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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-24053
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 34236
Sarasota, Florida
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(Address of principal (Zip Code)
executive offices)
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 under Section 12(g) of the Act:
Common Stock, $.0005 par value
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(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained in this form, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The market value of the voting stock held by non-affiliates of the registrant as
of March 24, 1999 was approximately $13,117,500.
The number of shares of the Common Stock outstanding as of March 24, 1999 was
4,327,666.
Documents incorporated by reference: None.
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Part I
Item 1. Description of Business.
Unless otherwise indicated, all share information contained in this report has
been adjusted to give effect for a two for one split of the outstanding shares
of Common Stock effected on June 17, 1998. Unless otherwise indicated, all
references to the Company includes its wholly-owned subsidiary, CPCA 2000, Inc.,
a Nevada corporation.
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. Through its wholly-owned subsidiary, CPCA 2000, Inc.,
a Nevada corporation, the Company intends to manufacture and distribute external
counterpulsation devices for the treatment of coronary artery disease. The
Company also intends to provide counterpulsation treatment through Company-owned
and joint-venture clinical facilities. The Company intends to enter into joint
ventures with third-parties, called "co-sourcing" arrangements, to provide
counterpulsation services and support to hospitals, health maintenance
organizations ("HMO"s), preferred provider organizations ("PPO"s), and other
physician groups. The Company also intends to establish regional and national
management service organizations ("MSO"s) to provide an entity to manage its co-
sourcing ventures. As of the date of this report, the Company has not acquired
any MSOs or established any cardiology co-sourcing relationships, however, and
as described further below, the Company has recently entered into an agreement
to form an alliance with an existing MSO that provides services to over 100
cardiologists throughout South Florida.
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. As of March 24, 1999, warrants to purchase 45,000 shares of Common
Stock have been exercised for the gross proceeds of $78,750. All sales of Units
in the private placement were made pursuant to Rule 504 under the Securities Act
of 1933, as amended ("1933 Act"). 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 June 17, 1998, the Company conducted 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 Report gives effect to the split and changes in
par value as of June 17, 1998.
In November 1998, the Company commenced a private placement of 235,294 shares
of its Series A Preferred Stock, $.001 par value per share ("Series A Preferred
Stock"), at a price of $8.50 per share, pursuant to Rule 506 under the 1933 Act.
The Series A Preferred Stock has no voting rights. Each Series A Preferred
Share is convertible into Common Stock at a conversion price of $8.50 per share,
however, on December 31, 1999, the conversion price shall be adjusted to the
lower of (i) seventy-five percent (75%) of the average last sale price of the
Common Stock for the thirty (30) trading days immediately preceding such date as
reported on any stock exchange or (ii) $6.38 per share. As of March 24, 1999,
the Company had sold 39,294 shares of Series A Preferred Stock for the gross
proceeds of $334,000. Proceeds from the sale of the shares were applied towards
the Company's working capital.
In November 1998, the Company transferred 100% of the issued and outstanding
common stock of its wholly-owned subsidiary, DSDS Group, Inc., a Florida
corporation, to a consultant in exchange for research and development
engineering consulting services valued at approximately $60,000. The consulting
services are to be performed over a six month period commencing in December 1998
and relate to the development of improvements to the CPCA 2000 and CPCA 2000M.
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The Company's executive offices are located at 1133 Fourth Street, Suite 200,
Sarasota, Florida 34236; telephone number (941) 906-9546.
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Business of the Issuer
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General
The Company is engaged in the business of manufacturing and distributing
external counterpulsation devices for the treatment of coronary artery disease.
Counterpulsation is a non-invasive, atraumatic and non-toxic method of treating
certain coronary disease states. Counterpulsation 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 intends to provide counterpulsation treatment through Company-
owned and joint-venture clinical facilities. The Company intends to 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 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.
The Company also intends to establish MSOs to manage its co-sourcing
ventures by acquiring and/or creating joint ventures and alliances with existing
MSOs. These MSOs will be designed to own, operate and/or manage the technical
and professional aspects of a hospital's or practice's counterpulsation center.
The Company's MSOs 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 pension plan management and financial reporting, medical
information management services, marketing and business development, and
executive management and support.
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 direct cost of coronary disease is great in terms of treatment expense, loss
of earnings and productivity while the indirect costs are 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. A percentage of these patients undergo invasive surgical procedures
such as angioplasty or artery bypass surgery, both designed to remedy coronary
artery narrowing. 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
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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. Cuffs inflate sequentially
and rapidly at the onset of diastole to prevent blood from being trapped in
vascular beds. Cuffs deflate just before the heart squeezes, reducing the
pressure against which the heart must pump and allowing the heart to eject blood
more efficiently and completely. External counterpulsation is designed to
increase the ease of work during the contraction phase and to increase blood
flow during the relaxation phase of the cardiac cycle.
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 global cost of $7,500 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. The other 11 patients all remained free of limiting angina.
In 1998, results of a study regarding the effectiveness of counterpulsation
were reported in a section of the official program of the American Heart
Association's 71st Scientific Sessions. The study involved a randomized, sham-
controlled, double-blinded clinical trial of 139 patients with chronic angina.
The study used standardized methodology to determine whether counterpulsation
treatment had an effect on quality-of-life functions up to 12 months after
completion of treatment. Of the 125 patients who entered the study, the group
who received counterpulsation treatment demonstrated a 23% improvement in their
quality-of-life 12 months after the completion of their treatment. The group
that did not receive the counterpulsation treatment showed no improvement.
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.
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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
and/or the treatment equipment. A global co-sourcing arrangement combines both
technical and professional assistance. Thus, the key 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 MSOs 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 both efficient and quality-driven.
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.
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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.
Counterpulsation Technology Market
The target market for counterpulsation technology is vast. Approximately 7
million people are alive today who have a history of heart attack, angina
pectoris or chest pain, with approximately another 350,000 diagnosed each year.
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 500,000 coronary bypass procedures were performed in 1998. Of the
current population of approximately 260 million people in the United States,
approximately 70 million people (approximately 27%) suffer from some form of
cardiovascular disease.
Based upon this data, management believes that current market conditions
could support approximately 5,000 counterpulsation units in the U.S. alone. The
international patient base is estimated to be four times as large as the U.S.
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.
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 counterpulsation treatment 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 intends to establish MSOs to provide an entity to manage its
co-sourcing ventures with providers of services. The MSOs will be designed to
own,operate and/or manage the technical and professional aspects of a hospital's
or practice's counterpulsation center. The MSO would manage various aspects of
these treatment centers, 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 providing 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.
The Company's strategy is to either acquire or form a joint venture or
alliance with an existing MSO. However, there can be no assurances that the
Company will be able to find a suitable MSO candidate for acquisition or
alliance or, that the Company will be able to secure the financing necessary for
an acquisition. The Company intends to seek financing for the acquisitions of
MSOs 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.
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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 service
fees, licensing fees and co-sourcing revenues. 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
. National and international distribution agreements; and
. Internet commerce
Following FDA approval of the CPCA 2000, the Company intends to initially
focus its marketing efforts on the state of Florida. The Company believes that
Florida has a relatively high concentration of eligible patients with the
ability to pay before complete reimbursement by the payors is fully recognized.
In addition, the Medicare population of Florida is approximately 1,400,000,
which represents approximately 10% of the overall state population of
13,500,000.
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. 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 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
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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.
On November 12, 1998, the Company submitted to the FDA its final
application for the CPCA 2000. The FDA responded to the application on February
10, 1999 with requests for clarification on certain issues and for additional
data. The Company believes that it will receive FDA approval to market the CPCA
2000 in the second quarter of 1999. There can be no assurance, however, 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.
The commercial success of the CPCA 2000 is also dependent upon positive
coverage policies by the Health Care Financing Administration ("HCFA"), which
administers the Medicare program, as well as other third-party payors. In
February 1999, the HCFA extended Medicare coverage to external counterpulsation
treatment for Class III and Class IV patients with disabling angina who, in the
opinion of a cardiologist or cardiothoracic surgeon, are not readily amenable to
surgical interventions. However, there can be no assurance that counterpulsation
treatment will continue to be covered by Medicare in these circumstances or that
Medicare and other third-party payors will expand their coverage of
counterpulsation treatment. Failure to obtain such coverage could 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
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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 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.
11
<PAGE>
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 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 in the event it acquires or forms a joint venture
or alliance with an MSO, 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
12
<PAGE>
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 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 three other companies that are
currently producing and marketing or intending to market a counterpulsation
device similar to the CPCA 2000 or the CPCA 2000M: Vasomedical, Inc.;
Cardiomedics, Inc., an affiliate of Trimedyne, Inc.; and Cardio-Vascular
Electronics, Inc. The Company may also face limited competition from physicians
and treatment centers currently utilizing counterpulsation technology. The
Company believes that theses competitors have only a limited presence in the
market and that the market in general for counterpulsation devices is largely
untapped. There can be no assurance, however, 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.
Management of the Company estimates that counterpulsation therapy is
presently used to treat only a small percentage of all patients with coronary
artery diseases. Accordingly, the Company anticipates that the CPCA 2000 and the
CPCA 2000M will 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.
13
<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, Cardinal, Equimed, Inc., Dynecare Diagnostic Health,
Prime Medical and National Surgery Centers. Many of these companies have
established co-sourcing relationships with hospitals as a point of service
partner.
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.
Research and Development
Since inception, the Company's research and development expenses have
amounted to approximately $981,000. 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 report, the Company and its subsidiary 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.
Item 2. 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.
Item 3. Legal Proceedings.
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 a
defendant Rod Shipman, the Chief Executive Officer 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
14
<PAGE>
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.
On February 1, 1999, the Company filed a lawsuit against Partner Provider
Health, Inc. ("PPH") and its parent company, TLC The Laser Center, Inc., a
Canadian corporation, alleging breach of contract, misrepresentation and fraud.
In its complaint, the Company alleges that in August 1998, the Company and PPH
organized a Delaware limited liability company under the name of HeartMed, LLC
("HeartMed") to provide managed health care and related practice management in
the area of cardiology disease management. In September 1998, PPH and the
Company entered into an Operating Agreement providing for the operation and
management of HeartMed and its business. At the same time, HeartMed entered into
a Management Services Agreement with PPH pursuant to which PPH was to act as the
managing member of HeartMed. In its complaint the Company further alleges that
soon thereafter, in or about September 1998, PPH abandoned its duties and
obligations under the Operating Agreement and Management Services Agreement,
thereby expressing to the Company its intention to terminate its participation
in the HeartMed joint venture.
The Company alleges that PPH's breach of the Management Services Agreement
has caused the Company to lose profits from the sales and leasing of its CPCA
2000.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the security holders of the Company
during the fourth quarter of fiscal year 1998.
Part II
Item 5. Market for Common Equity and Related Shareholder Matters.
The Company's Common Stock has been listed on the OTC Bulletin Board under
the symbol "CPCF" since February 18, 1998. Set forth below are high and low
closing prices for the Company's Common Stock for each quarter during the fiscal
year ended December 31, 1998. The quotations listed below have been adjusted to
provide for the two for one stock split which was effected in June 1998. 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. The
quotations represent inter-dealer quotations without retail markups, markdowns
or commissions and may not represent actual transactions:
<TABLE>
<CAPTION>
Quarter Ended High Low
------------------------------------------- ------ ------
<S> <C> <C>
March 31, 1998 (since February 18, 1998) $ 3.125 $ 1.50
June 30, 1998 $14.75 $ 2.375
September 30, 1998 $15.62 $ 8.62
December 31, 1998 $ 8.62 $ 3.75
</TABLE>
As of March 24, 1999, there were approximately 43 record holders and
approximately 400 beneficial owners of the Company's Common Stock.
15
<PAGE>
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.
During the fiscal year ended December 31, 1998, the Company sold
unregistered shares of its Common Stock in the following transactions:
A. 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. The warrants are exercisable at
any time commencing on February 10, 1999 and expiring on 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. There was no underwriter involved in
this placement. The issuance was conducted pursuant to Rule 504 under the 1933
Act.
B. 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.
C. In April 1998, the Company issued to five 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.
D. In October 1998, the Company issued an aggregate of 15,000 shares of
Common Stock upon the exercise of stock options to one of its officers and to a
consultant. The exercise price paid to the Company ranged from $1.125 to $2.50
per share. There was no underwriter involved in this issuance. The issuance was
conducted pursuant to Section 4(2) of the 1933 Act.
E. In September 1998, the Company issued to two consultants options to
purchase an aggregate of 10,000 shares of Common Stock at an exercise price of
$9.00 per share. All of the options are immediately exercisable and expire on
September 30, 2003. There was no underwriter involved in these issuances. The
issuances were conducted pursuant to Section 4(2) of the 1933 Act.
F. In November 1998, the Company issued an aggregate of 42,000 shares of
Common Stock upon the exercise of stock options to three consultants of the
Company. The exercise price paid to the Company ranged from $1.125 to $2.50 per
share. There was no underwriter involved in this issuance. The issuance was
conducted pursuant to Section 4(2) of the 1933 Act.
G. In November 1998, the Company commenced a private placement of shares
of its Series A Preferred Stock at a price of $8.50 per share. As of March 24,
1999, the Company has sold 39,294 shares of Series A Preferred Stock for the
aggregate proceeds of $334,000. The placement is being conducted pursuant to
Rule 506 under the 1933 Act. There is no underwriter involved in the private
placement .
H. In December 1998, the Company issued to a consultant options to
purchase up to 5,000 shares of Common Stock at an exercise price of $4.625 per
share. All of the options are immediately exercisable and expire
16
<PAGE>
on December 31, 2003. There was no underwriter involved in these issuances. The
issuances were conducted pursuant to Section 4(2) of the 1933 Act.
Item 6. Management's Discussion and Analysis or Plan of Operation.
General
- -------
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 second quarter of
1999, subject to FDA approval of its counterpulsation units.
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. In
addition, the Company intends to market is counterpulsation units to existing
facilities through national and international distributors. Each company-owned
and joint-ventured 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.
In addition to its working capital on hand as of the date of this report,
the Company believes that it will require, at least, an additional $1,000,000 of
capital in order to fund its plan of operations over the next 12 months. The
Company expects to obtain the working capital it needs from both the present
private placement of Series A Preferred Stock as well as from the exercise of
currently outstanding warrants. See Item 1, "Description of Business - Business
Development." There can be no assurance, however, that the Company will be able
to obtain sufficient additional capital, either through the present private
placement, the exercise of warrants or otherwise, in order to fund the Company's
working capital requirements in a timely manner. The report of the Company's
independent accountants for the fiscal year ended December 31, 1998 states that
due to the absence of operating revenues and the Company's limited capital
resources, there is doubt about the Company's ability to continue as a going
concern.
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 has performed an audit of its
computer systems to assess the scope of the Company's risks and bring its
applications into compliance. Following the completion of that audit,
management of the Company believes that all of the Company's and its third party
systems are Year 2000 compliant. Management estimates that the cost to the
Company of performing its Year 2000 audit is $5,000 and that the costs of
bringing all of its software programs into compliance with the Year 2000 is
$25,000.
17
<PAGE>
Forward Looking Statements
- --------------------------
This report 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 report, 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.
18
<PAGE>
Item 7. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants.......................20
Consolidated Balance Sheet at December 31, 1998..........................21
Consolidated Statements of Operations for the years ended December 31,
1998 and 1997 and cumulative from inception (April 11, 1996) to
December 31, 1998.....................................................22
Consolidated Statements of Shareholders' Equity (Deficit) from
inception (April 11, 1996) to December 31, 1998.......................23
Consolidated Statements of Cash Flows for the years ended December 31,
1998 and 1997 and cumulative from inception (April 11, 1996) to
December 31, 1998.....................................................24
Notes to Consolidated Financial Statements...............................25
19
<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, 1998, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for each of the two years ended
December 31, 1998 and for the period from inception (April 11, 1996) to December
31, 1998. 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, 1998, and the results of their
consolidated operations and cash flows for each of the two years ended December
31, 1998 and for the period from inception (April 11, 1996) to December 31,
1998, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 6 to
the financial statements, the Company has incurred losses since its inception
and remains in the development stage. These conditions raise substantial doubt
about its ability to continue as a going concern Management's plans regarding
those matters are also described in Note 6. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
CACCIAMATTA ACCOUNTANCY CORPORATION
Irvine, California
March 4, 1999
20
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
ASSETS
Current assets:
Cash and equivalents $ 49,864
Prepaid and other 147,095
-----------
Total current assets 196,959
Equipment, net of accumulated depreciation of $4,181 11,239
Other 5,608
-----------
$ 213,806
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 40,744
-----------
Total current liabilities 40,744
-----------
Commitments and contingencies -
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized, $.001
par value, 8,824 issued and outstanding 9
Common stock, 20,000,000 shares authorized, $.0005
par value, 4,327,666 shares issued and outstanding 2,164
Additional paid-in capital - preferred 99,991
Additional paid-in capital - common 1,253,386
Deficit accumulated during the development stage (1,182,488)
-----------
Net shareholders' equity 173,062
-----------
$ 213,806
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Cumulative
from inception
Year ended Year ended (April 11, 1996)
December 31, December 31, to December 31,
1998 1997 1998
------------ ------------ ----------------
<S> <C> <C> <C>
Costs and expenses:
Research and development $ 531,807 $ 393,772 $ 981,060
General and administrative 116,256 57,600 176,256
Depreciation and amortization 4,947 13,409 18,444
--------- --------- -----------
Operating loss (653,010) (464,781) (1,175,760)
--------- --------- -----------
Other income (expense):
Interest expense - (5,833) (7,000)
Embedded interest expense (25,000) - (25,000)
Interest income 11,790 12,305 24,152
--------- --------- -----------
(13,210) 6,472 (7,848)
--------- --------- -----------
Loss before minority interest (666,220) (458,309) (1,183,608)
Minority interest 640 480 1,120
--------- --------- -----------
Net loss $(665,580) $(457,829) $(1,182,488)
========= ========= ===========
Basic and diluted net loss per share $ (0.16) $ (0.12)
========= =========
Basic and diluted weighted average
number of common shares outstanding 4,285,471 3,838,046
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<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, 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------- -----------------------------------
Amount Amount
------------- -----------------------
Number Per Number Per
of Shares Share Total of Shares Share Total
--------- ----- ----- --------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Initial capitalization - $ - $ - 2,400,000 $ 0.0005 $1,200
Issuance of common stock for a note - - - 300,000 0.0005 150
Issuance of common stock for cash - - - 100,000 0.05 50
Issuance of common stock for services - - - 764,000 0.05 382
Net loss for 1996 - - - - - -
----- ----- --------- ------
Balance, December 31, 1996 - - - 3,564,000 1,782
Exercise of options - - - 26,666 1.125 13
Issuance of common stock for cash and
conversion of note payable ($77,000) - - - 640,000 1.45 320
Payment of note receivable from
shareholder - - - - - -
Net loss for 1997 - - - - - -
----- ----- --------- ------
Balance, December 31, 1997 - - - 4,230,666 - 2,115
Exercise of options - - - 57,000 1.125 - 2.50 29
Issuance of common stock for cash - - - 40,000 1.45 20
Issuance of preferred stock for cash 8,824 8.50 9 - - -
Additional paid-in capital related to
embedded interest - - - - - -
Contribution of officer's salary - - - - - -
Net loss for 1998 - - - - - -
----- ----- --------- ------
Balance, December 31, 1998 8,824 $ 9 4,327,666 $2,164
===== ===== ========= ======
<CAPTION>
Deficit
Note Additional Additional Accumulated Net
Receivable Paid-in Paid-in During the Shareholders'
from Capital - Capital - Development Equity
Shareholder Common Preferred Stage (Deficit)
----------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Initial capitalization $ - $ - $ - $ - $ 1,200
Issuance of common stock for a note (150) - - - -
Issuance of common stock for cash - 4,950 - - 5,000
Issuance of common stock for services - 37,818 - - 38,200
Net loss for 1996 - - (59,079) (59,079)
------- ---------- ------- ----------- ---------
Balance, December 31, 1996 (150) 42,768 - (59,079) (14,679)
Exercise of options - 29,987 - - 30,000
Issuance of common stock for cash and
conversion of note payable ($77,000) - 927,680 - - 928,000
Payment of note receivable from
shareholder 150 - - - 150
Net loss for 1997 - - (457,829) (457,829)
------- ---------- ------- ----------- ---------
Balance, December 31, 1997 - 1,000,435 - (516,908) 485,642
Exercise of options - 114,971 - - 115,000
Issuance of common stock for cash - 57,980 - - 58,000
Issuance of preferred stock for cash - - 74,991 - 75,000
Additional paid-in capital related to
embedded interest - - 25,000 - 25,000
Contribution of officer's salary - 80,000 - - 80,000
Net loss for 1998 - - - (665,580) (665,580)
------- ---------- ------- ----------- ---------
Balance, December 31, 1998 $ - $1,253,386 $99,991 $(1,182,488) $ 173,062
======= ========== ======= =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Cumulative
from inception
Year ended Year ended (April 11, 1996)
December 31, December 31, to December 31,
1998 1997 1998
------------ ------------ ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(665,580) $(457,829) $(1,182,488)
Adjustments to reconcile net loss to net cash
used by operating activities:
Minority interest (640) (480) (1,120)
Depreciation and amortization 4,947 13,409 18,444
Embedded interest expense 25,000 - 25,000
Contribution of officer's salary 80,000 - 80,000
Gain on disposition of Tercero - (15,679) (15,679)
Issuance of common stock for services - - 38,200
Sale of Tercero - assignment of payables - 55,678 55,678
Increase in other assets (62,000) (29,344) (93,326)
Increase in accounts payable 28,072 10,020 41,224
(Decrease)/increase in accrued expenses (10,000) 26,000 16,000
Increase in accrued interest - 5,833 7,000
--------- --------- -----------
Net cash used by operating activities (600,201) (392,392) (1,011,067)
--------- --------- -----------
Cash flows from investing activities:
Tercero acquisition/sale - 1 (49,999)
DSDS acquisition (18,000) (61,000) (79,000)
Capital expenditures - (13,662) (15,420)
--------- --------- -----------
Net cash used by investing activities (18,000) (74,661) (144,419)
--------- --------- -----------
Cash flows from financing activities:
Proceeds from notes to shareholders - - 73,000
Proceeds from note receivable from shareholder - 150 150
Payments on note payable to shareholder - (3,000) (3,000)
Exercise of options 115,000 30,000 145,000
Issuance of preferred stock 75,000 - 75,000
Issuance of common stock 58,000 851,000 915,200
--------- --------- -----------
Net cash provided by financing activities 248,000 878,150 1,205,350
--------- --------- -----------
Net (decrease) increase in cash (370,201) 411,097 49,864
Cash, beginning of period 420,065 8,968 -
--------- --------- -----------
Cash, end of period $ 49,864 $ 420,065 $ 49,864
========= ========= ===========
Non-cash investing and financing activities:
Issuance of common stock for note receivable $ - $ - $ 150
Debt to equity conversion $ - $ 77,000 $ 77,000
Acquisition of minority interest $ 18,000 $ 15,250 $ 33,250
Sale of Tercero - elimination of goodwill $ - $ (40,000) $ (40,000)
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 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.
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. In September 1998, the Company purchased the remaining 20%
interest of DSDS for $18,000 cash. 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. On December
1, 1998, the Company sold DSDS for its book value of $60,000 to a consulting
firm that has been providing research and development activities to the
Company since early 1998. In consideration for the acquisition of DSDS, this
R & D consulting firm will provide $60,000 worth of consulting services to
the Company through May 1999.
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.
In June 1998 CPC formed CPCA 2000, Inc., a Nevada corporation ("CPCA") to
serve as the Company's wholly-owned operating subsidiary. The Company
transferred all of its assets and liabilities to CPCA.
25
<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)
- --------------------------------------------------------------------------
Principles of consolidation
---------------------------
The accompanying consolidated financial statements include the amounts of the
Company and its subsidiaries: Tercero, from December 1996 through December
1997, DSDS, from July 1997 through November 1998 and CPCA, from June 1998.
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.
26
<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)
- --------------------------------------------------------------------------
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".
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. The Company adopted the provisions for pro forma
disclosure requirements of SFAS 123. 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.
27
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
2. Shareholders' equity
- -----------------------
Series A Preferred stock
------------------------
In November 1998, the Company offered in a private placement memorandum
Series A preferred stock at $8.50 per share. As of December 31, 1998, the
Company sold 8,824 shares for net proceeds of $75,000. The Series A
Preferred stock has no voting rights. Each Series A share is convertible
into one common share at $8.50 per share; however, on December 31, 1999, the
conversion price shall be adjusted to the lower of (i) 75% of the average
last sale price of the common stock for the 30 trading days immediately
preceeding such date as reported on any stock exchange or (ii) $6.38 per
share. In the event of a liquidation of the Company, the holders of the
Series A shares shall be entitled to receive a liquidation preference payment
of $8.50 per share; before any payment is made to the holders of the common
stock. The Company has recorded $25,000 as additional paid-in capital for
the discount related to the embedded interest in the preferred stock and
fully amortized the expense in the fourth quarter, when the stock was issued.
This interest expense is included in the caption "Embedded interest expense"
in the accompanying 1998 statement of operations.
Common stock
------------
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 these financial has been
adjusted to reflect the two-for-one stock split.
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 December 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 December 1996, the Company issued 4,000 shares of common stock to its
attorney for payment of $200 in legal fees.
In October 1996, the Company issued 760,000 shares of common stock to related
parties in payment of $38,000 in consulting fees rendered in 1996.
In May 1996, the Company sold to its founders 2,400,000 shares of common
stock for $.0005 cash per share and 300,000 shares for a $150 note
receivable. In September 1996, the Company sold 100,000 shares of common
stock for $.005 cash per share to one of its founders.
28
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to 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:
<TABLE>
<CAPTION>
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) $1.18
---------- -------------
Outstanding at December 31, 1997 4,193,334 $1.125 - 1.25 2006
---------- -------------
Granted 4,152,000 $ 1.25 - 9.00 2008
Exercised (57,000) $1.125 - 2.50 2003
Canceled (1,173,334) $1.125
---------- ------------- -----------
Outstanding at December 31, 1998 7,115,000 $1.125 - 9.00 2003 - 2008
========== ============= ===========
Exercisable at December 31, 1998 3,251,000 $1.125 - 9.00 2003 - 2008
========== ============= ===========
</TABLE>
Included in total options granted in 1998 and 1996 are 2,000,000 and
1,000,000, respectively, 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.
29
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
2. Shareholders' equity (continued)
- -----------------------------------
Stock options (continued)
-------------------------
The following information applies to employee options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Weighted Weighted
Average average average
Number remaining exercise Number exercise
Outstanding life (years) price Exercisable price
----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Options 2,990,000 8 $2.05 1,190,000 $1.36
========== ============ ======== =========== =========
</TABLE>
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 1998 and 1996, respectively: risk-free interest rate of 6%
and 9%; volatility of 50% and 200%; and a weighted fair value of $1.26 and
$.001.
Had compensation cost been determined based on the fair value of the options
at the grant dates consistent with the method of SFAS 123, the Company's net
loss and loss per share would have been:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Net loss
As reported $ (665,580) $(457,829)
Pro forma $(1,539,580) $(457,829)
Basic and fully diluted loss per share
As reported $ (0.16) $ (0.12)
Pro forma $ (0.36) $ (0.12)
</TABLE>
30
<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>
1998 1997
---------- ----------
<S> <C> <C>
Basic and diluted loss per share:
- ---------------------------------
Numerator
---------
Net loss $ (665,580) $ (457,829)
---------- ----------
Denominator
-----------
Basic and diluted weighted average number of
common shares outstanding during the period 4,285,471 3,838,046
---------- ----------
Basic and diluted loss per share $(0.16) $(0.12)
========== ==========
Incremental common shares (not included in denominator
of diluted earnings per share calculation due to their
antidilutive nature) attributable to exercise of:
Outstanding options 7,115,000 4,193,334
Outstanding warrants 1,360,000 1,280,000
---------- ----------
8,475,000 5,473,334
========== ==========
</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. For 1998 and 1997 there is no difference between income
tax expense and the amount computed by applying the federal statuatory income
tax rate.
At December 31, 1998, the Company has a net operating loss carryforward for
federal tax purposes of $1,157,000 which, if unused to offset future taxable
income, will expire in 2012 and 2013.
The Company had deferred tax assets of $405,000 and $175,000 at December 31,
1998 and 1997, 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.
31
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
5. Commitments
- --------------
Lease
-----
The Company leases office space on a month-to-month basis at $95 per month.
Actual rent expense was $1,860 in 1998 and $475 in 1997.
Consulting agreements
---------------------
In January 1997, the Company entered into a consulting agreement with its
financial advisor, a related party, for five years at $5,000 per month. The
agreement was revised in November 1997 to $8,000 per month and in April 1998
to $10,000 per month.Options to purchase 1,000,000 shares of common stock at
an exercise price of $2.50 per share were also granted under the April 1998
revision agreement, with an additional 1,000,000 options to be granted if the
agreement is 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 and are exercisable for ten years. As of December
31, 1998, the Company has prepaid a company controlled by this related party
$70,000 for research and development costs to be provided in 1999.
In April 1998, the Company entered into an employment agreement with its
President and CEO for five years with a five year extension option. The
agreement provides for a base salary of $10,000 per month beginning May 1998,
to be paid when the Company begins recording revenues. In December 1998, the
Company's president elected to contribute his accrued salary of $80,000 to
the Company. Options to purchase 1,000,000 shares of common stock at an
exercise price of $2.50 per share were granted under the agreement, with an
additional 1,000,000 options to be granted if the agreement is 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 and are exercisable for ten years.
6. Going concern
- ----------------
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has
reported losses from its inception, is still in the development stage and
does not have sufficient cash to cover its current operating needs. The
Company is continuing the offering of its Series A Preferred Stock to raise
the additional capital it will require to meet its obligations in 1999.
32
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Set forth below are the directors and officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Rod A. Shipman 49 President, Secretary and Director
Rafe Cohen 51 Treasurer and Director
William C. Lievense 51 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 20 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 July 1998. Mr. Cohen previously served as a director of the Company in
1996. Mr. Cohen is a certified public accountant and has owned and managed his
own accounting practice since 1974. Mr. Cohen also currently serves as President
of Galaxy Theaters. Mr. Cohen received a Masters Degree in Business Taxation
from the University of Southern California in 1976 and a Masters Degree in
Finance from the University of California, Los Angeles in 1972.
Mr. Lievense has served as a director of the Company since October
1996. He has approximately 26 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.
All directors serve for a one year term and until their successors are
duly elected and qualified. All officers serve at the discretion of the Board of
Directors.
Key Consultants to the Company
The CTM Group, Inc., a Nevada corporation has a consulting contract to
provide strategic planning
33
<PAGE>
services to the Company. Mr. Paul Shabty is primarily responsible for the
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. 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.
Gene Meyers, MD, is a consultant to the Company and has served as the
Medical Director for CPCA 2000, Inc. since July 1998. For the past five years,
Dr. Meyers has maintained his own cardiology practice in Sarasota. Florida. Dr.
Meyers has performed medical internships at the University of Michigan's
Department of Internal Medicine and at the University Health Center in
Pittsburgh. Dr. Meyers received a Bachelor's degree in Chemistry and Physics
from Pennsylvania State University and an MD from the Pennsylvania School of
Medicine.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers, directors and persons who beneficially own more than 10%
of a registered class of our equity securities to file reports of securities
ownership and changes in such ownership with the Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than 10% beneficial
owners are also required by rules promulgated by the SEC to furnish us with
copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to us,
or written representations that no Form 5 filings were required, we believe that
during the period from April 20, 1998 (the inception of Section 16(a) reporting
obligations for our officers, directors and greater than 10% beneficial owners)
through December 31, 1998, all Section 16(a) filing requirements applicable to
our officers, directors and greater than 10% beneficial owners were complied
with.
34
<PAGE>
Item 10. 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 years ended
December 31, 1998 and 1997 and from inception (April 11, 1996) to December 31,
1996.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Name and Position Year Salary Bonus Other Annual Restricted Common Shares All Other
Compensation Stock Awards($) Underlying Options Compen-
Granted sation
(# Shares)
<S> <C> <C> <C> <C> <C> <C> <C>
Rod A. Shipman, President and 1998 -0- -0- -0- -0- 2,000,000 (1) -0-
Secretary(1) 1997 -0- -0- -0- -0- -0- -0-
1996 -0- -0- -0- -0- 1,000,000 -0-
Rafe Cohen, Treasurer(2) 1998 $-0- -0- -0- -0- -0- -0-
1997 -0- -0- -0- -0- -0- -0-
1996 -0- -0- -0- -0- -0-
Richard E. Rubin, Senior 1998 $-0- -0- -0- -0- -0- -0-
Executive Vice President 1997 -0- -0- -0- -0- -0- -0-
and Treasurer(3) 1996 -0- -0- -0- -0- -0- -0-
</TABLE>
_____________
(1) 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.
Pursuant to his employment agreement with the Company, Mr. Shipman shall not
receive any salary from the Company until the Company generates revenues
from its operations. Accordingly, the Company has not paid, nor has it
accrued, any salary payable to Mr. Shipman. In addition, Mr. Shipman
received options to purchase 2,000,000 shares of Common Stock at an exercise
price of $2.50 per share, of which option to purchase 200,000 are
immediately exercisable, options to purchase 200,000 shares vest and first
become exercisable on April 23, 1999 and options to purchase 200,000 shares
vest and first become exercisable on each of the next eight anniversaries of
the date of grant. The options expire on April 22, 2008. The Employment
Agreement is for a term of ten years.
(2) In July 1998, Mr. Cohen became the Treasurer and a director of the Company.
(3) Dr. Rubin served as an officer and a director of the Company through June 2,
1998.
35
<PAGE>
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
Name Number of Securities % of Total Options/SARs Exercise or Base Expiration Date
Underlying Options/SARs Granted to Employees in Price ($/Sh)
Granted (#) Fiscal Year
<S> <C> <C> <C> <C>
Rod A. Shipman, President 2,000,000(1) 100% 2.50 4/22/08
and Secretary
</TABLE>
(1) Options to purchase 200,000 are immediately exercisable, options to
purchase 200,000 shares vest and first become exercisable on April 23, 1999
and options to purchase 200,000 shares vest and first become exercisable on
each of the next eight anniversaries of the date of grant
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Name Shares Acquired on Value Realized ($) Number of Securities Value of Unexercised
Exercise (#) Underlying In-the-Money
Unexercised Options/SARs at
Options/SARs at FY-End ($)
FY-End (#)
Exercisable/
Exercisable/ Unexercisable
Unexercisable
<S> <C> <C> <C> <C>
Rod A. Shipman 10,000 57,500 1,400,000/1,600,000 2,968,000/3,392,000
President and Secretary
</TABLE>
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.
36
<PAGE>
Item 11. 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 December 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) 1,556,000 (2) 27.2%
Rafe Cohen(1) 37,000 (3)
Dr. Richard E. Rubin(4) 496,666 11.5%
William C. Lievense(1) 40,000 (3)
CTM Group, Inc.(5) 2,087,000 (6) 36.4%
Leslie J. Kessler(7) 1,980,000 (8) 45.8%
All officers and directors as a group 1,633,000 28.6%
</TABLE>
_______________
(1) Address is 1133 Fourth Street, Suite 200, Sarasota, Florida 34236.
(2) Includes options granted to Mr. Shipman to purchase 1,390,000 shares of
Common Stock. Does not include options to purchase 1,600,000 shares of
Common Stock, which are subject to vesting.
(3) Less than one percent.
(4) Address is 5530 Wisconsin Avenue, Suite 750, Chevy Chase, Maryland 20815.
(5) Address is 1350 East Flamingo, #800, Las Vegas, Nevada 89119.
(6) Includes options granted to the CTM Group to purchase 1,400,000 shares of
Common Stock. Does not include options to purchase 1,600,000 shares of
Common Stock, which are subject to vesting.
(7) Address is 11 Hedgerow Lane, Jericho, New York 11753.
(8) Includes an option granted to Ms. Kessler to purchase 990,000 shares of
Common Stock at $1.125 per share for a ten year period ending May 2, 2006.
37
<PAGE>
Item 12. 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 with 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 option 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 13. Exhibits and Reports on Form 8-K.
(a) Index To Exhibits Page
----
3.1 Articles of Incorporation of the Company.(1)
3.2 Bylaws of the Company.(1)
4.1 Specimen of Common Stock Certificate.(1)
10.1 Consulting Agreement between the Company and CTM Group, Inc.(1)
10.2 Stock Purchase Agreement between the Company and DSDS Group, Inc.
dated July 25, 1997.(1)
10.3 Employment Agreement dated April 23, 1998 between the Company and Rod
A. Shipman.(2)
10.4 Operating Agreement dated August 21, 1998 between the Company and
Partner Provider Health, Inc.(2)
10.5 Consulting Agreement dated April 23, 1998 between the Company and CTM
Consulting Group, Inc.(2)
10.6 Agreement dated November 17, 1998 between the Company and
Metropolitan Health Networks.
10.7 Agreement dated November 17, 1998
21.1 The Company has one subsidiary, CPCA 2000, Inc., a Nevada corporation.
27.1 Financial Data Schedule
_______________
(1) Previously filed as part of the Company's registration statement on Form 10-
SB (SEC File No. 0-24053) filed with the Securities and Exchange Commission
on April 20, 1998.
38
<PAGE>
(2) Previously filed as part of the Company's registration statement on Form 10-
SB/A (SEC File No. 0-24053) filed with the Securities and Exchange
Commission on August 14, 1998.
(b) Reports on Form 8-K.
None.
39
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CPC OF AMERICA, INC.
Date: March 30, 1999 By: /s/ ROD A. SHIPMAN
----------------------
Rod A. Shipman, President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
/s/ ROD A. SHIPMAN President, Chief Financial Officer, March 30, 1999
- ----------------------- Secretary and Principal Accounting
ROD A. SHIPMAN Officer and Director
/s/ RAFE COHEN Treasurer and Director March 30, 1999
- -----------------------
RAFE COHEN
/s/ WILLIAM LIEVENSE Director March 30, 1999
- -----------------------
WILLIAM LIEVENSE
40
<PAGE>
EXHIBIT 10.6
[CPC LETTERHEAD]
November 17, 1998
SENT VIA FACSIMILE (941) 748-1969
- ---------------------------------
Mr. Dale Ferguson
Vice President
Automation Specialties Enterprises, Inc.
1836 14th Street West
Bradenton, Florida 34205
Re: Research and Development Engineering Services
---------------------------------------------
Dear Mr. Ferguson:
This letter follows up recent conversations and meetings with the Company's
representatives regarding your company, Automation Specialties Enterprises, Inc.
("ASE"). The subject matter of these meetings dealt with an additional Research
and Development Engineering Consulting Services assignment on the CPCA 2000
units for engineering services relating to future product enhancement analysis.
This specific task assignment beginning December 1, 1998 covering a period
of approximately six months or less will be for approximately $60,000 in
Research and Development Engineering Consulting Services. In consideration for
these services will be the 100% stock transfer of DSDA Group, Inc. has the two
patents of the self-destruct double syringe assigned to it by the U.S. Patent
Office.
With your signature approving this transaction below in consideration for
services to be performed, I will authorize the Company's legal counsel, Mr.
Daniel K. Donahue of Oppenheimer Wolff & Donnelly LLP to prepare a stock
purchase agreement for DSDS Group, Inc. to be transferred to ASE within the
necessary timeframes.
We look forward to much continued success for both of our companies as we
move forward in delivery solutions for the treatment of heart disease.
<PAGE>
If you have any questions, please do not hesitate to contact me.
Sincerely,
/s/ Rod A. Shipman
-----------------------------------
Rod A. Shipman
I agree to the terms and conditions as set forth in this transaction for
consulting services to be rendered.
/s/ Dale Ferguson November 19, 1998
- ----------------- -----------------
Dale Ferguson, Vice President Date
Automation Specialties Enterprises, Inc.
cc: Mr. Daniel K. Donahue, Oppenheimer Wolff & Donnelly LLP
Mr. Paul Shabty, CTM Group, Inc.
<PAGE>
EXHIBIT 10.7
[CPC LETTERHEAD]
November 17, 1998
Mr. Noel J. Guillama
President and Chief Executive Officer
METROPOLITAN HEALTH NETWORKS
5100 Town Center Circle
Boca Raton, Florida 33486
Re: Managed Services Organization Alliance/Joint Venture
----------------------------------------------------
Dear Noel:
It was a pleasure talking with your team today regarding Metropolitan's
Managed Services organization (MSO). CPC of America, Inc. is desirous after
recent management and board decisions to not pursue acquiring a MSO to meet the
objectives of the Company's business plan. However, to meet the Company's
business plan as presented to Wall Street and SEC, we must form an alliance and
or joint venture to provide these services to our Company owned treatment
facilities as well as to be able to offer these services to our customers in
their practices.
I would like to propose the following to you for consideration and
finalization of a brief contract by both parties:
. Metropolitan become exclusive provider of MSO services to CPC of
American owned treatment facilities.
. Metropolitan become exclusive provider of MSO services to CPC of America
for Joint Ventured owned facilities.
. Pricing of the MSO to CPC of America, Inc. facilities will be 1% of
collected revenue below published pricing schedules of Metropolitan.
. Metropolitan's MSO services will be promoted by the sales and marketing
staff of CPC of America, Inc.
. CPC of America, Inc. will provide access to Metropolitan for booth space
at major Cardiology meetings such as the American College of
Cardiology and American Heart Association meetings.
. Metropolitan will promote CPC of America, Inc.'s CPCA2000(TM) counter-
pulsation care treatment devices.
. Term of agreement is for five (5) years with 90-day notices of
cancellation by either party without cause.
. Joint Press Release approved by both parties.
<PAGE>
If you have any questions, please do not hesitate to contact me.
Sincerely,
/s/ Rod A. Shipman
------------------
Rod A. Shipman
President and Chief Executive Officer
I hereby acknowledge and agree to these terms and conditions set forth in
the above.
- -------------------------------------- --------------------
Mr. Noel J. Guillama Date
President and Chief Executive Officer
Metropolitan Healthcare Networks, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JAN-01-1998
<CASH> 49,864
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 196,959
<PP&E> 11,239
<DEPRECIATION> 0
<TOTAL-ASSETS> 213,806
<CURRENT-LIABILITIES> 40,744
<BONDS> 0
0
9
<COMMON> 2,164
<OTHER-SE> 170,889
<TOTAL-LIABILITY-AND-EQUITY> 213,806
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 653,010
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,000
<INCOME-PRETAX> (665,580)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (665,580)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
