March 1997 to February 1998, the Company conducted a private
placement of units of its securities ("Units"), each Unit consisting of 20,000
shares of Common Stock and warrants to purchase up to 40,000 shares of Common
Stock at an exercise price of $1.75 per share from February 10, 1999 to December
31, 2000. The Units were offered at a price of $29,000 per Unit. In the private
placement, the Company sold thirty-four (34) Units to twenty-seven (27)
investors. The gross proceeds of the private placement were $986,000, including
the conversion of $70,000 of indebtedness. All of the investors were "accredited
investors," as that term is defined under Rule 501 of the 1933 Act, and had a
prior relationship with management, however none of the investors were at the
time or are now considered to be affiliates of the Company. There was no
underwriter involved in this placement. The issuance was conducted pursuant to
Rule 504 under the 1933 Act.
G. In April 1997, the Company issued 26,666 shares of Common Stock to one
individual upon the exercise of options. The exercise price paid to the Company
was $1.125 per share. There was no underwriter involved in this issuance. The
issuance was conducted pursuant to Section 4(2) of the 1933 Act.
H. In April 1998, the Company issued to its president and to its key
consultant each an option to purchase 2,000,000 shares of Common Stock at an
exercise price of $2.50 per share. Options to purchase 200,000 shares of Common
Stock are immediately exercisable and options to purchase 200,000 shares vest
and first become exercisable on the next nine anniversaries of the date of
grant. The options expire on April 22, 2008. There was no underwriter involved
in these issuances. The issuances were conducted pursuant to Section 4(2) of the
1933 Act.
I. In April 1998, the Company issued to five employees and consultants of
the Company options to purchase an aggregate of 137,000 shares of Common Stock
at an exercise price of $2.50 per share. All of the options are immediately
exercisable except for options to purchase 80,000 shares granted to one
consultant, of which options to purchase 16,000 shares of Common Stock are
immediately exercisable and options to purchase 16,000 shares vest and first
become exercisable on the next four anniversaries of the date of grant. The
options expire on April 22, 2003. There was no underwriter involved in these
issuances. The issuances were conducted pursuant to Section 4(2) of the 1933
Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Nevada Statutes
- ---------------
Section 78.751 of the Nevada General Corporation Law provides for the
indemnification of the Company's officers, directors and corporate agents under
certain circumstances as follows:
1. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, has no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, does not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was unlawful.
2. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation,
-18-
<PAGE>
partnership, joint venture, trust or other enterprise against expenses,
including amounts paid in settlement and attorneys' fees actually paid and
reasonably incurred by him in connection with the defense or settlement of the
action or suit if he acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation.
Indemnification may not be made for any claim, issue or matter as to which such
a person has been adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable to the corporation or for
amounts paid in settlement to the corporation, unless and only to the extent
that the court in which the action or suit was brought or other court of
competent jurisdiction determines upon application that in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
3. To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections 1 and 2, or in defense of
any claim, issue or matter therein, he must be indemnified by the corporation
against expenses, including attorneys' fees, actually and reasonably incurred by
him in connection with the defense.
4. Any indemnification under subsections 1 and 2, unless ordered by a
court or advanced pursuant to subsection 5, must be made by the corporation only
as authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances. The
determination must be made:
(a) By the stockholders;
(b) By the board of directors by majority vote of a quorum
consisting of directors who were not parties to the act, suit or proceeding;
(c) If a majority vote of a quorum consisting of directors who
were not parties to the act, suit or proceeding so orders, by independent legal
counsel in a written opinion; or
(d) If a quorum consisting of directors who were not parties to
the act, suit or proceeding cannot be obtained, by independent legal counsel in
a written opinion.
5. The certificate or articles of incorporation, the bylaws or an
agreement made by the corporation may provide that the expenses of officers and
directors incurred in defending a civil or criminal action, suit or proceeding
must be paid by the corporation as they are incurred and in advance of the final
disposition of the action, suit or proceeding, upon receipt of an undertaking by
or on behalf of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that he is not entitled to be
indemnified by the corporation. The provisions of this subsection do not affect
any rights to advancement of expenses to which corporate personnel other than
directors or officers may be entitled under any contract or otherwise by law.
6. The indemnification and advancement of expenses authorized in or
ordered by a court pursuant to this section:
(a) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under the certificate
or articles of incorporation or any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, for either an action in his official
capacity or an action in another capacity while holding his office, except that
indemnification, unless ordered by a court pursuant to subsection 2 or for the
advancement of expenses made pursuant to subsection 5, may not be made to or on
behalf of any director or officer if a final adjudication establishes that his
acts or omissions involved intentional misconduct, fraud or a knowing violation
of the law and was material to the cause of action.
(b) Continues for a person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the heirs, executors and
administrators of such a person.
-19-
<PAGE>
Bylaws
- ------
The Company's Bylaws provide for the permissive indemnification of the
Company's officers and directors under certain circumstances as follows:
(a) Right of Indemnity. To the full extent permitted by law, this
------------------
corporation shall indemnify its directors, officers, employees and other persons
described in Subsection 78.751 of the Nevada Revised Statutes, including persons
formerly occupying any such position, against all expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred by them in
connection with any "proceeding," as that term is used in such Subsection and
including an action by or in the right of the corporation to prove a judgment in
its favor, by reason of the fact that such person is or was a person described
by such Subsection. "Expenses", as used in this Bylaw, shall have the same
meaning as in Section 78.751 of the Nevada Revised Statutes.
(b) Approval of Indemnity. Upon written requests to the Board of Directors
---------------------
by any person seeking indemnity under Section 78.751 of the Nevada Revised
Statutes, the Board shall promptly determine whether such person has met the
applicable standard of conduct set forth in such Subsection. If the Board
determines the person seeking indemnity has not met such standard of conduct,
the Board shall promptly call a meeting of shareholders at which the
shareholders shall determine whether the person seeking indemnity has met such
standard of conduct.
(c) Advancement of Expenses. To the full extent permitted by law and
-----------------------
except as shall otherwise be determined by the Board of Directors in the
specific instance, expenses incurred by a person seeking indemnity under this
Bylaw in defending any proceeding covered by this Bylaw shall be advanced by the
corporation prior to the final disposition of the proceeding upon receipt of an
undertaking by or on behalf of such person to repay such amount unless it shall
ultimately be determined that such person is entitled to be indemnified by the
corporation therefore.
-20-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report....................................... F-1
Consolidated Balance Sheet at December 31, 1997.................... F-2
Consolidated Statements of Operations for the fiscal year
ended December 31, 1997 and for the period from inception
(April 11, 1996) to December 31, 1996............................ F-3
Consolidated Statements of Stockholders' Equity (Deficit)
for the fiscal year ended December 31, 1997 and for
the period from inception (April 11, 1996) to December 31, 1996.. F-4
Consolidated Statements of Cash Flows for the fiscal year ended
December 31, 1997 and for the period from inception
(April 11, 1996) to December 31, 1996............................ F-5
Notes to Consolidated Financial Statements......................... F-6
Unaudited Consolidated Balance Sheet at March 31, 1998............. F-13
Unaudited Consolidated Statements of Operations for the three month
periods ended March 31, 1998 and 1997 and for the period from
inception (April 11, 1996) to March 31, 1998..................... F-14
Unaudited Consolidated Statements of Cash Flows for the three month
periods ended March 31, 1998 and 1997 and for the period from
inception (April 11, 1996) to March 31, 1998..................... F-15
Notes to Unaudited Consolidated Financial Statements............... F-16
</TABLE>
-21-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------
The Board of Directors and Shareholders
CPC of America, Inc.
We have audited the accompanying consolidated balance sheet of CPC of America,
Inc. and subsidiaries (a development stage company) (the "Company") as of
December 31, 1997, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the year ended December 31,
1997 and for the period from inception (April 11, 1996) to December 31, 1996.
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 on 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, on a test basis, examination of
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 consolidated
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 CPC of
America, Inc. and subsidiaries as of December 31, 1997, and the results of their
consolidated operations and cash flows for the year ended December 31, 1997 and
for the period from inception (April 11, 1996) to December 31, 1996, in
conformity with generally accepted accounting principles.
CACCIAMATTA ACCOUNTANCY CORPORATION
Irvine, California
February 25, 1998
F-1
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Consolidated Balance Sheet
<TABLE>
<CAPTION>
DECEMBER 31,
1997
---------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 420,065
Other 25,000
---------------
TOTAL CURRENT ASSETS 445,065
PATENTS, NET OF ACCUMULATED AMORTIZATION OF $2,400 73,850
EQUIPMENT, ENT OF ACCUMULATED DEPRECIATION OF $1,097 14,323
OTHER 6,327
---------------
$ 539,565
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,153
Accrued expenses 24,000
TOTAL CURRENT LIABILITIES 37,153
Accrued expenses 2,000
---------------
TOTAL LIABILITIES 39,153
---------------
MINORITY INTEREST 14,770
---------------
SHAREHOLDERS' EQUITY:
Preferred stock, 5,000,000 shares authorized, $.001 par value, -
none issued and outstanding
Common stock, 20,000,000 shares authorized, $.001 par value, 2,115
2,115,333 shares issued and outstanding
Additional paid-in capital 1,000,435
Deficit accumulated during the development stage (516,908)
---------------
NET SHAREHOLDERS' EQUITY 485,642
---------------
$ 539,565
===============
</TABLE>
F-2
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR INCEPTION CUMULATI VE FROM
ENDED (APRIL 11, INCEPTION
DECEMBER 1996) TO (APRIL 11,
31, 1997 DECEMBER 1996) TO
31, 1996 DECEMBER 31, 1997
------------ ----------- -------------------
<S> <C> <C> <C>
COSTS AND EXPENSES:
Research and development $ 393,772 $ 55,481 $ 449,253
General and administrative 57,600 2,400 60,000
Depreciation and amortization 13,409 88 13,497
------------ ----------- -------------------
OPERATING LOSS (464,781) (57,969) (522,750)
INTEREST INCOME (EXPENSE):
Interest expense (5,833) (1,167) (7,000)
Interest income 12,305 57 12,362
------------ ----------- -------------------
6,472 (1,110) 5,362
LOSS BEFORE MINORITY INTEREST (458,309) (59,079) (517,388)
MINORITY INTEREST 480 - 480
------------ ----------- -------------------
NET LOSS $ (457,829) $ (59,079) $(516,908)
============ =========== ===================
BASIC AND DILUTED NET LOSS PER SHARE $(0.24) $(0.04)
============ ===========
BASIC AND DILUTED WEIGHTED AVERAGE 1,919,023 1,382,920
NUMBER OF COMMON SHARES
OUTSTANDING
------------ -----------
</TABLE>
The accompanying are an integral part of these financial statements.
F-3
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statements of Shareholders' Equity (Deficit)
From inception (April 11, 1996) to December 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK NOTE ADDITIONAL DEFICIT NET
--------------------------------
NUMBER OF AMOUNT RECEIVABLE PAID-IN ACCUMULATED SHAREHOLDERS'
-------------------
SHARES PER SHARE TOTAL SHAREHOLDER CAPITAL STAGE EQUITY (DEFICIT)
----------- -------- -------- -------------- ------------ ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization 1,200,000 $ 0.001 $ 1,200 $ - $ - $ - $ 1,200
Issuance of common stock 150,000 0.001 150 (150) - - 0
for a note
Issuance of common stock 50,000 0.100 50 - 4,950 - 5,000
for cash
Issuance of common stock 382,000 0.100 382 - 37,818 - 38,200
for services
Net loss for 1996 - - - - - (59,079) (59,079)
---------- -------- ------- -------------- ------------ --------------- ----------------
BALANCE, DECEMBER 31, 1996 1,782,000 - $ 1,782 $ (150) $ 42,768 $ (59,079) $ (14,679)
Exercise of options 13,333 2.250 13 - 29,987 - 30,000
Issuance of common stock 320,000 2.900 320 - 927,680 - 928,000
for cash and conversion
of note payable ($77,000)
Payment of note receivable - - - 150 - - 150
from shareholder
Net loss for 1997 - - - - - (457,829) (457,829)
---------- ------- -------------- ------------ -------------- ----------------
BALANCE, DECEMBER 31, 1997 2,115,333 $ 2,115 $ - $ 1,000,435 $ (516,908) $ 485,642
========== ======= ============== ============ =============== ================
</TABLE>
The accompanying notes are an integral part of these financial statemenst.
F-4
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
CUMULATIVE
INCEPTION FROM INCEPTION
(APRIL 11, (APRIL 11,
YEAR ENDED 1996) TO 1996) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997
--------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (457,829) $ (59,079) $ (516,908)
Adjustments to reconcile net loss to net
cash used by operating activities:
Minority interest (480) - (480)
Depreciation and amortization 13,409 88 13,497
Gain on disposition of Tercero (15,679) - (15,679)
Issuance of common stock for services - 38,200 38,200
Sale of Tercero - assignment of payables 55,678 - 55,678
Increase in other assets (29,344) (1,982) (31,326)
Increase in accounts payable 10,020 3,132 13,152
Increase in accrued expenses 26,000 - 26,000
Increase in accrued interest 5,833 1,167 7,000
--------------- ------------- --------------
Net cash used by operating activities (392,392) (18,474) (410,866)
--------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Tercero acquisition/sale 1 (50,000) (49,999)
DSDS acquisition (61,000) - (61,000)
Capital expenditures (13,662) (1,758) (15,420)
--------------- ------------- --------------
Net cash used by investing activities (74,661) (51,758) (126,419)
--------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes to shareholders - 73,000 73,000
Proceeds from note receivable from shareholder 150 - 150
Payments on note payable to shareholder (3,000) - (3,000)
Exercise of options 30,000 - 30,000
Issuance of common stock 851,000 6,200 857,200
--------------- ------------- --------------
Net cash provided by financing activities 878,150 79,200 957,350
--------------- ------------- --------------
Net increase in cash 411,097 8,968 420,065
CASH, BEGINNING OF PERIOD 8,968 - -
--------------- ------------- --------------
CASH, END OF PERIOD $ 420,065 $ 8,968 $ 420,065
=============== ============= ==============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for note receivable $ - $ 150 $ 150
=============== ============= ==============
Debt to equity conversion $ 77,000 $ - $ 77,000
=============== ============= ==============
Acquisition of minority interest $ 15,250 $ - $ 15,250
=============== ============= ==============
Sale of Tercero - elimination of goodwill $ (40,000) $ - $ (40,000)
--------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------
Organization
------------
CPC of America, Inc., a Nevada corporation ("CPC" or the "Company") was formed
on April 11, 1996 to manufacture and distribute external counterpulsation
medical devices and own controlling interests in various management service
organizations ("MSO"s) and medical services companies. The Company is
classified as a development stage company because its principal activities
involve obtaining capital and rights to certain technology, and conducting
research and development activities.
On July 25, 1997, the Company acquired 80% of DSDS Group, Inc. ("DSDS"). The
sole owner of DSDS, John P. Colonna, served as a technical and engineering
consultant to the Company. DSDS has no operating history and its only assets
consist of two patents relating to a self-destructing single-use syringe.
The patents have approximately 16 years remaining before expiration, and were
deemed to have a fair value of $76,250. The Company purchased its interest
in DSDS for a total price of $61,000, of which $25,000 was paid in cash at
the closing, and $36,000 was to be paid by the Company in 18 equal monthly
installments. The transaction was accounted for as a purchase of DSDS by the
Company and, accordingly, the accompanying financial statements include the
amounts and operations of the Company from its inception and of DSDS from
July 25, 1997. The pro forma summary combining the results of operations of
the Company and DSDS as if the acquisition had occurred at the inception of
CPC (April 11, 1996) would be the same as the accompanying financial
statements since DSDS had no operations.
In December 1996, the Company acquired 90% of the outstanding and issued
shares of Tercero Corporation ("Tercero"), a public shell, for $50,000 cash.
Tercero was incorporated under the laws of the state of Nevada on November 6,
1995. From inception, Tercero has been inactive, has operated no business, and
held no assets or liabilities. On December 31, 1997, the Company sold Tercero
for $1 and the assumption of $55,678 in legal fees incurred by Tercero in 1997.
The Company recognized a gain of $15,679 on the disposition, after amortization
of $10,000 goodwill.
Principles of consolidation
---------------------------
The accompanying consolidated financial statements include the amounts of the
Company and its majority-owned subsidiaries, DSDS (80%) and Tercero (90%).
Tercero was sold on December 31, 1997. All significant intercompany
transactions and balances have been eliminated in consolidation.
(Continued)
F-6
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ----------------------------------------------------------------------------
Cash and equivalents
--------------------
The Company considers all liquid investments with a maturity of three
months or less from the date of purchase that are readily convertible into cash
to be cash equivalents. Balances in bank accounts may, from time to time, exceed
federally insured limits.
Patents and trademarks
----------------------
The patents are stated at cost and are amortized using the straight-line
method over their remaining economic useful lives, which has been estimated
to be sixteen years. The trademark is stated at cost and was filed in late
1997. Amortization will begin in 1998 using the straight-line method over
its economic useful life, which is estimated at ten years.
Equipment
---------
Depreciation expense is provided over the estimated useful life of 5 years
using the straight-line method.
Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Income taxes
------------
The Company reports certain expenses differently for financial and tax
reporting purposes and, accordingly, provides for the related deferred taxes.
Income taxes are accounted for under the liability method in accordance with
SFAS 109.
Research and development costs
------------------------------
Costs and expenses that can be clearly identified as research and
development are charged to expense as incurred in accordance with FASB Statement
No. 2, "Accounting for Research and Development Costs".
(Continued)
F-7
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------
Basic and diluted net loss per share
------------------------------------
Net loss per share is calculated in accordance with Statement of Financial
Accounting Standards 128, Earnings Per Share ("SFAS 128"), which superseded
Accounting Principles Board Opinion 15 ("APB 15"). Net loss per share for all
periods presented has been restated to reflect the adoption of SFAS 128. Basic
net loss per share is based upon the weighted average number of common shares
outstanding. Diluted net loss per share is based on the assumption that all
dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the period.
Stock-based compensation
------------------------
The Company accounts for compensation costs related to employee stock
options and other forms of employee stock-based compensation plans in accordance
with the requirements of Accounting Principles Board Opinion 25 ("APB 25"). APB
25 requires compensation costs for stock-based compensation plans to be
recognized based on the difference, if any, between the fair market value of the
stock on the date of grant and the option exercise price. In October 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards 123, Accounting for Stock - Based Compensation ("SFAS 123"). SFAS 123
established a fair value - based method of accounting for compensation costs
related to stock options and other forms of stock-based compensation plans.
However, SFAS 123 allows an entity to continue to measure compensation costs
using the principles of APB 25 if certain pro forma disclosures are made. SFAS
123 is effective for fiscal years beginning after December 15, 1995. The Company
adopted the provisions for pro forma disclosure requirements of SFAS 123 in
fiscal 1996. Options granted to non-employees are recognized at their estimated
fair value at the date of grant.
Reclassification of prior year amounts
--------------------------------------
Certain prior year balances have been reclassified to conform to the
current year presentation.
(Continued)
F-8
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
2. SHAREHOLDERS' EQUITY
- -------------------------
Common stock
------------
In May 1996, the Company sold to its founders 1,200,000 shares of common
stock for $.001 cash per share and 150,000 shares for a $150 note
receivable. In September 1996, the Company sold 50,000 shares of common
stock for $.10 cash per share to one of its founders.
In October 1996, the Company issued 380,000 shares of common stock to
related parties in payment of $38,000 in consulting fees rendered in 1996.
In December 1996, the Company issued 2,000 shares of common stock to its
attorney for payment of $200 in legal fees.
In March 1997, the Company offered in a private placement memorandum 35
units at $29,000 per unit. Each unit consists of 10,000 shares of common
stock and warrants to purchase 20,000 shares of common stock exercisable at
$3.50 per share from February 10, 1999 until December 31, 2000. As of
December 31, 1997, the Company sold 32 units, including 3 units in
conversion of notes payable. An investor converted a note with a balance of
$70,000 and related accrued interest of $7,000 into 3 units, and the
Company received $10,000 cash for the balance. No value was allocated to
the warrants because the exercise price was above market price at the time
of issuance.
In July 1997, the Company amended the number of common shares authorized
from 10,000,000 to 20,000,000 and authorized 5,000,000 shares of preferred
stock at $.001 par value of which no shares are currently issued or
outstanding.
Stock options
-------------
The Company has granted options to purchase its common stock to its
founders. The option prices at the time of grant were at or above the fair
value of the Company's common stock. A summary of stock option activity
follows:
(Continued)
F-9
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
2. SHAREHOLDERS' EQUITY (CONTINUED)
- -------------------------------------
Stock options (continued)
-------------------------
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE PER
OPTIONS SHARE EXPIRATION
------------ --------------- ------------
<S> <C> <C> <C>
Inception (April 11, 1996) - - -
Granted 2,210,000 $ 2.25 - 2.50 1997 - 2006
------------ ---------------
Outstanding at December 31, 1996 2,210,000 42.25 - 2.50 1997 - 2006
Exercised (13,333) $ 2.25
Expired (100,000) $ 2.35
------------ ---------------
Outstanding at December 31, 1997 2,096,667 $ 2.25 - 2.50 2006
============ =============== ============
Exercisable at December 31, 1997 2,096,667
------------
</TABLE>
Included in total options granted in 1996 are 1,000,000 options granted to
employees. Statement of Financial Accounting Standards 123, "Accounting for
Stock-Based Compensation", encourages but does not require companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees", and related
interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire
the stock.
The fair value of these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions for 1996: risk-free interest rate of 9%; volatility of 200%;
and a weighted fair value of $.001.
The effect of applying SFAS 123's fair value method to the Company's stock-
based compensation results in pro forma net loss and net loss per share
that are not materially different from the actual amounts reported.
(Continued)
F-10
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
3. BASIC AND DILUTED NET LOSS PER SHARE
- ---------------------------------------
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations.
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Numerator
---------
Net loss $ (457,829) $ (59,079)
------------- ------------
Denominator
-----------
Basic weighted average number of common
shares outstanding during the period 1,919,023 1,382,920
------------- ------------
Basic net loss per share $ (0.24) $ (0.04)
============= ============
DILUTED EARNINGS PER SHARE:
Numerator
---------
Net loss $ (457,829) $ (59,079)
------------- ------------
Denominator
-----------
Basic weighted average number of common shares
outstanding during the period 1,919,023 1,382,920
------------- ------------
Diluted net loss per share $ (0.24) $ (0.04)
============= ============
Incremental common shares (not included in
denominator of diluted earnings per share calculation
due to their antidilutive nature) attributable to
exercise of:
Outstanding options 2,096,667
Outstanding warrants 640,000
-------------
2,736,667
=============
</TABLE>
4. INCOME TAXES
- ------------------
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting and tax bases of its assets and
liabilities. Deferred tax assets are reduced by a valuation allowance when
deemed appropriate.
(Continued)
F-11
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
4. INCOME TAXES (CONTINUED)
- ---------------------------
At December 31, 1997, the Company has a net operating loss carryforward for
federal tax purposes of $473,000 which, if unused to offset future taxable
income, will expire between 2011 and 2012.
The Company had deferred tax assets of $190,000 and $9,800 at December 31,
1997 and 1996, respectively, relating to its net operating loss. A valuation
allowance has been recognized to offset all of the related deferred tax asset
due to the uncertainty of realizing the benefit.
5. COMMITMENTS
- ----------------
The Company leases office space on a month-to-month basis at $95 per month.
Actual rent expense was $475 in 1997 and $2,400 in 1996.
In January 1997, the Company entered into a consulting agreement with its
financial advisors, a related party, for five years at $5,000 per month,
with a five year extension option. The agreement was revised in November
1997 increasing the monthly amount to $8,000 per month.
F-12
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
March 31,
1998
----------
<S> <C>
ASSETS
Current assets:
Cash and equivalents $ 358,905
Deposits 43,500
----------
Total current assets 402,405
Equipment, net of accumulated depreciation of $1,868 13,552
Patents, net of accumulated amortization of $3,600 72,650
Trademarks, net of accumulated amortization of $156 6,076
Other 95
----------
$ 494,778
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,153
Accrued expenses 18,000
----------
Total current liabilities 31,153
Accrued expenses 2,000
----------
Total liabilities 33,153
----------
Minority interest 14,530
----------
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized, $.001 par value,
none issued and outstanding -
Common stock, 20,000,000 shares authorized, $.0005 par value,
4,270,666 shares issued and outstanding 2,135
Additional paid-in capital 1,058,415
Deficit accumulated during the development stage (613,455)
----------
Net shareholders' equity 447,095
----------
$ 494,778
==========
</TABLE>
See accompanying notes to financial statements
F-13
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
Three Months Ended from inception
--------------------- (April 11, 1996)
March 31, March 31, to March 31,
1998 1997 1998
--------- --------- ----------------
<S> <C> <C> <C>
Costs and expenses:
Research and development $ 93,055 $ 46,966 $542,308
General and administrative 6,524 100 66,524
Depreciation and amortization 2,127 110 15,624
--------- --------- --------
Operating loss 101,706 47,176 624,456
Interest income (expense):
Interest expense - - (7,000)
Interest income 4,919 2,100 17,281
--------- --------- --------
4,919 2,100 10,281
Loss before minority interest 96,787 45,076 614,175
Minority interest (240) - (720)
--------- --------- --------
Net loss $ 96,547 $ 45,076 $613,455
========= ========= ========
Basic and diluted net loss per share $ 0.02 $ 0.01
========= =========
Basic and diluted weighted average
number of common shares outstanding 4,252,444 3,601,926
========= =========
</TABLE>
See accompanying notes to financial statements
F-14
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
Three Months Ended from inception
--------------------- (April 11, 1996)
March 31, March 31, to March 31,
1998 1997 1998
--------- --------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (96,547) $(45,076) $ (613,455)
Adjustments to reconcile net income to
net cash used by operating activities:
Minority interest (240) - (720)
Depreciation and amortization 2,127 110 15,624
Gain on disposition of Tercero - - (15,679)
Issuance of common stock for services - - 38,200
Sale of Tercero - assignment of payables - - 55,678
Increase in deposits (18,500) - (43,594)
Increase in trademarks - - (6,232)
Increase in accounts payable - 10,968 13,152
Increase (decrease) in accrued expenses (6,000) - 20,000
Increase in accrued interest - - 7,000
--------- -------- ----------
Net cash used by operating activities (119,160) (33,998) (530,026)
--------- -------- ----------
Cash flows from investing activities:
Tercero acquisition/sale - - (49,999)
DSDS acquisition - - (61,000)
Capital expenditures - 450 (15,420)
--------- -------- ----------
Net cash used by investing activities - 450 (126,419)
--------- -------- ----------
Cash flows from financing activities:
Proceeds from notes to shareholders - - 73,000
Proceeds from note receivable from shareholder - - 150
Payments on note payable to shareholder - - (3,000)
Exercise of options - 30,000 30,000
Issuance of common stock 58,000 261,000 915,200
--------- -------- ----------
Net cash provided by financing activities 58,000 291,000 1,015,350
--------- -------- ----------
Net increase in cash (61,160) 257,452 358,905
Cash, beginning of period 420,065 8,968 -
--------- -------- ----------
Cash, end of period $ 358,905 $266,420 $ 358,905
========= ======== ==========
</TABLE>
See accompanying notes to financial statements
F-15
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
March 31, 1998
1. Organization and summary of significant accounting policies
- ----------------------------------------------------------------
Organization
------------
CPC of America, Inc., a Nevada corporation ("CPC" or the "Company"), was
formed on April 11, 1996 to manufacture and distribute external
counterpulsation medical devices and own controlling interests in various
management service organizations ("MSO"s) and medical services companies.
The Company is classified as a development stage company because its
principal activities involve obtaining capital and rights to certain
technology, and conducting research and development activities.
Principles of consolidation
---------------------------
The accompanying consolidated financial statements include the amounts of
the Company and its majority-owned subsidiary DSDS (80%). All significant
intercompany transactions and balances have been eliminated in
consolidation.
Interim periods
---------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and do not
include all of the information required by generally accepted accounting
principles for complete financial statements. In the opinion of the
Company's management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 1998 are
not necessarily indicative of results for any future period. These
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-SB for the
year ended December 31, 1997.
F-16
(continued)
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
2. Shareholders' equity
- -------------------------
Common stock
------------
In March 1997, the Company offered in a private placement memorandum 35
units at $29,000 per unit. Each unit consists of 20,000 shares of common
stock and warrants to purchase 40,000 shares of common stock exercisable at
$1.75 per share from February 10, 1999 until December 31, 2000. As of March
31, 1998, the Company sold 34 units, including 3 units in conversion of
notes payable. An investor converted a note with a balance of $70,000 and
related accrued interest of $7,000 into 3 units, and the Company received
$10,000 cash for the balance. No value was allocated to the warrants
because the exercise price was above market price at the time of issuance.
In the first quarter of 1998 the Company sold 2 units (40,000 shares) for
$58,000.
In July 1997, the Company amended the number of common shares authorized
from 10,000,000 to 20,000,000 and authorized 5,000,000 shares of preferred
stock at $.001 par value of which no shares are currently issued or
outstanding.
In June 1998, the Company effected a two-for-one stock split, decreasing
the par value to $.0005 per share. The number of authorized shares remained
at 20,000,000. All share information reported in this 10-QSB has been
adjusted to reflect the two-for-one stock split.
F-17
(continued)
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
2. Shareholders' equity (continued)
- -------------------------------------
Stock options
-------------
The Company has granted options to purchase its common stock to its
founders. The option prices at the time of grant were at or above the fair
value of the Company's common stock. A summary of stock option activity
follows (the number of shares has been adjusted for the two-for-one stock
split):
<TABLE>
<CAPTION>
Exercise
Number of Price
Options Per Share Expiration
--------- ------------- -----------
<S> <C> <C> <C>
Inception (April 11, 1996) - - -
Granted 4,420,000 $1.125 - 1.25 1997 - 2006
--------- -------------
Outstanding at December 31, 1996 4,420,000 $1.125 - 1.25 1997 - 2006
-------------
Exercised (26,666) $1.125
Expired (200,000) $1.175
--------- ------------- -----------
Outstanding at December 31, 1997 4,193,334 $1.125 - 1.25 2006
Outstanding at March 31, 1998 4,193,334 $1.125 - 1.25 2006
========= ============= ===========
Exercisable at March 31, 1998 4,193,334
=========
</TABLE>
3. Subsequent event - Employment agreements
- ---------------------------------------------
In April 1998, the Company entered into an employment agreement with its
President and CEO, and a consulting agreement under similar terms with its
financial advisors, a related party, for five years with a five year
extension option. The latter consulting agreement replaces the original
agreement held with the Company's financial advisors. The agreements
provide for annual base salaries of $120,000 plus bonus to be paid when the
Company begins recording revenues. Options to purchase 1,000,000 shares of
common stock at an exercise price of $2.50 exercisable for ten years were
also granted under each agreement, with an additional 1,000,000 options to
be granted if the agreements are extended for an additional five year term.
The options vest and become exercisable in five equal installments of
200,000 shares each year starting on the grant date.
F-18
(continued)
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
4. Subsequent events - Letter of intent
- ------------------------------------------
In June 1998, the Company entered into a letter of intent with Medical
Resources Technologies Ltd. ("MRT") to buy CarePoint Network Inc. The
acquisition will provide management service organization functions for the
Company and MRT.
5. Subsequent event - Organization of HeartMed, LLC
- -----------------------------------------------------
On August 14, 1998, the Company and Partner Provider Health, Inc. ("PPH"),
a company engaged in the business of providing specialized support services
to regional organizations of health care providers, organized a Delaware
limited liability company under the name HeartMed, LLC ("HeartMed").
HeartMed has been organized to provide managed health care and related
practice management in the area of cardiology disease management. PPH shall
be the managing member of HeartMed. PPH and the Company will share in both
the capitalization of HeartMed and its profits, losses and distributions on
a 51/49% basis.
F-19
<PAGE>
PART III
- --------
ITEM 1. INDEX TO EXHIBITS PAGE
----
3.1* Articles of Incorporation of the Company.
3.2* Bylaws of the Company.
3.3 Amendment to Articles of Incorporation.
4.1* Specimen of Common Stock Certificate.
10.1* Consulting Agreement between the Company and CTM Group, Inc.
10.2* Stock Purchase Agreement between the Company and DSDS Group, Inc.
dated July 25, 1997.
10.3* Employment Agreement dated April 23, 1998 between the Company and
Rod A. Shipman.
10.4 Operating Agreement dated August 21, 1998 between the Company and
Partner Provider Health, Inc.
10.5* Consulting Agreement dated April 23, 1998 between the Company and
CTM Consulting Group, Inc.
21.1 The Company has two subsidiaries, CPCA 2000, Inc., a Nevada
corporation, and DSDS Group, Inc., a Florida corporation.
27.1 Financial Data Schedule.
____________________
* Previously filed.
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
CPC OF AMERICA, INC.,
a Nevada corporation
Date: August 14, 1998 By: /s/ ROD A. SHIPMAN
----------------------------------
Rod A. Shipman, President
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
CPC OF AMERICA, INC.
A Nevada Corporation
Rod A. Shipman certifies that:
1. He is the President and Secretary of CPC of America, Inc., a Nevada
corporation (the "Corporation").
2. Article Third of the Articles of Incorporation shall be amended to read in
its entirety as follows:
"THIRD: The aggregate number of shares of all classes of capital stock
which this Corporation shall have authority to issue is Twenty Five Million
(25,000,000), consisting of (i) Twenty Million (20,000,000) shares of
common stock, par value $.0005 per share (the "Common Stock"), and (ii)
Five Million (5,000,000) shares of preferred stock, par value $.001 per
share (the "Preferred Stock"). Each one (1) share of Common Stock issued
and outstanding on the effective date of this amendment shall be
automatically converted into two (2) shares of Common Stock. The Preferred
Stock may be issued from time to time in one or more series. The board of
directors is authorized to fix the number of shares of any series of
Preferred Stock, to determine the designation of any such series and to
determine or alter the rights, preferences, privileges, qualifications,
limitations and restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock and, within the limits and restrictions stated in
any resolution or resolutions of the board of directors originally fixing
the number of shares constituting any series, to increase or decrease (but
not below the number of shares of such series then outstanding) the number
of shares of any such series subsequent to the issue of shares of that
series."
3. The change has been duly approved by the Corporation's Board of Directors
by resolutions duly approved by all of the members of the Board of
Directors by resolutions duly adopted by Joint Written Consent of the Board
of Directors and Majority Stockholders effective June 17, 1998.
4. The number of shares of the Corporation outstanding and entitled to vote on
these amendments to the Articles of Incorporation is 2,135,333. These
amendments have been duly approved by a majority vote of the Corporation's
stockholders holding at least a majority of the issued and outstanding
shares of capital stock of the
-1-
<PAGE>
Corporation entitled to vote, by resolutions duly adopted by Joint Written
Consent of the Board of Directors and Stockholders effective June 17, 1998.
The undersigned hereby declares and certifies that the matters set forth in
the foregoing Certificate are true and correct to his knowledge and that this
Certificate was executed on June 15, 1998 at Douglas City, Nevada.
/s/ Rod A. Shipman
------------------------------------------
Rod A. Shipman, President and Secretary
STATE OF NEVADA )
) ss.
COUNTY OF DOUGLAS )
On June 16th, 1998, before me, Rod A. Shipman, personally appeared Rod A.
Shipman, personally known to me (or proved to me on the basis of satisfactory
evidence) to be the person whose name is subscribed to the within instrument and
acknowledged to me that he executed the same in his authorized capacity, and
that by his signature on the instrument the person or the entity upon behalf of
which the person acted, executed the instrument.
WITNESS my hand and official seal.
/s/ Judith P. Junge
------------------------------------------
(Seal)
-2-
<PAGE>
EXHIBIT 10.4
OPERATING AGREEMENT
FOR
HEARTMED, LLC
A LIMITED LIABILITY COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
DEFINITIONS.............................................................. 1
1.1 "Act"....................................................... 1
1.2 "Affiliate"................................................. 1
1.3 "Agreement"................................................. 1
1.4 "Bankruptcy"................................................ 1
1.5 "Capital Account"........................................... 2
1.6 "Capital Contribution"...................................... 2
1.7 "Certificate"............................................... 2
1.8 "Code"...................................................... 2
1.9 "Company"................................................... 2
1.10 "Company Minimum Gain"...................................... 2
1.11 "Dissolution Event"......................................... 2
1.12 "Distributable Cash"........................................ 2
1.13 "Economic Interest"......................................... 2
1.14 "Economic Interest Owner"................................... 3
1.15 "Fiscal Year"............................................... 3
1.16 "Former Member"............................................. 3
1.17 "Former Member's Interest".................................. 3
1.18 "Majority of Members"....................................... 3
1.19 "Managing Member"........................................... 3
1.20 "Member".................................................... 3
1.21 "Member Nonrecourse Debt"................................... 3
1.22 "Member Nonrecourse Deductions"............................. 3
1.23 "Membership Interest"....................................... 3
1.24 "Net Profits" and "Net Losses".............................. 3
1.25 "Nonrecourse Liability"..................................... 3
1.26 "Percentage Interest"....................................... 3
1.27 "Person".................................................... 4
1.28 "Regulations"............................................... 4
1.29 "Remaining Member".......................................... 4
1.30 "Tax Matters Partner"....................................... 4
ARTICLE II
ORGANIZATIONAL MATTERS................................................... 4
2.1 Formation.................................................... 4
2.2 Name......................................................... 4
2.3 Term......................................................... 4
2.4 Office and Agent............................................. 4
2.5 Addresses of the Members..................................... 5
2.6 Purpose of Company........................................... 5
ARTICLE III
CAPITAL CONTRIBUTIONS.................................................... 5
3.1 Initial Capital Contributions................................ 5
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
3.2 Additional Capital Contributions............................. 5
3.3 Capital Accounts............................................. 5
3.4 No Interest.................................................. 5
3.5 Failure to Make Contributions................................ 6
ARTICLE IV
MEMBERS.................................................................. 6
4.1 Limited Liability............................................ 6
4.2 Admission of Additional Members.............................. 6
4.3 Withdrawals or Resignations.................................. 7
4.4 Termination of Membership Interest........................... 7
4.5 Transactions With The Company................................ 7
4.6 Remuneration to Members...................................... 7
4.7 Meetings of Members.......................................... 7
A. Date, Time and Place of Meetings of Members.............. 7
B. Power to Call Meetings................................... 7
C. Notice of Meeting........................................ 7
D. Quorum................................................... 8
E. Waiver of Notice or Consent.............................. 8
F. Action by Written Consent Without a Meeting.............. 8
G. Telephonic Participation by Member at Meetings........... 8
H. Record Date.............................................. 8
I. Proxies.................................................. 8
J. No Requirement of Meetings............................... 8
ARTICLE V
MANAGEMENT AND CONTROL OF THE COMPANY.................................... 9
5.1 Management of the Company by Members......................... 9
A. Management by Members; Powers............................ 9
B. Election of Managing Member.............................. 9
C. Financial and Operating Plan............................. 9
D. Authority of Managing Member............................. 9
E. Limitations on Power of Members.......................... 10
5.2 Performance of Duties; Liability of Members.................. 11
5.3 Devotion of Time............................................. 11
5.4 Acts of Members as Conclusive Evidence of Authority.......... 11
5.5 Limited Liability............................................ 12
5.6 Officers..................................................... 12
A. Appointment of Officers.................................. 12
B. Removal, Resignation and Filling of Vacancy of Officers.. 12
C. Salaries of Officers..................................... 12
D. Duties and Powers of the Chairperson..................... 12
E. Duties and Powers of the President....................... 12
F. Duties and Powers of Vice-President...................... 13
G. Duties and Powers of Secretary........................... 13
H. Duties and Powers of Chief Financial Officer............. 13
I. Acts of Officers as Conclusive Evidence of Authority..... 14
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ARTICLE VI
ALLOCATIONS OF NET PROCEEDS AND NET LOSSES AND DISTRIBUTIONS............. 15
6.1 Allocations of Net Profit and Net Losses..................... 15
A. Net Losses............................................... 15
B. Net Profit............................................... 15
6.2 Special Allocations.......................................... 15
A. Minimum Gain Chargeback.................................. 15
B. Chargeback of Minimum Gain Attributable
to Member Nonrecourse Debt............................... 15
C. Nonrecourse Deduction.................................... 16
D. Member Nonrecourse Deductions............................ 16
E. Qualified Income Offset.................................. 16
6.3 Code Section 704(c) Allocations.............................. 16
6.4 Allocation of Net Profit and Net Losses and
Distributions in Respect of Transferred Interest............. 17
6.5 Distribution of Assets by the Company........................ 17
6.6 Form of Distribution......................................... 17
6.7 Restriction on Distributions................................. 18
6.8 Return of Distribution....................................... 18
6.9 Obligations of Members to Report Allocations................. 19
ARTICLE VII
TRANSFER AND ASSIGNMENT OF INTERESTS..................................... 19
7.1 Transfer and Assignment of Interests......................... 19
7.2 Further Restrictions on Transfer of Interests................ 19
7.3 Substitution of Members...................................... 19
7.4 Family and Affiliate Transfers............................... 19
7.6 Right of Legal Representatives............................... 20
7.7 No Effect to Transfers in Violation of Agreement............. 20
7.8 Right of First Refusal....................................... 20
ARTICLE VIII
CONSEQUENCE OF DEATH, DISSOLUTION,
RETIREMENT OR BANKRUPTCY OF MEMBER....................................... 22
8.1 Dissolution Event............................................ 22
8.2 Withdrawal................................................... 22
8.3 Purchase Price............................................... 22
8.4 Notice of Intent to Purchase................................. 23
8.5 Election to Purchase Less Than All of the Former Member's
Interest..................................................... 23
8.6 Payment of Purchase Price.................................... 23
8.7 Closing of Purchase of Former Member's Interest.............. 23
8.8 Purchase Terms Varied by Agreement........................... 24
8.9 Noncompetition............................................... 24
A. Prohibited Activities..................................... 24
B. Separate Covenants..... .................................. 25
C. Intent; Severability...................................... 25
D. Injunctive and Other Relief............................... 25
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ARTICLE IX
ACCOUNTING, RECORDS, REPORTING BY MEMBERS................................ 25
9.1 Books and Records............................................ 25
9.2 Delivery to Members and Inspection........................... 26
9.3 Annual Statements............................................ 27
9.4 Financial and Other Information.............................. 27
9.5 Filings...................................................... 27
9.6 Bank Accounts................................................ 27
9.7 Accounting Decisions and Reliance On Others.................. 27
9.8 Tax Matters for the Company Handled by Members and Tax Matters
Partner...................................................... 28
ARTICLE X
DISSOLUTION AND WINDING UP............................................... 28
10.1 Dissolution................................................. 28
10.2 Certificate of Dissolution.................................. 28
10.3 Winding Up.................................................. 28
10.4 Distributions in Kind....................................... 29
10.5 Order of Payment of Liabilities Upon Dissolution............ 29
10.6 Compliance with Regulations................................. 30
10.7 Limitations on Payments Made in Dissolution................. 30
10.8 Certificate of Cancellation................................. 30
10.9 No Action for Dissolution................................... 30
ARTICLE XI
INDEMNIFICATION AND INSURANCE............................................ 30
11.1 Indemnification of Agents................................... 30
11.2 Insurance................................................... 31
ARTICLE XII
MISCELLANEOUS............................................................ 31
12.1 Counsel to the Company...................................... 31
12.2 Complete Agreement.......................................... 31
12.3 Binding Effect.............................................. 31
12.4 Parties in Interest......................................... 32
12.5 Pronouns; Statutory Reference............................... 32
12.6 Headings.................................................... 32
12.7 Interpretation.............................................. 32
12.8 References to this Agreement................................ 32
12.9 Jurisdiction................................................ 32
12.10 Exhibits.................................................... 32
12.11 Severability................................................ 32
12.12 Additional Documents and Acts............................... 32
12.13 Notices..................................................... 33
12.14 Amendments.................................................. 33
12.15 Reliance on Authorization of Person Signing Agreement....... 33
12.16 No Interest in Company Property; Waiver of Action for
Partition................................................... 33
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12.17 Multiple Counterparts........................................ 33
12.18 Attorney Fees................................................ 33
12.19 Time is of the Essence....................................... 33
12.20 Remedies Cumulative.......................................... 33
ARTICLE 13
DISPUTE RESOLUTION........................................................ 33
13.1 Dispute Resolution........................................... 33
13.2 Informal Dispute Resolution.................................. 34
13.3 Arbitration.................................................. 34
13.4 Proceedings; Final Decision.................................. 34
13.5 Costs........................................................ 34
13.6 Rights and Remedies.......................................... 34
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OPERATING AGREEMENT
FOR
HEARTMED, LLC
A DELAWARE LIMITED LIABILITY COMPANY
This Operating Agreement is made as of August 14, 1998 by and between the
parties listed on the signature pages hereof, with reference to the following
facts.
A. On August 14, 1998, a Certificate of Formation for HeartMed, LLC (the
"Company"), a limited liability company under the laws of the State of Delaware,
was filed with the Office of the Secretary of State of the State of Delaware.
B. The parties desire to adopt and approve an Operating Agreement
("Agreement") for the Company upon the terms and subject to the conditions set
forth below.
NOW, THEREFORE, the parties (hereinafter sometimes collectively referred to
as the "Members," or individually as the "Member") by this Agreement set forth
the operating agreement for the Company under the laws of the State of Delaware
upon the terms and subject to the conditions of this Agreement.
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms shall have the meanings
set forth below (all terms used in this Agreement that are not defined in this
Article I shall have the meanings set forth elsewhere in this Agreement):
1.1 "Act" shall mean the Delaware Limited Liability Company Act, codified
in Title 6 of the Delaware Code, Section 18-101 et seq., as the same may be
amended from time to time.
1.2 "Affiliate" shall mean any individual, partnership, corporation, trust
or other entity or association, directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control with the
Member.
1.3 "Agreement" shall mean this Operating Agreement, as originally
executed and as amended from time to time hereafter.
1.4 "Bankruptcy" shall mean: (a) the filing of an application by a Member
for, or his consent to, the appointment of a trustee, receiver, or custodian of
his or her other assets; (b) the entry of an order for relief with respect to a
Member in proceedings under the United States Bankruptcy Code, as amended or
superseded from time to time; (c) the
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making by a Member of a general assignment for the benefit of creditors; (d) the
entry of an order, judgment, or decree by any court of competent jurisdiction
appointing a trustee, receiver, or custodian of the assets of a Member unless
the proceedings and the person appointed are dismissed within ninety (90) days;
or (e) the failure by a Member generally to pay his debts as the debts become
due within the meaning of Section 303(h)(1) of the United States Bankruptcy
Code, as determined by the Bankruptcy Court, or the admission in writing of his
inability to pay his debts as they become due.
1.5 "Capital Account" shall mean with respect to any Member the capital
account which the Company establishes and maintains for such Member pursuant to
Section 3.3.
1.6 "Capital Contribution" shall mean the total value of cash and fair
market value of property (including promissory notes or other obligation to
contribute cash or property) contributed.
1.7 "Certificate" shall mean the Certificate of Formation for the Company
originally filed with the Office of the Secretary of State of the State of
Delaware on August 14, 1998, as amended from time to time.
1.8 "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, the provisions of succeeding law, and to the extent applicable,
the Regulations.
1.9 "Company" shall mean HeartMed, LLC, a Delaware limited liability
company.
1.10 "Company Minimum Gain" shall have the meaning ascribed to the term
"Partnership Minimum Gain in the Regulations Section 1.704-2(d).
1.11 "Dissolution Event" shall mean with respect to any Member one or more
of the following: the death, insanity, withdrawal, resignation, expulsion,
Bankruptcy, dissolution or occurrence of any other event which terminates the
continued membership of any Member unless the other Members consent to continue
the business of the Company pursuant to Section 8.1, including a failure to make
capital contributions under Section 3.5C.
1.12 "Distributable Cash" shall mean the amount of cash which the Members
deem available for distribution to the Members, taking into account all Company
debts, liabilities, and obligations of the Company then due and amounts which
the Members deem necessary to place into reserves for customary and usual claims
with respect to the Company's business.
1.13 "Economic Interest" shall mean a Member's or Economic Interest Owner's
share of one or more of the Company's Net Profits, Net Losses, and distributions
of the Company's assets pursuant to this Agreement and the Act, but shall not
include any other rights of a Member, including, without limitation, the right
to vote or participate in the management, or except as provided in the Act, any
right to information concerning the business and affairs of Company.
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1.14 "Economic Interest Owner" shall mean the owner of an Economic Interest
who is not a Member.
1.15 "Fiscal Year" shall mean the Company's fiscal year, which shall be the
calendar year.
1.16 "Former Member" shall have the meaning ascribed to it in Section 8.1.
1.17 "Former Member's Interest" shall have the meaning ascribed to it in
Section 8.1.
1.18 "Majority of Members" shall mean a Member or Members whose Percentage
Interests represent more than 51% of the Percentage Interests of all Members.
1.19 "Managing Member" shall mean Partner Provider Health, Inc., a Delaware
corporation.
1.20 "Member" shall mean each Person who (a) is an initial signatory to
this Agreement, has been admitted to the Company as a Member in accordance with
the Articles or this Agreement or is an assignee who has become a Member in
accordance with Article VII and (b) has not resigned, withdrawn, been expelled
or, if other than an individual, dissolved.
1.21 "Member Nonrecourse Debt" shall have the meaning ascribed to the term
"Partner Nonrecourse Debt" in Regulations Section 1.704-2(b)(4).
1.22 "Member Nonrecourse Deductions" shall mean items of Company loss,
deduction, or Code Section 705(a)(2)(B) expenditures which are attributable to
Member Nonrecourse Debt.
1.23 "Membership Interest" shall mean a Member's entire interest in the
Company including the Member's Economic Interest, the right to vote on or
participate in the management, and the right to receive information concerning
the business and affairs of the Company.
1.24 "Net Profits" and "Net Losses" shall mean the income, gain, loss,
deductions, and credits of the Company in the aggregate or separately stated, as
appropriate, determined in accordance with generally accepted accounting
principles employed under the method of accounting at the close of each fiscal
year on the Company's information tax return filed for federal income tax
purposes.
1.25 "Nonrecourse Liability" shall have the meaning set forth in
Regulations Section 1.752-1(a)(2).
1.26 "Percentage Interest" shall mean the percentage of a Member set forth
opposite the name of such Member under the column "Member's Percentage Interest"
in Exhibit A hereto, as such percentage may be adjusted from time to time
pursuant to the terms of this
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Agreement. Percentage Interests shall be determined annually, unless otherwise
provided herein, in accordance with the relative proportions of the Capital
Accounts of the Members, effective as of the first day of the Company's Fiscal
Year but with all distributions under this Agreement to be deemed to have
occurred on such day immediately prior to determination of the Percentage
Interest of a Member.
1.27 "Person" shall mean an individual, general partnership, limited
partnership, limited liability company, corporation, trust, estate, real estate
investment trust association or any other entity.
1.28 "Regulations" shall, unless the context clearly indicates otherwise,
mean the regulations currently in force as final or temporary that have been
issued by the U.S. Department of Treasury pursuant to its authority under the
Code.
1.29 "Remaining Member" shall have the meaning ascribed to it in Section
8.1.
1.30 "Tax Matters Partner" shall be Partner Provider Health, Inc. or its
successor as designated pursuant to Section 9.8.
ARTICLE II
ORGANIZATIONAL MATTERS
2.1 Formation. Pursuant to the Act, the Members have formed a Delaware
---------
limited liability company under the laws of the State of Delaware by filing the
Certificate with the Office of the Secretary of State of the State of Delaware
and entering into this Agreement. The rights and liabilities of the Members
shall be determined pursuant to the Act and this Agreement. To the extent that
the rights or obligations of any Member are different by reason of any provision
of this Agreement than they would be in the absence of such provision, this
Agreement shall, to the extent permitted by the Act, control.
2.2 Name. The name of the Company shall be "HeartMed, LLC." The business
----
of the Company may be conducted under that name or, upon compliance with
applicable laws, any other name that the Members deem appropriate or advisable.
The Members shall file any fictitious name certificates and similar filings, and
any amendments thereto, that the Members consider appropriate or advisable.
2.3 Term. The term of this Agreement shall be co-terminus with the period
----
of duration of the Company provided in the Certificate, unless extended or
sooner terminated as hereinafter provided.
2.4 Office and Agent. The Company shall continuously maintain an office
----------------
and registered agent in the State of Delaware as required by the Act. The
principal office of the Company shall be as the Members may determine. The
Company also may have such offices, anywhere within and without the State of
Delaware, as the Members from time to time may determine, or the business of the
Company may require. The registered agent shall be as stated in the Certificate
or as otherwise determined by the Members.
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2.5 Addresses of the Members. The respective addresses of the Members are
------------------------
set forth on Exhibit A.
2.6 Purpose of Company. The purpose of the Company is to engage in any
------------------
lawful activity for which a limited liability company may be organized under the
Act. Notwithstanding the foregoing, without the unanimous consent of the
Members, the Company shall not engage in any business other than the following:
(a) the provision of managed health care and related practice
management in the area of cardiology disease management; and
(b) such other activities directly related to the foregoing business
as may be necessary, advisable, or appropriate, in the reasonable opinion of the
Managing Member to further the foregoing business.
ARTICLE III
CAPITAL CONTRIBUTIONS
3.1 Initial Capital Contributions. Each Member shall contribute such
-----------------------------
amount as is set forth on Exhibit A as their initial Capital Contribution, which
Exhibit A shall be revised to reflect any additional contributions contributed
in accordance with Section 3.2.
3.2 Additional Capital Contributions. The Members shall contribute
--------------------------------
additional capital to the Company in such amounts, for such Membership Interests
and at such times as the Members shall determine by the unanimous vote of the
Members. The Members shall make all additional Capital Contributions in
proportion to their respective Percentage Interests. Upon a determination that
additional capital is required, each Member shall have fifteen (15) days from
the date such notice is given to contribute his share of the additional capital
to the Company. Each Member shall receive a credit to its Capital Account in
the amount of any additional capital which is contributed to the Company.
Without limiting the Members' ability to make capital calls pursuant to this
Article III, the Members agree that commencing on the first business day of the
second full month following the date of this Agreement, the Members shall meet
on the first business day of each month for purposes of determining the capital
required by the Company for the month next following. The Members shall agree
on the amount required by the consent of a Majority of the Members.
3.3 Capital Accounts. The Company shall establish an individual Capital
----------------
Account for each Member. The Company shall determine and maintain each Capital
Account in accordance with Regulations Section 1.704-1(b)(2)(iv). If a Member
transfers all or a part of his Membership Interest in accordance with this
Agreement, such Member's Capital Account attributable to the transferred
Membership Interest shall carry over to the new owner of such Membership
Interest pursuant to Regulations Section 1.704-1(b)(2)(iv)(l).
3.4 No Interest. No Member shall be entitled to receive any interest on
-----------
Capital Contributions.
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3.5 Failure to Make Contributions. If a Member does not timely contribute
-----------------------------
capital when required, that Member shall be in default under this Agreement. In
such event, the non-defaulting Member shall send the defaulting Member written
notice of such default, giving him ten (10) days from the date such notice is
given to contribute the entire amount of its required capital contribution. If
the defaulting Member does not contribute its required capital to the Company
within said ten (10) day period, the non-defaulting Member may elect either of
the following remedies:
A. The non-defaulting Member may contribute those amounts which the
defaulting Member fails to contribute, and by such contribution shall acquire
the additional Membership Interest attributable to those amounts.
B. The non-defaulting Member may dissolve the Company, in which
event the Company shall be wound-up, liquidated and terminated pursuant to
Article X.
C. In the event that a Member defaults hereunder twice during any
consecutive six month period, the non-defaulting Member may elect to purchase,
and the defaulting Member shall be required to sell, the entire Membership
Interest of the defaulting Member for the purchase price calculated pursuant to
Section 8.3.
Each Member acknowledges and agrees that the remedies described in this
Section 3.5 bear a reasonable relationship to the damages which the Members
estimate may be suffered by the Company and the non-defaulting Member by reason
of the failure of a defaulting Member to make an additional Capital Contribution
and the election of any or all of the above described remedies is not
unreasonable under the circumstances existing as of the date hereof.
The election of the non-defaulting Members to pursue any remedy provided in
this Section 3.5 shall not be a waiver or limitation of the right to pursue an
additional or different remedy available hereunder or of law or equity with
respect to any subsequent default.
ARTICLE IV
MEMBERS
4.1 Limited Liability. Except as required under the Act or as expressly
-----------------
set forth in this Agreement, no Member shall be personally liable for any debt,
obligation, or liability of the Company, whether that liability or obligation
arises in contract, tort, or otherwise.
4.2 Admission of Additional Members. Upon the unanimous vote of all of
-------------------------------
the Members, the Members may admit to the Company additional Members. Any
additional Members shall obtain Membership Interests and will participate in the
management, Net Profits, Net Losses, and distributions of the Company on such
terms as are approved by the unanimous vote of the Members and upon executing
this Operating Agreement. Notwithstanding the foregoing, substitute Members may
only be admitted in accordance with Article VII.
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4.3 Withdrawals or Resignations. Any Member may withdraw or resign from
---------------------------
the Company at any time upon one hundred twenty (120) days prior written notice
to the Company. Such Member's Membership Interest shall be subject to purchase
and sale as provided in Section 8.2.
4.4 Termination of Membership Interest. Upon the transfer of a Member's
----------------------------------
Membership Interest in violation of this Agreement or the occurrence of a
Dissolution Event as to such Member which does not result in the dissolution of
the Company, the Membership Interest of a Member may be purchased by the Company
or Remaining Member as provided herein. Each Member acknowledges and agrees that
such purchase of a Membership Interest upon the occurrence of any of the
foregoing events is not unreasonable under the circumstances existing as of the
date hereof.
4.5 Transactions With The Company. Subject to any limitations set forth
-----------------------------
in this Agreement and with the prior unanimous approval of the Members after
full disclosure of the Member's involvement, a Member may lend money to and
transact other business with the Company. Subject to other applicable law, such
Member has the same rights and obligations with respect thereto as a Person who
is not a Member.
4.6 Remuneration to Members. Except as otherwise authorized in, or
-----------------------
pursuant to, this Agreement, no Member is entitled to remuneration for acting in
the Company business, subject to the entitlement of Members winding up the
affairs of the Company to reasonable compensation pursuant to Section 10.3.
4.7 Meetings of Members.
-------------------
A. Date, Time and Place of Meetings of Members. Meetings of Members
-------------------------------------------
may be held at such date, time and place within or without the State of Delaware
as the Members may fix from time to time. No annual or regular meetings of
Members is required. At any Members' meeting, the Members shall appoint a person
to preside at the meeting and a person to act as secretary of the meeting. The
secretary of the meeting shall prepare minutes of the meeting which shall be
placed in the minute books of the Company.
B. Power to Call Meetings. Unless otherwise prescribed by the Act or
----------------------
by the Certificate, meetings of the Members may be called upon written demand of
Members holding more than ten percent (10%) of the Percentage Interests for the
purpose of addressing any matters.
C. Notice of Meeting. Written notice of a meeting of Members shall
-----------------
be sent or otherwise given to each Member either personally or by first-class
mail or telegraphic or other written communication, charges prepaid, addressed
to the Member at the address of that Member appearing on the books of the
Company or given by the Member to the Company for the purpose of notice not less
than ten (10) nor more than sixty (60) days before the date of the meeting. The
notice shall specify the place, date and hour of the meeting and the general
nature of the business to be transacted. No other business may be transacted at
this meeting. If the notice is not given within twenty (20) days after the
receipt a request by any person entitled to call a meeting, the person entitled
to call the
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meeting may give the notice. An affidavit of the mailing or other means of
giving any notice of any meeting shall be executed by any Member of the Company
giving the notice, and shall be filed and maintained in the minute book of the
Company.
D. Quorum. The presence in person or by proxy of the holders of a
------
majority of the Percentage Interest shall constitute a quorum at a meeting of
Members.
E. Waiver of Notice or Consent. The actions taken at any meeting of
---------------------------
Members however called and noticed, and wherever held, have the same validity as
if taken at a meeting duly held after regular call and notice, if a quorum is
present either in person or by proxy, and if, either before or after the
meeting, each of the Members entitled to vote, who was not present in person or
by proxy, signs a written waiver of notice or consents to the holding of the
meeting or approves the minutes of the meeting. All such waivers, consents or
approvals shall be filed with the Company records or made a part of the minutes
of the meeting.
Attendance of a person at a meeting shall constitute a waiver of notice of
that meeting, except when the person objects, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened, and except that attendance at a meeting is not a waiver of any right
to object to the consideration of matters not included in the notice of the
meeting if that objection is expressly made at the meeting.
F. Action by Written Consent Without a Meeting. Any action that may
-------------------------------------------
be taken at a meeting of Members may be taken without a meeting pursuant to the
unanimous written consent of the Members.
G. Telephonic Participation by Member at Meetings. Members may
----------------------------------------------
participate in any Members' meeting through the use of any means of conference
telephones or similar communications equipment as long as all Members
participating can hear one another. A Member so participating is deemed to be
present in person at the meeting.
H. Record Date. The record date for determining Members entitled to
-----------
notice of or to vote at a meeting of Members shall be at the close of business
on the business day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held. The record date for determining Members
entitled to give consent to Company action in writing without a meeting shall be
the day on which the first written consent is given.
I. Proxies. Every Member entitled to vote shall have the right to do
-------
so either in person or by one or more agents authorized by a written proxy
signed by the person and filed with the Members or the secretary, if any, of the
Company.
J. No Requirement of Meetings. The provisions of this Section 4.7
--------------------------
govern meetings of the Members if the Members elect, in their discretion, to
hold meetings. However, nothing in this Section 4.7 or in this Agreement is
intended to require that
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meetings of Members be held, it being the intent of the Members that meetings of
Members are not required.
ARTICLE V
MANAGEMENT AND CONTROL OF THE COMPANY
5.1 Management of the Company by Members.
------------------------------------
A. Management by Members; Powers. The business, property and
-----------------------------
affairs of the Company shall be managed exclusively by the Members. Except as
otherwise provided in this Agreement or the Act, all decisions shall be made by
the unanimous approval of the Members. Accordingly, subject to this Agreement,
the Members shall have full, complete and exclusive authority, power, and
discretion to manage and control the business, property and affairs of the
Company, to make all decisions regarding those matters and to perform any and
all other acts customary or incident to the management of the Company's
business, property and affairs.
B. Election of Managing Member. Members have designated PPH by and
---------------------------
through Barry Barresi, its President, as "Managing Member" who shall manage the
day-to-day business and affairs of the Company. The Members by unanimous
approval of the Members may vote at any time to change the Managing Member.
C. Financial and Operating Plan. Annually (but in any event at
----------------------------
least thirty (30) days prior to the commencement of each fiscal year of the
Company), the Managing Member shall prepare and deliver to the other Members the
financial and operating plan ("Plan") of the Company for the next fiscal year,
which Plan shall include a description, in reasonable detail, of the Company's
proposed plan of operations for the next fiscal year and projected financials,
including statements of income and a projected cash flow statement for such
fiscal year and a projected balance sheet as of the end of such fiscal year.
The other Members shall have the right to ask questions and receive additional
detail and description on the proposed Plan, to the extent the Managing Member
possesses or can obtain such information without unreasonable effort or expense.
The Managing Member shall revise or modify the Plan subject to the comments of
the other Members. The Members shall unanimously approve the Plan no later than
the first day of such fiscal year to which such Plan relates.
D. Authority of Managing Member. The Members hereby approve that
----------------------------
certain Management Services Agreement ("MSA") of even date herewith between PPH
and the Company, including the Company's payment of all amounts earned by PPH
thereunder. Without limiting the authority or rights of the Managing Member
hereunder, it is expressly recognized and agreed that the Managing Member shall
have the authority to take the following actions without Member approval,
provided that such actions are consistent with the operative Plan:
(i) execution of payor contracts;
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(ii) product development as contemplated by Section 4.2 of the
MSA;
(iii) marketing and sales as contemplated by Section 4.3 of the
MSA;
(iv) network development and credentialing as contemplated by
Section 4.1 of the MSA;
(v) the engagement of independent auditors and counsel to the
Company; and
(vi) reimbursement of provider.
E. Limitations on Power of Members.
-------------------------------
Notwithstanding any other provisions of this Agreement, no Member nor
the Managing Member shall have authority to cause the Company to engage in the
following transactions without first obtaining the unanimous approval of the
Members:
(i) The sale, exchange or other disposition of all, or
substantially all, of the Company's assets occurring as part of a single
transaction or plan, or in multiple transactions over a twelve (12) month
period, except in the orderly liquidation and winding up of the business of the
Company upon its duly authorized dissolution ;
(ii) The merger of the Company with another limited liability
company or corporation, general partnership, limited partnership or other entity
(except that any act which would cause a Member to incur personal liability for
the obligations of the Company or its successor shall also require the consent
of such Member);
(iii) Altering the purpose of the Company as set forth in
Section 2.6 hereof;
(iv) A decision to continue the business of the Company after
the occurrence of a Dissolution Event;
(v) Except as provided in Article VII, the transfer of a
Membership Interest and admission of the assignee as a Member of the Company;
(vi) Any amendment of the Certificate or this Agreement;
(vii) A decision to compromise the obligation of a Member to
make a Capital Contribution or return money or property paid or distributed in
violation of the Act;
(viii) A decision to allow one or more Members to make
additional Capital Contributions pursuant to Section 3.2;
-10-
<PAGE>
(ix) A decision to pursue an action, course of action or
operation that is either a material deviation from the Plan or not reasonably
identified and described in the Plan;
(x) A decision to admit additional Members to the Company
pursuant to Section 4.2;
(xi) A decision to approve or carry out any material
transaction between the Company or any Affiliate of the Company and any Member
or any Affiliate of a Member; and
(xii) Any other matter which is said elsewhere herein to require
the unanimous approval of the Members.
5.2 Performance of Duties; Liability of Members. A Member shall not be
-------------------------------------------
liable to the Company or to any other Member for any loss or damage sustained by
the Company or any Member, unless the loss or damage shall have been the result
of fraud, deceit, gross negligence, reckless or intentional misconduct, or a
knowing violation of law by the Member. The Members shall perform their
managerial duties in good faith, in a manner they reasonably believe to be in
the best interests of the Company and its Members, and with such care, including
reasonable inquiry, as an ordinarily prudent person in a like position would use
under similar circumstances. A Member who so performs his duties shall not have
any liability by reason of being or having been a Member of the Company.
In performing their duties, the Members shall be entitled to rely on
information, opinions, reports, or statements, including financial statements
and other financial data, of the following persons or groups unless they have
knowledge concerning the matter in question that would cause such reliance to be
unwarranted and provided that the Members act in good faith and after reasonable
inquiry when the need therefor is indicated by the circumstances:
(a) one or more employees or other agents of the Company whom the
Members reasonably believe to be reliable and competent in the matters
presented; or
(b) any attorney, independent accountant, or other person as to
matters which the Members reasonably believe to be within such person's
professional or expert competence.
5.3 Devotion of Time. The Members are not obligated to devote all of
----------------
their time or business efforts to the affairs of the Company. The Members shall
devote whatever time, effort, and skill as they deem appropriate for the
operation of the Company.
5.4 Acts of Members as Conclusive Evidence of Authority. Any note,
---------------------------------------------------
mortgage, evidence of indebtedness, contract, certificate, statement,
conveyance, or other instrument in writing, and any assignment or endorsement
thereof, executed or entered into between the Company and any other person, when
signed by at least two Members, is not invalidated as to the Company by any lack
of authority of the signing Members in the
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<PAGE>
absence of actual knowledge on the part of the other person that the signing
Members had no authority to execute the same.
5.5 Limited Liability. No person who is a Member of the Company shall be
-----------------
personally liable under any judgment of a court, or in any other manner, for any
debt, obligation, or liability of the Company, whether that liability or
obligation arises in contract, tort, or otherwise, solely by reason of being a
Member of the Company.
5.6 Officers.
--------
A. Appointment of Officers. The Members may appoint officers at any
-----------------------
time. The officers of Company, if deemed necessary by the Members, may include
a chairperson, president, vice president, secretary, and chief financial
officer. The officers shall serve at the pleasure of the Members, subject to
all rights, if any, of an officer under any contract of employment. Any
individual may hold any number of offices. No officer need be a resident of the
State of Delaware or citizen of the United States. The officers shall exercise
such powers and perform such duties as specified in this Agreement and as shall
be determined from time to time by the Members.
B. Removal, Resignation and Filling of Vacancy of Officers. Subject
-------------------------------------------------------
to the rights, if any, of an officer under a contract of employment, any officer
may be removed, either with or without cause, by the Members at any time.
Any officer may resign at any time by giving written notice to the
Members. Any resignation shall take effect at the date of the receipt of that
notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Company under any contract to which the officer is a
party.
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
this Agreement for regular appointments to that office.
C. Salaries of Officers. The salaries of all officers and agents of
--------------------
the Company, if any, shall be fixed by the unanimous vote of the Members.
D. Duties and Powers of the Chairperson. The chairperson, if such
------------------------------------
an officer be appointed, shall, if present, preside at meetings of the Members,
and exercise and perform such other powers and duties as may be from time to
time assigned to him by the Members or prescribed by this Agreement. If there
is no president, the chairperson shall in addition be the chief executive
officer of the Company and shall have the powers and duties prescribed in
Section 5.9.
E. Duties and Powers of the President. Subject to such supervisory
----------------------------------
powers, if any, as may be given by the Members to the chairperson, the president
shall be the chief executive officer of the Company, and shall, subject to the
control of the Members and this Agreement have authority and responsibility to
carry out the general and active
-12-
<PAGE>
day-to-day management of the business of the Company on behalf of the Managing
Member and shall see that all orders and resolutions of the Members and Members
are carried into effect. He shall have the general powers and duties of
management usually vested in the office of president of a corporation, and shall
have such other powers and duties as may be prescribed by the Members or this
Agreement.
The president shall execute bonds, mortgages and other contracts
requiting a seal, under the seal of the Company, except where required or
permitted by law to be otherwise signed and executed, and except where the
signing and execution thereof shall be expressly delegated by the Members to
some other officer or agent of the Company.
F. Duties and Powers of Vice-President. The vice-president or vice-
-----------------------------------
presidents in the order determined by a resolution of the Members, shall, in the
absence or disability of the president, perform the duties and exercise the
powers of the president and shall perform such other duties and have such other
powers as the Members by resolution may from time to time prescribe.
G. Duties and Powers of Secretary. The secretary shall attend all
------------------------------
meetings of the Members, and shall record all the proceedings of the meetings in
a book to be kept for that purpose, and shall perform like duties for the
standing committees when required. The secretary shall give, or cause to be
given, notice of all meetings of the Members and shall perform such other duties
as may be prescribed by the Members. The secretary shall have custody of the
seal, if any, and the secretary shall have authority to affix the same to any
instrument requiring it, and when so affixed, it may be attested by his or her
signature. The Members may give general authority to any other officer to affix
the seal of the Company, if any, and to attest the affixing by his or her
signature.
The secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the Company's transfer agent or registrar,
as determined by resolution of the Members, a register, or a duplicate register,
showing the names of all Members and their addresses, their Percentage
Interests, the number and date of certificates issued for the same, and the
number and date of cancellation of every certificate surrendered for
cancellation. The secretary shall also keep all documents described in Section
9.1 and such other documents as may be required under the Act. The secretary
shall perform such other duties and have such other authority as may be
prescribed elsewhere in this Agreement or from time to time by the Members. The
secretary shall have the general duties, powers and responsibilities of a
secretary of a corporation.
If the Members choose to appoint an assistant secretary or assistant
secretaries, the assistant secretaries, in the order of their seniority, in the
absence, disability or inability to act of the secretary, shall perform the
duties and exercise the powers of the secretary, and shall perform such other
duties as the Members may from time to time prescribe.
H. Duties and Powers of Chief Financial Officer. The chief
--------------------------------------------
financial officer shall keep and maintain, or cause to be kept and maintained,
adequate and correct
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<PAGE>
books and records of accounts of the properties and business transactions of the
Company, including accounts of its assets, liabilities, receipts, disbursements,
gains, losses, capital, Membership Interests and Economic Interests. The books
of account shall at all reasonable times be open to inspection by any Member.
The chief financial officer shall have the custody of the funds and
securities of the Company, and shall keep full and accurate accounts of receipts
and disbursements in books belonging to the Company, and shall deposit all
moneys and other valuable effects in the name and to the credit of the Company
in such depositories as may be designated by the Members.
The chief financial officer shall disburse the funds of the Company as
may be ordered by the Members, taking proper vouchers for such disbursements,
and shall render to the president and the Members, at their regular meetings, or
when Members so require, at a meeting of the members an account of all his or
her transactions as treasurer and of the Financial condition of the Company.
The chief financial officer shall perform such other duties and shall
have such other responsibility and authority as may be prescribed elsewhere in
this Agreement or from time to time by the Members. The chief financial officer
shall have the general duties, powers and responsibility of a chief financial
officer of a corporation, and shall be the chief financial and accounting
officer of the Company.
If the Members choose to elect an assistant treasurer or assistant
treasurers, the assistant treasurers in the order of their seniority shall, in
the absence, disability or inability to act of the chief financial officer,
perform the duties and exercise the powers of the chief financial officer, and
shall perform such other duties as the Members shall from time to time
prescribe.
I. Acts of Officers as Conclusive Evidence of Authority. Any note,
----------------------------------------------------
mortgage, evidence of indebtedness, contract, certificate, statement,
conveyance, or other instrument in writing, and any assignment or endorsement
thereof, executed or entered into between the Company and any other Person, when
signed by the chairperson of the board, the president or any vice president and
any secretary, any assistant secretary, the chief financial officer, or any
assistant treasurer of the Company, is not invalidated as to the Company by any
lack of authority of the signing officers in the absence of actual knowledge on
the part of the other Person that the signing officers had no authority to
execute the same.
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<PAGE>
ARTICLE VI
ALLOCATIONS OF NET PROCEEDS AND NET LOSSES AND DISTRIBUTIONS
6.1 Allocations of Net Profit and Net Losses.
----------------------------------------
A. Net Losses. Net Losses shall be allocated to the Members in
----------
proportion to their Percentage Interests.
Notwithstanding the previous sentence, loss allocations to a Member shall
be made only to the extent that such loss allocations will not create a deficit
Capital Account balance for that Member in excess of an amount, if any, equal to
such Member's share of Company Minimum Gain that would be realized on a
foreclosure of the Company's property. Any loss not allocated to a Member
because of the foregoing provision shall be allocated to the other Members (to
the extent the other Members are not limited in respect of the allocation of
losses under this Section 6.1A). Any loss reallocated under this Section 6.1A
shall be taken into account in computing subsequent allocations of income and
losses pursuant to this Article VI, so that the net amount of any item so
allocated and the income and losses allocated to each Member pursuant to this
Article VI, to the extent possible, shall be equal to the net amount that would
have been allocated to each such Member pursuant to this Article VI if no
reallocation of losses had occurred under this Section 6.1A.
B. Net Profit. Net Profit shall be first allocated to the Members to
----------
the extent of prior Net Losses which has been allocated to them, then to the
Members in proportion to their Percentage Interests.
6.2 Special Allocations.
-------------------
A. Minimum Gain Chargeback. Notwithstanding Section 6.1, if there is
-----------------------
a net decrease in Company Minimum Gain during any Fiscal Year, each Member who
has a share of Company Minimum Gain shall be specially allocated items of
Company income and gain for such Fiscal Year (and, if necessary, in subsequent
Fiscal Years) in an amount equal to the portion of such Member's share of the
net decrease in Company Minimum Gain which share of such net decrease shall be
determined in accordance with Regulations Section 1.704-2(g)(2). Allocations
pursuant to this Section 6.2A shall be made in proportion to the amounts
required to be allocated to each Member under this Section 6.2A. The items to be
so allocated shall be determined in accordance with Regulations Section 1.704-
2(f). This Section 6.2A is intended to comply with the minimum gain chargeback
requirement contained in Regulations Section 1.704-2(f) and shall be interpreted
consistently therewith.
B. Chargeback of Minimum Gain Attributable to Member Nonrecourse
-------------------------------------------------------------
Debt. Notwithstanding Section 6.1 of this Agreement, if there is a net decrease
- ----
in Company Minimum Gain attributable to a Member Nonrecourse Debt, during any
Fiscal Year, each member who has a share of the Company Minimum Gain
attributable to such Member Nonrecourse Debt (which share shall be determined in
accordance with Regulations Section 1.704(b)(4)) shall be specially allocated
items of Company income and gain for such Fiscal Year (and, if necessary, in
subsequent Fiscal Years) in an amount equal to that portion of such Member's
share of the net decrease in Company Minimum Gain attributable to such
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<PAGE>
Member Nonrecourse Debt (which share of such net decrease shall be determined in
accordance with Regulations Section 1.704-2(i)(5)). Allocations pursuant to this
Section 6.2B shall be made in proportion to the amounts required to be allocated
to each Member under this Section 6.2B. The items to be so allocated shall be
determined in accordance with Regulations Section 1.704-2(i)(4). This Section
6.2B is intended to comply with the minimum gain chargeback requirement
contained in Regulations Section 1.704-2(i)(4) and shall be interpreted
consistently therewith.
C. Nonrecourse Deduction. Notwithstanding Section 6.1, any
---------------------
nonrecourse deductions (as defined in Regulations Section 1.704-2(b)(1)) for any
Fiscal Year or other period shall be specially allocated to the Members in
proportion to their Percentage Interests.
D. Member Nonrecourse Deductions. Notwithstanding Section 6.1, those
-----------------------------
items of Company loss, deduction, or Code Section 705(a)(2)(B) expenditures
which are attributable to a particular Member Nonrecourse Debt for any Fiscal
Year or other period shall be specially allocated to the Member who bears the
economic risk of loss with respect to the Member Nonrecourse Debt to which such
items are attributable in accordance with Regulations Section 1.704-2(i).
E. Qualified Income Offset. Notwithstanding Section 6.1, if a Member
-----------------------
unexpectedly receives any adjustments, allocations, or distributions described
in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), or any other event
creates a deficit balance in such Member's Capital Account in excess of such
Member's share of Company Minimum Gain, items of Company income and gain shall
be specially allocated to such Member in an amount and manner sufficient to
eliminate such excess deficit balance as quickly as possible. Any special
allocations of items of income and gain pursuant to this Section 6.2E shall be
taken into account in computing subsequent allocations of income and gain
pursuant to this Article VI so that the net amount of any item so allocated and
the income, gain, and losses allocated to each Member pursuant to this Article
VI to the extent possible, shall be equal to the net amount that would have been
allocated to each such Member pursuant to the provisions of this Section 6.2E if
such unexpected adjustments, allocations, or distributions had not occurred.
6.3 Code Section 704(c) Allocations. Notwithstanding any other provision
-------------------------------
in this Article VI, in accordance with Code Section 704(c) and the Regulations
promulgated thereunder, income, gain, loss, and deduction with respect to any
property contributed to the capital of the Company shall, solely for tax
purposes, be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the Company for federal income
tax purposes and its fair market value on the date of contribution. Allocations
pursuant to this Section 6.3 are solely for purposes of federal, state and local
taxes. As such, they shall not affect or in any way be taken into account in
computing a Member's Capital Account or share of profits, losses, or other items
of distributions pursuant to any provision of this Agreement.
6.4 Allocation of Net Profit and Net Losses and Distributions in Respect
--------------------------------------------------------------------
of Transferred Interest. If any Membership interest is transferred, or is
- -----------------------
increased or decreased
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<PAGE>
by reason of the admission of a new Member or otherwise, during any Fiscal Year
of the Company, each item of income, gain, loss, deduction, or credit of the
Company for such Fiscal Year shall be assigned pro rata to each day in the
particular period of such Fiscal Year to which such item is attributable (i.e.,
the day on or during which it is accrued or otherwise included) and the amount
of each such item so assigned to any such day shall be allocated to the Member
based upon his respective Membership Interest at the close of such day.
However, for the purpose of accounting convenience and simplicity, the
Company shall treat a transfer of, or an increase or decrease in, a Membership
Interest which occur at any time during a semi-monthly period (commencing with
the semi-monthly period including the date hereof) as having been consummated on
the last day of such semi-monthly period, regardless of when during such semi-
monthly period such transfer, increase, of decrease actually occurs (i.e., sales
and dispositions made during the first fifteen (15) days of any month will be
deemed to have been made on the 15th day of the month).
Notwithstanding any provision above to the contrary, gain or loss of the
Company realized in connection with a sale or other disposition of any of the
assets of the Company shall be allocated solely to the parties owning Membership
Interests as of the date such sale or other disposition occurs.
6.5 Distribution of Assets by the Company. Subject to applicable law and
-------------------------------------
any limitations contained elsewhere in this Agreement, the Members may elect
from time to time to distribute Distributable Cash to the Members, which
distributions shall be in the following order of priority:
(a) To the Members in proportion to their unreturned Capital
Contributions until each Member has recovered his other Capital Contributions;
and
(b) To the Members in proportion to their Percentage Interests.
All such distributions shall be made only to the Persons who, according to
the books and records of the Company, are the holders of record of the Economic
Interests in respect of which such distributions are made on the actual date of
distribution. Neither the Company nor any Member shall incur any liability for
making distributions in accordance with this Section 6.5.
6.6 Form of Distribution. A Member, regardless of the nature of the
--------------------
Member's Capital Contribution, has no right to demand and receive any
distribution from the Company in any form other than money. No Member may be
compelled to accept from the Company a distribution of any asset in kind in lieu
of a proportionate distribution of money being made to other Members. Except
upon a dissolution and the winding up of the Company, no Member may be compelled
to accept a distribution of any asset in kind.
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<PAGE>
6.7 Restriction on Distributions.
----------------------------
A. No distribution shall be made if, after giving effect to the
distribution:
(i) The Company would not be able to pay its debts as they
become due in the usual course of business.
(ii) The Company's total assets would be less than the sum of its
total liabilities plus, unless this Agreement provides otherwise, the amount
that would be needed, if the Company were to be dissolved at the time of the
distribution, to satisfy the preferential rights of other Members, if any, upon
dissolution that are superior to the rights of the Member receiving the
distribution.
B. The Members may base a determination that a distribution is not
prohibited on any of the following:
(i) Financial statement prepared on the basis of accounting
practices and principles that are reasonable in the circumstances.
(ii) A fair valuation.
(iii) Any other method that is reasonable in the circumstances.
Except as provided in the Act, the effect of a distribution is measured as
of the date the distribution is authorized if the payment occurs within 120 days
after the date of authorization, or the date payment is made if it occurs more
than 120 days of the date of authorization.
C. A Member who votes for a distribution in violation of this
Agreement or the Act is personally liable to the Company for the amount of the
distribution that exceeds what could have been distributed without violating
this Agreement or the Act if it is established that the Member did not act in
compliance with Section 6.7B or Section 10.4. Any Member who is so liable shall
be entitled to compel contribution from (i) each other Member who also is so
liable and (ii) each Member for the amount the Member received with knowledge of
facts indicating that the distribution was made in violation of this Agreement
or the Act.
6.8 Return of Distribution. Except for distributions made in violation of
----------------------
the Act or this Agreement, no Member or Economic Interest Owner shall be
obligated to return any distribution to the Company or pay the amount of any
distribution for the account of the Company or to any creditor of the Company.
The amount of any distribution returned to the Company by a Member or Economic
Interest Owner or paid by a Member or Economic Interest Owner for the account of
the Company or to a creditor of the Company shall be added to the account or
accounts from which it was subtracted when it was distributed to the Member or
Economic Interest Owner.
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<PAGE>
6.9 Obligations of Members to Report Allocations. The Members are aware
--------------------------------------------
of the income tax consequences of the allocations made by this Article VI and
hereby agree to be bound by the provisions of this Article VI in reporting their
shares of Company income and loss for income tax purposes.
ARTICLE VII
TRANSFER AND ASSIGNMENT OF INTERESTS
7.1 Transfer and Assignment of Interests. No Member shall be entitled to
------------------------------------
transfer, assign, convey, sell, encumber or in any way alienate all or any part
of his Membership Interest except with the prior written consent of all of the
other Members, which consent may be given or withheld, conditioned or delayed
(as allowed by this Agreement or the Act), as the other Members may determine in
their sole discretion. Transfers in violation of this Article VII shall only be
effective to the extent set forth in Section 7.7. After the consummation of any
transfer of any part of a Membership Interest, the Membership Interest so
transferred shall continue to be subject to the terms and provisions of this
Agreement and any further transfers shall be required to comply with all the
terms and provisions of this Agreement.
7.2 Further Restrictions on Transfer of Interests. In addition to other
---------------------------------------------
restrictions found in this Agreement, no Member shall transfer, assign, convey,
sell, encumber or in any way alienate all or any part of his Membership Interest
if the Membership Interest to be transferred, assigned, sold or exchanged, when
added to the total of all other Membership Interests sold or exchanged in the
preceding twelve (12) consecutive months prior thereto, would cause the
termination of the Company under the Code, as determined by the Members.
7.3 Substitution of Members. A transferee of a Membership Interest shall
-----------------------
have the right to become a substitute Member only if (i) the requirements of
Sections 7.1 and 7.2 relating to unanimous consent of Members, securities and
tax requirements hereof are met, (ii) such Person executes an instrument
satisfactory to the Members accepting and adopting the terms and provisions of
this Agreement, and (iii) such Person pays any reasonable expenses in connection
with his admission as a new Member. The admission of a substitute Member shall
not result in the release of the Member who assigned the Membership Interest
from any liability that such Member may have to the Company.
7.4 Family and Affiliate Transfers. The Membership Interest of any Member
------------------------------
may be transferred subject to compliance with Section 7.2, upon consent of the
Members, which shall not be unreasonably withheld, by the Member (i) by inter
vivos gift or by testamentary transfer to any spouse, parent, sibling, in-law,
child or grandchild of the Member, or to a trust for the benefit of the Member
or such spouse, parent, sibling, in-law, child or grandchild of the Member, or
(ii) to any Affiliate of the Member; it being agreed that in executing this
Agreement, each Member has consented to such transfers under this Section 7.4.
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<PAGE>
7.5 Effective Date of Permitted Transfers. Any permitted transfer of all
-------------------------------------
or any portion of a Membership Interest shall be effective as of the date upon
which the requirements of Sections 7.1, 7.2 and 7.3 have been met. The Members
shall be provided with written notice of such transfer as promptly as possible
after the requirements of Sections 7.1, 7.2 and 7.3 have been met. Any
transferee of a Membership Interest shall take subject to the restrictions on
transfer imposed by this Agreement.
7.6 Right of Legal Representatives. If a Member who is an individual dies
------------------------------
or is adjudged by a court of competent jurisdiction to be incompetent to manage
the Member's person or property, the Member's executor, administrator, guardian,
conservator, or other legal representative may exercise all of the Member's
rights for the purpose of settling the Member's estate or administering the
Member's property, including any power the Member has under the Certificate or
this Agreement to give an assignee the right to become a Member. If a Member is
a corporation, trust, or other entity and is dissolved or terminated, the powers
of that Member may be exercised by his legal representative or successor.
7.7 No Effect to Transfers in Violation of Agreement. Upon any transfer
------------------------------------------------
of a Membership Interest in violation of this Article VII, the transferee shall
have no right to vote or participate in the management of the business, property
and affairs of the Company or to exercise any rights of a Member. Such
transferee shall only be entitled to become an Economic Interest Owner and
thereafter shall only receive the share of one or more of the Company's Net
Profits, Net Losses and distributions of the Company's assets to which the
transferor of such Economic Interest would otherwise be entitled.
Notwithstanding the immediately preceding sentences, if, in the determination of
the Members, a transfer in violation of this Article VII would cause the
termination of the Company under the Code, in the sole discretion of the
Members, the transfer shall be null and void and the purported transferee shall
not become either a Member or an Economic Interest Owner.
Upon and contemporaneously with any transfer, assignment, conveyance or
sale (whether arising out of an attempted charge upon that Member's Economic
Interest by judicial process, a foreclosure by a creditor of the Member or
otherwise) of a Member's Economic Interest which does not at the same time
transfer the balance of the rights associated with the Membership Interest
transferred by the Member (including, without limitation, the rights of the
Member to vote or participate in the management of the business, property and
affairs of the Company), the Company shall purchase from the Member, and the
Member shall sell to Company for a purchase price of $100, all remaining rights
and interests retained by the Member that immediately before the transfer,
assignment, conveyance or sale were associated with the transferred Economic
Interest. Such purchase and sale shall not, however, result in the release of
the Member from any liability to the Company as a Member.
Each Member acknowledges and agrees that the right of the Company to
purchase such remaining rights and interests from a Member who transfers a
Membership Interest in violation of this Article VII is not unreasonable under
the circumstances existing as of the date hereof.
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<PAGE>
7.8 Right of First Refusal. Each time a Member proposes to transfer,
----------------------
assign, convey, sell, encumber or in any way alienate all or any part of his
Membership Interest (or as required by operation of law or other involuntary
transfer to do so) other than pursuant to Section 7.4, such Member shall first
offer such Membership Interest to the Company and the non-transferring Members
in accordance with the following provisions:
A. Such Member shall deliver a written notice to the Company and the
other Members stating (i) such Member's bona fide intention to transfer such
Membership interest, (ii) the name and address of the proposed transferee, (iii)
the Membership Interest to be transferred, and (iv) the purchase price in terms
of payment for which the Member proposes to transfer such Membership Interest.
B. Within thirty (30) days after receipt of the notice described in
Section 7.8A, each non-transferring Member shall notify the transferring Member
in writing of his desire to purchase a portion of the Membership Interest being
so transferred. The failure of any Member to submit a notice within the
applicable period shall constitute an election on the part of that Member not to
purchase any of the Membership Interest which may be so transferred. Each
Member so electing to purchase shall be entitled to purchase a portion of such
Membership Interest in the same proportion that the Percentage Interest of such
Member bear to the aggregate of the Percentage Interests of all of the Members
electing to so purchase the Membership Interest being transferred. In the event
any Member elects to purchase none or less than all of his pro rata share of
such Membership Interest, then the other Members can elect to purchase more than
their pro rata share. If such Members fail to purchase the entire Membership
Interest being transferred, the Company may purchase any remaining share of such
Membership Interest.
C. Within ninety (90) days after receipt of the notice described in
Section 7.8A the Company and the Members electing to purchase such Membership
Interest shall have the first right to purchase or obtain such Membership
Interest upon the price and terms of payment designated in such notice. If such
notice provides for the payment of non-cash consideration, the Company and such
purchasing Members each may elect to pay the consideration in cash equal to the
good faith estimate of the present fair market value of the noncash
consideration offered as determined by the Members.
D. If the Company or the other Members elect not to purchase or
obtain all of the Membership Interest designated in such notice, then the
transferring Member may transfer the Membership Interest described in the notice
to the proposed transferee, providing such transfer (i) is completed within
thirty (30) days after the expiration of the Company's and the other Members'
right to purchase such Membership Interest, (ii) is made on terms no less
favorable to the transferring Member than as designated in the notice, and (iii)
the requirements of Sections 7.1, 7.2 and 7.3 relating to unanimous consent of
Members, securities and tax requirements hereof are met. If such Membership
Interest is not so transferred, the transferring Member must give notice in
accordance with this Section prior to any other or subsequent transfer of such
Membership Interest.
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ARTICLE VIII
CONSEQUENCE OF DEATH, DISSOLUTION,
RETIREMENT OR BANKRUPTCY OF MEMBER
8.1 Dissolution Event. Upon the occurrence of a Dissolution Event, the
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Company shall dissolve unless the remaining Members ("Remaining Members")
holding all of the remaining Membership Interests consent within ninety (90)
days of the Dissolution Event to the continuation of the business of the
Company. In the event the Remaining Members do not consent to the continuation
of the business of the Company, the Company's name and any service marks or
trademarks shall be distributed to the Remaining Members in the dissolution of
the Company. If the Remaining Members consent to the continuation of the
business of the Company, the Company and/or the Remaining Members shall
purchase, and the Member whose actions or conduct resulted in the Dissolution
Event ("Former Member") or such Former Member's legal representative shall sell,
the Former Member's Membership Interest ("Former Member's Interest") as provided
in this Article VIII to avoid dissolution of the Company.
8.2 Withdrawal. Notwithstanding Section 8.1, only upon the withdrawal by
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a Member in accordance with Section 4.3, will such Member be treated as a Former
Member, and will the Company and/or Remaining Members be obligated to purchase,
and will the Former Member be obligated to sell, the Former Member's Interest as
provided in this Article VIII.
8.3 Purchase Price. The purchase price for the Former Member's Interest
--------------
shall be the Capital Account balance of the Former Member as adjusted pursuant
to Section 3.3; provided, however, that if the Former Member, such Former
Member's legal representative or the Company, deems the Capital Account balance
to vary from the fair market value of the Former Member's Interest by more than
ten percent (10%), such party shall be entitled to require an appraisal by
providing notice of the request for appraisal within ten (10) days after the
determination of the Remaining Members to continue the business of the Company.
In such event, the value of the Former Member's Interest shall be determined by
three (3) independent appraisers, one selected by the Former Member or such
Former Member's legal representative, one selected by the Company, and one
selected by the two appraisers so named. The fair market value of the Former
Member's Interest shall be the average of the two appraisals closest in amount
to each other. In the event the fair market value is determined to vary from the
Capital Account balance by less than ten percent (10%), the party requesting
such appraisal shall pay all expense of all the appraisals incurred by the party
offering to enter into the transaction at the Capital Account valuation. In all
other events, the party requesting the appraisal shall pay one-half of such
expense and the other party shall pay one-half of such expense. Notwithstanding
the foregoing, if the Dissolution Event results from:
A. A breach of this Agreement by the Former Member, the purchase
price shall be reduced by an amount equal to the damages suffered by the Company
or the Remaining Members as a result of such breach; or
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B. A withdrawal by the Former Member, the purchase price shall be
reduced by twenty-five percent (25%).
8.4 Notice of Intent to Purchase. Within thirty (30) days after the
----------------------------
Remaining Members have been notified as to the purchase price of the Former
Member's Interest determined in accordance with Section 8.3, each Remaining
Member shall notify the Former Member in writing of his desire to purchase a
portion of the Former Member's Interest. The failure of any Remaining Member to
submit a notice within the applicable period shall constitute an election on the
part of the Member not to purchase any of the Former Member's Interest. Each
Remaining Member so electing to purchase shall be entitled to purchase a portion
of the Former Member's Interest in the same proportion that the Percentage
Interest of the Remaining Member bears to the aggregate of the Percentage
Interests of all of the Remaining Members electing to purchase the Former
Member's Interest.
8.5 Election to Purchase Less Than All of the Former Member's Interest.
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If any Remaining Member elects to purchase none or less than all of his pro rata
share of the Former Member's Interest, then the Remaining Members can elect to
purchase more than their pro rata share. If the Remaining Members fail to
purchase the entire interest of the Former Member, the Company shall purchase
any remaining share of the Former Member's Interest.
8.6 Payment of Purchase Price. The purchase price shall be paid by the
-------------------------
Company or the Remaining Members, as the case may be, by either of the following
methods, each of which may be selected separately by the Company or the
Remaining Members:
A. The Company or the Remaining Members shall at the closing pay in
cash the total purchase price for the Former Member's Interest; or
B. The Company or the Remaining Members shall pay at the closing one-
fifth (1/5) of the purchase price in which case the balance of the purchase
price shall then be paid in four equal annual principal installments, plus
accrued interest, and be payable each year on the anniversary date of the
closing. The unpaid principal balance shall accrue interest at the current
applicable federal rate as provided in the Code for the month in which the
initial payment is made, but the Company and the Remaining Members shall have
the right to prepay in full or in part at any time without penalty. The
obligation to pay the balance due shall be evidenced by a promissory note. and
if purchased by a Remaining Member, secured by a pledge of the Membership
Interest being purchased.
8.7 Closing of Purchase of Former Member's Interest. The closing for the
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sale of a Former Member's Interest pursuant to this Article VIII shall be held
at 10:00 a.m. at the principal office of Company no later than sixty (60) days
after the determination of the purchase price, except that if the closing date
falls on a Saturday, Sunday, or Delaware legal holiday, then the closing shall
be held on the next succeeding business day. At the closing, the Former Member
or such Former Member's legal representative shall deliver to the Company or the
Remaining Members an instrument of transfer (containing warranties of title and
no encumbrances) conveying the Former Member's Interest. The Former Member or
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such Former Member's legal representative, the Company and the Remaining Members
shall do all things and execute and deliver all papers as may be necessary fully
to consummate such sale and purchase in accordance with the terms and provisions
of this Agreement.
8.8 Purchase Terms Varied by Agreement. Nothing contained herein is
----------------------------------
intended to prohibit Members from agreeing upon other terms and conditions for
the purchase by the Company or any Member of the Membership Interest of any
Member in the Company desiring to retire, withdraw or resign, in whole or in
part, as a Member.
8.9 Noncompetition.
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A. Prohibited Activities. Each Member agrees that while it is a
---------------------
Member it will not undertake, own any interest in, become employed by or
otherwise associate himself with any enterprise that is engaged in the provision
of managed health care and related practice management in the area of cardiology
disease management. In addition, each Member agrees that while he is a Member
any business plans or opportunities relating to the provision of managed health
care and related practice management in the area of cardiology disease
management by or communicated to the Member shall first be presented to the
Company for its pursuit and that Member shall be entitled to pursue such
opportunity in his individual interest only if (i) the Company declines to
pursue the opportunity itself, and (ii) the opportunity does not relate to an
---
establishment that would directly compete with the Company. Each Member also
agrees that for a period of two (2) years from the date it transfers its
Membership Interest pursuant to either Article VII or VIII of such transfer, he
shall not:
(i) Enter, directly or indirectly, into the employment of, or
render, directly or indirectly, any services (whether as a director, officer,
agent, representative, independent contractor, consultant or advisor or any
other similar relationship or capacity), to any Person which owns, operates or
has controlling interest in any enterprise that is engaged in the provision of
managed health care and related practice management in the area of cardiology
disease management;
(ii) Engage, directly or indirectly, in any such business as a
Competitor;
(iii) Become interested, directly or indirectly, in any such
Competitor as an individual, proprietor, franchisee, partner, joint venturer,
stockholder, principal, member, investor, trustee or any other similar other
relationship or capacity;
(iv) Directly or indirectly, by sole action or in concert with
others, solicit, induce or influence, or seek to solicit, induce or influence,
any Person who is engaged by the Company, or an Affiliate of the Company, as an
employee, agent, independent contractor or otherwise, to leave the employ of the
Company or any Affiliate, successor or assign;
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(v) Directly or indirectly, by sole action or in concert with others,
solicit, induce or influence, or seek to solicit, induce or influence, any
customer or client of the Company, or an Affiliate of the Company; or
(vi) Use, divulge, furnish or make accessible to any Person (other
than at the written request of the Company) any secret, confidential or
proprietary knowledge or information of the Company, or an Affiliate of the
Company, including, but not limited to, any trade secrets, recipes, financial
information, customer or client lists, marketing methods, data, properties,
specifications, personnel, organization or internal affairs of the Company.
B. Separate Covenants. The agreements contained in Section 8.9A
------------------
shall be construed as a series of separate covenants, one for each activity of
the Member, capacity in which the Member is prohibited from competing and each
part of the Territory in which the Company is carrying on in such activity.
C. Intent; Severability. If any territorial or time restrictions or
--------------------
any other provision contained herein shall be deemed to be illegal,
unenforceable or unreasonable by a court of competent jurisdiction, each Member
agrees and submits to the reduction of such territorial or time restriction or
other provision to such an area or period as such court shall deem reasonable.
D. Injunctive and Other Relief. Each Member acknowledges that (i)
---------------------------
the covenants and the restrictions contained in Section 8.9A are a material
factor to such Member's execution of this Agreement and are necessary and
required for the protection of the Company, (ii) such covenants relate to
matters that are of a special, unique and extraordinary character that gives
each of such covenants a special, unique and extraordinary value, and (iii) a
breach of any of such covenants will result in irreparable harm and damages to
the Company in an amount difficult to ascertain and which cannot be adequately
compensated by a monetary award. Accordingly, in addition to any of the relief
to which the Company may be entitled at law or in equity, the Company shall be
entitled to temporary and/or permanent injunctive relief from any breach or
threatened breach by a Member of the provisions of Section 8.9A without proof of
actual damages that have been or may be caused to the Company by such breach or
threatened breach. Each Member further acknowledges that in the event he is
found to have violated subpart (A)(vii) of this Section 8.9 by any court of
competent jurisdiction, such judgment shall be grounds for termination of his
employment by the Company and any Affiliate and, further, the Member shall
forfeit all voting rights associated with his Membership Interest under this
Agreement.
ARTICLE IX
ACCOUNTING, RECORDS, REPORTING BY MEMBERS
9.1 Books and Records. The books and records of the Company shall be
-----------------
kept, and the financial position and the results of its operations recorded, in
accordance with the accounting methods followed for federal income tax purposes.
The books and records of
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the Company shall reflect all the Company transactions and shall be appropriate
and adequate for the Company's business. The Company shall maintain at its
principal office in Massachusetts all of the following:
A. A current list of the full name and last known business or
residence address of each Member and Economic Interest Owner set forth in
alphabetical order, together with the Capital Contributions, Capital Account and
Percentage Interest of each Member and Economic Interest Owner;
B. A copy of the Certificate and any and all amendments thereto
together with executed copies of any powers of attorney pursuant to which the
Certificate or any amendments thereto have been executed;
C. Copies of the Company's federal, state, and local income tax or
information returns and reports, if any, for the six most recent taxable years;
D. A copy of this Agreement and any and all amendments thereto
together with executed copies of any powers of attorney pursuant to which this
Agreement or any amendments thereto have been executed;
E. Copies of the financial statements of the Company, if any, for the
six most recent Fiscal Years; and
F. The Company's books and records as they relate to the internal
affairs of the Company for at least the current and past four Fiscal Years.
9.2 Delivery to Members and Inspection.
----------------------------------
A. Upon the request of any Member or Economic Interest Owner for
purposes reasonably related to the interest of that Person as a Member or
Economic Interest Owner, the Company shall promptly deliver to the requesting
Member or Economic Interest Owner, at the expense of the Company, a copy of the
information required to be maintained by Sections 9.1 A, B and D, and a copy of
this Agreement.
B. Each Member and Economic Interest Owner has the right, upon
reasonable request for purposes reasonably related to the interest of the Person
as Member or Economic Interest Owner, to:
(i) inspect and copy during normal business hours any of the
Company records described in Sections 9.1A through B; and
(ii) obtain from the Company, promptly after their becoming
available, a copy of the Company's federal, state, and local income tax or
information returns for each Fiscal Year.
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C. Any request, inspection or copying by a Member or Economic
Interest Owner under this Section 9.2 may be made by that Person or that
Person's agent or attorney.
D. The Company shall promptly furnish to a Member a copy of any
amendment to the Certificate or this Agreement executed by a Member pursuant to
a power of attorney from the Member.
9.3 Annual Statements.
-----------------
A. The Members shall cause an annual report to be sent to each of the
Members not later than 120 days after the close of the Fiscal Year. The report
shall contain a balance sheet as of the end of the Fiscal Year and an income
statement for the Fiscal Year.
B. The Members shall cause to be prepared at least annually, at
Company expense, information necessary for the preparation of the Members and
Economic Interest Owners federal and state income tax returns. The Members shall
send or cause to be sent to each Member or Economic Interest Owner within 90
days after the end of each taxable year such information as is necessary to
complete federal and state income tax or information returns.
C. The Members shall cause to be filed at least annually with the
Delaware Secretary of State the statement required under the Act.
9.4 Financial and Other Information. The Members shall provide such
-------------------------------
financial and other information relating to the Company or any other Person in
which the Company owns, directly or indirectly, an equity interest, as a Member
may reasonably request.
9.5 Filings. The Members, at Company expense, shall cause the income
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tax returns for the Company to be prepared and timely filed with the appropriate
authorities. The Members, at Company expense, shall also cause to be prepared
and timely filed, with appropriate federal and state regulatory and
administrative bodies, amendments to, or restatements of, the Certificate and
all reports required to be filed by the Company with those entities under the
Act or other then current applicable laws, rules, and regulations. If a Member
required by the Act to execute or file any document fails, after demand, to do
so within a reasonable period of time or refuses to do so, any other Member may
prepare, execute and file that document with the Delaware Secretary of State.
9.6 Bank Accounts. The Members shall maintain the funds of the
-------------
Company in one or more separate bank accounts in the name of the Company, and
shall not permit the funds of the Company to be commingled in any fashion with
the funds of any other Person.
9.7 Accounting Decisions and Reliance On Others. All decisions as to
-------------------------------------------
accounting matters, except as otherwise specifically set forth herein, shall be
made by the Members. The Members may rely upon the advice of their accountants
as to whether such decisions are in accordance with accounting methods followed
for federal income tax purposes.
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9.8 Tax Matters for the Company Handled by Members and Tax Matters
--------------------------------------------------------------
Partner. The Members shall from time to time cause the Company to make such tax
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elections as they deem to be in the best interests of the Company and the
Members. The Tax Matters Partner, as defined in Code Section 6231, shall
represent the Company (at the Company's expense) in connection with all
examinations of the Company's affairs by tax authorities, including resulting
judicial and administrative proceedings, and shall expend the Company funds for
professional services and costs associated therewith. The Tax Matters Partner
shall oversee the Company tax affairs in the overall best interests of the
Company. If for any reason the Tax Matters Partner can no longer serve in that
capacity or ceases to be a Member, Members holding a Majority of Members
Interest may designate another to be Tax Matters Partner.
ARTICLE X
DISSOLUTION AND WINDING UP
10.1 Dissolution. The Company shall be dissolved, its assets shall
-----------
be disposed of, and its affairs wound up on the first to occur of the following:
A. Upon the happening of any event of dissolution specified in
the Certificate;
B. Upon the entry of a decree of judicial dissolution pursuant
to Section 802 of the Act;
C. Upon the unanimous vote of the Members;
D. The occurrence of a Dissolution Event and the failure of the
Remaining Members to consent in accordance with Section 8.1 to continue the
business of the Company within ninety (90) days after the occurrence of such
event; or
E. The sale of all or substantially all of the assets of
Company.
10.2 Certificate of Dissolution. As soon as possible following the
--------------------------
occurrence of any of the events specified in Section 10.1, the Members shall
execute a Certificate of Dissolution in such form as shall be prescribed by the
Delaware Secretary of State and file the Certificate as required by the Act.
10.3 Winding Up. Upon the occurrence of any event specified in
----------
Section 10.1, the Company shall continue solely for the purpose of winding up
its affairs in an orderly manner, liquidating its assets, and satisfying the
claims of its creditors. The Members shall be responsible for overseeing the
winding up and liquidation of Company, shall take full account of the
liabilities of Company and assets, shall either cause its assets to be sold or
distributed, and if sold as promptly as is consistent with obtaining the fair
market value thereof, shall cause the proceeds therefrom, to the extent
sufficient therefor, to be applied and distributed as provided in Section 10.5.
In the event a Member withdraws as a Member of the Company and the Remaining
Members do not consent to the continuation
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of the business of the Company, the Company's name and any service marks or
trademarks owned or used by the Company (the "Name Assets") shall be distributed
to the Remaining Members in the dissolution of the Company. The Persons winding
up the affairs of the Company shall give written notice of the commencement of
winding up by mail to all known creditors and claimants whose addresses appear
on the records of the Company. The Members winding up the affairs of the
Company shall be entitled to reasonable compensation for such services.
10.4 Distributions in Kind. Any non-cash asset distributed to one or
---------------------
more Members shall first be valued at its fair market value to determine the Net
Profit or Net Losses that would have resulted if such asset were sold for such
value, such Net Profit or Net Losses shall then be allocated pursuant to Article
VI, and the Members Capital Accounts shall be adjusted to reflect such
allocations. The amount distributed and charged to the Capital Account of each
Member receiving an interest in such distributed asset shall be the fair market
value of such interest (net of any liability secured by such asset that such
Member assumes or takes subject to). The fair market value of such asset shall
be determined by the Members or if any Member objects by an independent
appraiser (any such appraiser must be recognized as an expert in valuing the
type of asset involved) selected by the liquidating trustee and approved by the
Members.
10.5 Order of Payment of Liabilities Upon Dissolution.
------------------------------------------------
A. After determining that all known debts and liabilities of
the Company in the process of winding-up, including, without limitation, debts
and liabilities to Members who are creditors of the Company, have been paid or
adequately provided for, the remaining assets shall be first distributed to the
Members in accordance with their positive Capital Account balances, after taking
into account income and loss allocations for the Company's taxable year during
which liquidation occurs. After distributions are made which reduce the positive
Capital Account balances of the Members to zero, all additional distributions
shall be made to Members in accordance with their Percentage Interests. Such
liquidating distributions shall be made by the end of the Company's taxable year
in which the Company is liquidated, or, if later, within ninety (90) days after
the date of such liquidation.
B. The payment of a debt or liability, whether the whereabouts
of the creditor is known or unknown, has been adequately provided for if the
payment has been provided for by either of the following means:
(i) Payment thereof has been assumed or guaranteed in good
faith by one or more financially responsible persons or by the United States
government or any agency thereof, and the provision, including the financial
responsibility of the Person, was determined in good faith and with reasonable
care by the Members to be adequate at the time of any distribution of the assets
pursuant to this Section.
(ii) The amount of the debt or liability has been deposited
in a trust or escrow with an independent agent for the benefit of the creditors.
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This Section 10.5B shall not prescribe the exclusive means of making
adequate provision for debts and liabilities.
10.6 Compliance with Regulations. All payments to the Members upon
---------------------------
the winding and dissolution of Company shall be strictly in accordance with the
positive capital account balance limitation and other requirements of
Regulations Section 1.704-l(b)(2)(ii)(d).
10.7 Limitations on Payments Made in Dissolution. Except as
-------------------------------------------
otherwise specifically provided in this Agreement, each Member shall only be
entitled to look solely at the assets of Company for the return of his positive
Capital Account balance and shall have no recourse for his Capital Contribution
and/or share of Net Profits (upon dissolution or otherwise) against the Members
or any other Member except as provided in Article XI.
10.8 Certificate of Cancellation. The Members who filed the
---------------------------
Certificate of Dissolution shall cause to be filed in the office of, and on a
form prescribed by, the Delaware Secretary of State, a certificate of
cancellation of the Certificate upon the completion of the winding up of the
affairs of the Company.
10.9 No Action for Dissolution. Except as expressly permitted in
-------------------------
this Agreement, a Member shall not take any voluntary action that directly
causes a Dissolution Event. The Members acknowledge that irreparable damage
would be done to the goodwill and reputation of the Company if any Member should
bring an action in court to dissolve the Company under circumstances where
dissolution is not required by Section 10.1. This Agreement has been drawn
carefully to provide fair treatment of all parties and equitable payment in
liquidation of the Economic Interests. Accordingly, except where required by
this Article X, each Member hereby waives and renounces his right to initiate
legal action to seek the appointment of a receiver or trustee to liquidate the
Company or to seek a decree of judicial dissolution of the Company on the ground
that (a) it is not reasonably practicable to carry on the business of the
Company in conformity with the Certificate or this Agreement, or (b) dissolution
is reasonably necessary for the protection of the rights or interests of the
complaining Member. Damages for breach of this Section 10.9 shall be monetary
damages only (and not specific performance), and the damages may be offset
against distributions by the Company to which such Member would otherwise be
entitled.
ARTICLE XI
INDEMNIFICATION AND INSURANCE
11.1 Indemnification of Agents. The Company shall indemnify any
-------------------------
Person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reason of the
fact that he is or was a Member, employee or other agent of the Company or that,
being or having been such a Member, employee or agent, he is or was serving at
the request of the Company as a manager, director, employee or other agent of
another limited liability company, corporation, partnership, joint venture,
trust or other enterprise (all such persons being referred to hereinafter as an
"agent"), to the fullest extent permitted by applicable law in effect on the
date hereof and to such greater extent as applicable law may hereafter from time
to time
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permit. The Members may, on behalf of the Company, enter into indemnity
agreements from time to time with any Person entitled to be indemnified by the
Company hereunder, upon such terms and conditions as the Members deem
appropriate in their business judgment.
11.2 Insurance. The Company shall have the power to purchase and
---------
maintain insurance on behalf of any Person who is or was an agent of the Company
against any liability asserted against such Person and incurred by such Person
in any such capacity, or arising out of such Person's status as an agent,
whether or not the Company would have the power to indemnify such Person against
such liability under the provisions of Section 11.1 or under applicable law.
ARTICLE XII
MISCELLANEOUS
12.1 Counsel to the Company. Counsel to the Company may also be
----------------------
counsel to any Member or any Affiliate of a Member. Any Member may execute on
behalf of the Company and the Members any consent to the representation of the
Company that counsel may request pursuant to the appropriate professional
conduct rules ("Rules"). The Company has initially selected Mintz, Levin, Cohn,
Ferres, Glovsky & Popeo ("Company Counsel") as legal counsel to the Company.
Each Member acknowledges that Company Counsel does not represent any Member in
the absence of a clear and explicit agreement to such effect between the Member
and Company Counsel, and that in the absence of any such agreement Company
Counsel shall owe no duties directly to a Member. In the event any dispute or
controversy arises between any Members and the Company, then each Member agrees
that Company Counsel may represent either the Company or such Member, or both,
in any such dispute or controversy to the extent permitted by the Rules, and
each Member hereby consents to such representation.
12.2 Complete Agreement. This Agreement and the Certificate
------------------
constitute the complete and exclusive statement of agreement among the Members
with respect to the subject matter herein and therein and replace and supersede
all prior written and oral agreements or statements by and among the Members or
any of them. No representation, statement, condition or warranty not contained
in this Agreement or the Certificate will be binding on the Members or have any
force or effect whatsoever. To the extent that any provision of the Certificate
conflict with any provision of this Agreement, the Certificate shall control.
12.3 Binding Effect. Subject to the provisions of this Agreement
--------------
relating to transferability, this Agreement will be binding upon and inure to
the benefit of the Members, and their respective successors and assigns.
12.4 Parties in Interest. Except as expressly provided in the Act,
-------------------
nothing in this Agreement shall confer any rights or remedies under or by reason
of this Agreement on any Persons other than the Members and their respective
successors and assigns nor shall anything in this Agreement relieve or discharge
the obligation or liability of any third person
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to any party to this Agreement, nor shall any provision give any third person
any right of subrogation or action over or against any party to this Agreement.
12.5 Pronouns; Statutory Reference. All pronouns and all variations
-----------------------------
thereof shall be deemed to refer to the masculine, feminine, or neuter, singular
or plural, as the context in which they are used may require. Any reference to
the Code, the Regulations, the Act, Corporations Code or other statutes or laws
will include all amendments, modifications. or replacements of the specific
sections and provisions concerned.
12.6 Headings. All headings herein are inserted only for convenience
--------
of reference and are not to be considered in the construction or interpretation
of any provision of this Agreement.
12.7 Interpretation. In the event any claim is made by any Member
--------------
relating to any conflict, omission or ambiguity in this Agreement, no
presumption or burden of proof or persuasion shall be implied by virtue of the
fact that this Agreement was prepared by or at the request of a particular
Member or his counsel.
12.8 References to this Agreement. Numbered or lettered articles,
----------------------------
sections and subsections herein contained refer to articles, sections and
subsections of this Agreement unless otherwise expressly stated.
12.9 Jurisdiction. Each Member hereby consents to the exclusive
------------
jurisdiction of the state and federal courts sitting in the State of Delaware in
any action on a claim arising out of, under or in connection with this Agreement
or the transactions contemplated by this Agreement, provided such claim is not
required to be arbitrated pursuant to Article XIII. Each Member further agrees
that personal jurisdiction over him may be effected by service of process by
registered or certified mail addressed as provided in Section 12.13 of this
Agreement, and that when so made shall be as if served upon him personally
within the State of Delaware.
12.10 Exhibits. All Exhibits attached to this
--------
Agreement are incorporated and shall be treated as if set forth herein.
12.11 Severability. If any provision of this Agreement or the
------------
application of such provision to any person or circumstance shall be held
invalid, the remainder of this Agreement or the application of such provision to
persons or circumstances other than those to which it is held invalid shall not
be affected thereby.
12.12 Additional Documents and Acts. Each Member agrees to execute
-----------------------------
and deliver such additional documents and instruments and to perform such
additional acts as may be necessary or appropriate to effectuate, carry out and
perform all of the terms, provisions, and conditions of this Agreement and the
transactions contemplated hereby.
12.13 Notices. Any notice to be given or to be served upon the
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Company or any party hereto in connection with this Agreement must be in writing
(which may include facsimile) and will be deemed to have been given and received
when delivered to the
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address specified by the party to receive the notice. Such notices will be
given to a Member at the address specified in Exhibit A hereto. Any party may,
at any time by giving five (5) days' prior written notice to the other parties,
designate any other address in substitution of the foregoing address to which
such notice will be given.
12.14 Amendments. All amendments to this Agreement will be in writing
----------
and signed by all of the Members.
12.15 Reliance on Authorization of Person Signing Agreement. If a
-----------------------------------------------------
Member is not a natural person, neither the Company nor any Member will (a) be
required to determine the authority of the individual signing this Agreement to
make any commitment or undertaking on behalf of such entity or to determine any
fact or circumstance bearing upon the existence of the authority of such
individual or (b) be responsible for the application or distribution of proceeds
paid or credited to individuals signing this Agreement on behalf of such entity.
12.16 No Interest in Company Property; Waiver of Action for
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Partition. No Member or Economic Interest Owner has any interest in specific
- ---------
property of the Company. Without limiting the foregoing, each Member and
Economic Interest Owner irrevocably waives during the term of the Company any
right that he may have to maintain any action for partition with respect to the
property of the Company.
12.17 Multiple Counterparts. This Agreement may be executed in two
---------------------
or more counterparts, each of which shall be deemed an original, but all of
which shall constitute one and the same instrument.
12.18 Attorney Fees. In the event that any dispute between the
-------------
Company and the Members or among the Members should result in litigation or
arbitration, the prevailing party in such dispute shall be entitled to recover
from the other party all reasonable fees, costs and expenses of enforcing any
right of the prevailing party, including without limitation, reasonable
attorneys' fees and expenses.
12.19 Time is of the Essence. All dates and times in this Agreement
----------------------
are of the essence.
12.20 Remedies Cumulative. The remedies under this Agreement are
-------------------
cumulative and shall not exclude any other remedies to which any person may be
lawfully entitled.
ARTICLE XIII
DISPUTE RESOLUTION
13.1 Dispute Resolution. Matters in dispute under or relating to
------------------
this Agreement shall, unless settled pursuant to Section 13.2, be finally
resolved by binding arbitration.
13.2 Informal Dispute Resolution. The Members wish to encourage an
---------------------------
informal mechanism for resolving disputes. If within thirty (30) days the
Members are unable to
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<PAGE>
agree upon a resolution to the dispute, one or more Members may notify the other
Members of an intention to further discuss such disputed matter. Within ten
(10) days of receiving such notification, the Members shall each appoint
individuals to resolve the matter at issue. If such individuals are unable to
resolve the matter at issue within a further thirty (30) day period following
their appointment, then either party may refer the matter at issue to binding
arbitration in accordance with this Article 13.
13.3 Arbitration. In the event that the Members are unable to
-----------
resolve a dispute pursuant to Section 10.2, any Member or Members may serve a
notice on the other Members of its or their intention to formally arbitrate
stating reasonable particularity on the subject matter of such dispute. Such
arbitration shall be held in the Commonwealth of Massachusetts or such other
place as is mutually agreed by the Members. Within forty-five (45) days of
service of such notice the parties shall appoint a single arbitrator who shall
determine the matter. If the parties shall fail to appoint the arbitrator, the
Members may select their own arbitrators. The arbitrators thus selected shall
appoint a third arbitrator and the three arbitrators shall constitute a board of
arbitrators (the "Board of Arbitrators") and shall determine the matter. If
either party shall fail to name an arbitrator as described above within ten (10)
days notice from the other party, then the second arbitrator shall be appointed
pursuant to the Commercial Arbitration Rules, as amended and then in effect, of
the American Arbitration Association (the "Rules"). If the two arbitrators
shall fail to appoint a third arbitrator, then such third arbitrator shall be
appointed pursuant to the Rules.
13.4 Proceedings; Final Decision. In all respects, the provisions of
---------------------------
the Rules shall apply to any arbitration undertaken hereunder. The arbitrator
or Board of Arbitrators shall communicate the decision not less than thirty (30)
days after the close of argument in the arbitration, subject to any reasonable
delay. The decision of the arbitrator or Board of Arbitrators, as the case may
be, shall be in writing and signed by both parties and shall be final and
binding as to any question or questions so submitted to arbitration, and the
parties shall perform and comply with the terms and conditions thereof.
Judgment upon the award rendered may be entered in any court having jurisdiction
and thereupon execution or other legal process may issue thereon.
13.5 Costs. Unless otherwise agreed to by the parties, the costs
-----
incurred in connection with the arbitration and all other costs of the
arbitration shall be awarded to the prevailing or most prevailing party as
determined by the single arbitrator or Board of Arbitrators, as the case may be.
13.6 Rights and Remedies. Nothing herein contained shall prevent
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either party from seeking an injunction and any relief ancillary thereto from a
court of competent jurisdiction.
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<PAGE>
IN WITNESS WHEREOF, all of the Members of HeartMed, LLC, a Delaware
limited liability company, have executed this Operating Agreement, effective as
of the date written above.
MEMBER:
PARTNER PROVIDER HEALTH, INC.,
a Delaware corporation
By:/s/ Barry J. Barresi
-----------------------------------------
Barry J. Barresi, President
and Chief Executive Officer
MEMBER:
CPC OF AMERICA, INC.,
a Nevada corporation
By:/s/ Rod A. Shipman
------------------------------------------
Rod A. Shipman, President
and Chief Executive Officer
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<PAGE>
EXHIBIT A
CAPITAL CONTRIBUTIONS OF MEMBERS AND ADDRESSES OF MEMBERS
OF
HEARTMED, LLC
<TABLE>
<CAPTION>
Member's
Member's Initial
Capital Percentage
Member's Name Member's Address Contribution Interest
------------- ---------------- ------------ ----------
<S> <C> <C> <C>
Partner Provider 350 Main Street, Suite 14
Health, Inc. Maiden, Massachusetts 02148 $1,020 51%
CPC of America, Inc. 1133 Fourth Street, Suite 200
Sarasota, Florida 34236 $ 980 49%
</TABLE>
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