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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, 1999
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
Sarasota, Florida 34236
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (941) 906-9546
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None N/A
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Securities to be registered under Section 12(g) of the Act:
Common Stock, $.0005 par value
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(Title of class)
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 ____
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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 ]
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The market capitalization value of the voting stock held by non-affiliates of
the registrant as of March 31, 2000 was approximately $15,254,376.
The number of shares of the Common Stock outstanding as of March 31, 2000 was
4,603,741.
Documents incorporated by reference: None.
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Part I
Item 1. Description of Business.
Unless otherwise indicated, all references to the Company include its
wholly-owned subsidiaries, CPCA 2000, Inc., a Nevada Corporation and HeartMed,
LLC., a Delaware limited liability company, and its majority-owned subsidiary,
Med Enclosures, LLC. a Nevada limited liability company.
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 to develop and acquire cardiology medical
devices, therapeutic devices and disposable/consumable products. To date, the
Company has developed and, through CPCA 2000, intends to manufacture and
distribute external counterpulsation devices for the treatment of coronary
artery disease. In addition, the Company recently acquired a controlling
interest in Med Enclosures which owns two patents for a puncture closing device
and technique known as The Myers Solution(S). ("The Myers Solution"). Finally,
the Company continues to seek to acquire a revenue producing cardiology based
company with engineering and sales and marketing personnel and distribution
channels already in place. The Company's operations to date have consisted of
the design and development of its counterpulsation units, the acquisition of Med
Enclosures and the raising of capital.
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 $4.70
per share. In addition, the holders of the shares of Series A Preferred Stock
are entitled to an annual dividend of 5%, payable in either cash or shares of
Common Stock. In the private placement, the Company sold a total of 79,293
shares of Series A Preferred Stock for the gross proceeds of $674,000. Proceeds
from the sale of the shares were applied towards the Company's working capital
and research & development of the Company's counterpulsation units. As of March
31, 2000, a total of 70,469 shares of Series A Preferred Stock had been
converted into a total of 131,996 shares of Common Stock., including shares
issued as payment of the 5% dividend.
In November 1999, the Company formed Med Enclosures as a limited
liability company organized under the laws of the state of Nevada. Pursuant to
the terms of an Operating Agreement dated November 5, 1999, the Company received
a 73.3% interest in Med Enclosures in exchange for its contribution of $250,000
to the initial capital of Med Enclosures and its commitment to raise a minimum
of $4,000,000 for Med Enclosures during 2000 to fund the FDA approval process
for The Myers Solution procedure. Dr. Gene Myers, the Medical and Clinical
Affairs Director for the Company, contributed all rights to the "Myers Solution"
products and procedures for arterial closures, including U.S. Patent Nos.
5,486,195 and 5,941,897, in exchange for the remaining 26.7% interest in Med
Enclosures. The Company's contribution to Med Enclosures was made pursuant to a
Promissory Note dated November 5, 1999 in the original principal amount of
$250,000. The Note bears interest at the rate of 5% per annum and all principal
and interest is due and payable no later than November 5, 2000.
The Company's executive offices are located at 1133 Fourth Street,
Suite 200, Sarasota, Florida 34236; telephone number (941) 906-9546.
Business of the Issuer
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General
The Company is engaged in the business of developing and/or acquiring
cardiology therapeutic and disposable devices and products as well as the
manufacturing and distributing of these devices and products for the diagnosis
and treatment of coronary artery disease. To date, the Company has developed
and/or acquired two products: the CPCA 2000 counterpulsation devices and the
Myers Solutions puncture closing products and techniques.
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The Company's first product is the CPCA 2000 counterpulsation unit, a non-
invasive, atraumatic and non-toxic method of treating certain coronary disease
states. The Myers Solution is a puncture closing product and technique that
utilizes a human glue deployment to close puncture wounds following surgery,
thereby avoiding sutures and limiting discomfort to patients following surgery.
Both the CPCA 2000 and the Myers Solution are in the development stage and the
Company is seeking FDA approval of both of these products.
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.
Each year, thousands of people undergo cardiac catheterization, an invasive
procedure that involves threading a catheter through an artery from a patient's
groin to the heart. While cardiac catheterization is invaluable in diagnosing
coronary artery blockages, it carries a serious risk of hemorrhaging at the site
where the artery is punctured. To reduce this risk, heavy pressure is applied
to the incision area for the first 45 minutes, and the patient must lie flat and
still for up to 12 hours after the procedure.
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.
Products and Services
Counterpulsation Technology: "CPCA2000"
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.) Counterpulsation is significantly less
invasive than both angioplasty and artery bypass surgery and is designed to
reduce the need for these more complicated and costly procedures.
Counterpulsation involves the rhythmic inflation and deflation of sets of
balloons or cuffs wrapped around the muscles of the calves, thighs and buttocks.
Inflation and deflation occurs in a sequential manner, progressing from the
calves to the lower and upper thighs and then to the buttocks. The sequence of
cuff inflation and deflation compresses the vascular beds and is timed to the
beating of the patient's own heart through synchronization with the patient's
electrocardiogram. 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.
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Patients are typically treated with counterpulsation therapy during 35 one-
hour outpatient visits or sessions, spanning four to seven weeks. During their
treatments, the patients remain outside the hospital and are free to pursue work
and other scheduled activities. Treatment success is observed by relief of
symptoms, possible reduction in medication, increased exercise capacity on the
treadmill, and elimination of areas of poor cardiac circulation. A course of
counterpulsation treatments, with a total 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 the
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.
Puncture Closure Devices: "The Myers Solution"
The Myers Solution is a proprietary technique for use during catherization
procedures that is designed to reduce the risk of hemorrhage and speed recovery
time for patients following these procedures. The Myers Solution is based on a
basic principle of arterial clotting. When the outer surface of an artery,
called the adventitia, is injured it releases a sticky chemical that serves as
an adhesive for the body's clot-inducing substances, thus initiating the
clotting process. The Myers Solution accelerates the release of this chemical
through the use of a special instrument that surgically debrides the adventitia.
To further speed clotting, this debridement is combined with one of the newly
developed forms of "human glue." These products, a mixture of natural thrombin
and fibrinogen, are widely available and relatively inexpensive. In addition,
they can be manufactured to become adhesive only when exposed to a specific
catalyst such as a laser.
The glue alone is not sufficient to close the artery, however. Debridement
is the key to the effectiveness of this technique, creating a surface area that
allows the glue to adhere and form a solid seal. The Myers Solution includes a
patented instrument and technique to temporarily close the wound, debride the
surrounding adventitia and deliver a form of human glue to the puncture site
that can be activated by laser light. The Company's majority-owned subsidiary,
Med Enclosures, holds the patents for both the instrument and the technique used
in connection with The Myers Solution.
The Company believes that a major advantage of The Myers Solution is that
it requires no sutures and leaves no foreign matter in the artery thereby
reducing the risk of an embolism resulting from residual material in the artery.
In addition, The Myers Solution is designed to reduce the need for patients to
remain completely
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immobile after the catherization procedure, often the most difficult and
uncomfortable part of the entire procedure. The Company believes that The Myers
Solution will significantly reduce the time and discomfort associated with
catherization procedures thereby reducing patients' recovery time following such
procedures. The Myers Solution is also designed to reduce the costs associated
with cardiac catheterization by lowering post-procedural hospitalization time
and the intensity of care required.
Marketing and Distribution
Counterpulsation Technology "CPCA2000"
The Company intends to engage third parties, through original equipment
manufacturing ("OEM") relationships, to manufacture the Company's products.
However, the Company may elect to build a multi application medical
manufacturing facility in Sarasota, Florida. The Company intends to commence
marketing and distribution of its products by establishing relationships with
key providers and referring physicians across the nation, in geographically
strategic locations.
Distribution and marketing of the medical products 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 and licensing fees. The Company anticipates that it
will need to employ approximately 10 full-time employees to develop and enhance
the Company's sales, marketing and distribution efforts. The Company intends to
grow its distributorship network and sales to and through:
. Major cardiology groups
. HMO groups
. Major payor groups and insurance companies
. Other existing diagnostic and therapeutic companies and centers
. National and international distribution agreements; and
. Internet e-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.
Puncture Closure Device "The Myers Solution"
The Company initially intends to market The Myers Solution to both
hospitals and to physicians through both national and international distribution
agreements. In addition, the Company intends to establish a direct sales
support team to assist the distributors with their customers and to establish
national contracting agreements with major providers of services. The Company
intends to sell The Myers Solution at prices ranging from $138.00 to $200.00.
The Company intends to offer its products to potential customers through a
marketing campaign consisting of public relations, direct mail and personal
selling efforts by the Company's representatives. The public relations campaign
will be designed to raise awareness of The Myers Solution and its puncture
closure device among both industry leaders and the general public. The Company
intends to generate publicity for The Myers Solution through press conferences,
demonstrations and press releases to trade and professional publications.
Although the Company initially intends to concentrate its marketing efforts
on the U.S. domestic market, once domestic operations have been established the
Company intends to expand its marketing efforts in various international
markets. The Company intends to market its units to international customers
through affiliations and/or agreements with international partners.
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Government Regulation and Supervision
General
Clinical testing, manufacture and sale of the CPCA 2000, CPCA 2000M and
"The Myers Solution" are 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, the FDA places medical devices 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
classifies all medical devices. 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). The Company's current technologies are both considered by the FDA to
be a Class III device.
Before a new medical device can be introduced to the market, the
manufacturer generally must obtain FDA clearance through either a "510(k)
premarket notification" or through a premarket approval application ("PMA").
Although Class III devices normally require FDA clearance through the PMA
process, because counterpulsation devices and puncture closure devices are
already on the market, newer versions, similar to the CPCA 2000 and The Myers
Solution, 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 Company's products 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.
CPCA2000
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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 had a FDA inspection of one of its manufacturing facilities
in May 1999 and has limited items for clearance. The Company has retained FDA,
manufacturing, engineering, software and regulatory consulting from Quintiles
Consulting, Inc. 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 Company intends to submit The Myers Solution for FDA approval during
the fourth quarter of 2000.
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. On November 4, 1999, the Health Care Financing
Adminstration (HCFA) created a new code to describe external counterpulsation
technology. This new code, HCPCS code G0166, is specific to Medicare
beneficiaries and will be effective on January 1, 2000, for angina patients
being treating by the technology. The allowable charge under this HCPCS code
for 35 one-hour treatments $4,550. Certain patients may require additional
services, such as evaluation and management, which may be billed separately. In
addition, there are federal and state laws, which regulate the financial
relationships between manufacturers of medical devices and hospitals, physicians
and other potential purchasers of medical devices. The federal Medicare and
Medicaid anti-kickback statute prohibits financial relationships designed to
induce the purchase, or arranging for or recommending the purchase, of items or
services for which payment may be made under Medicare, Medicaid, or other
federally funded state health care programs. The anti-kickback statute contains
exceptions for, among other things, properly reported discounts and compensation
for bona fide employees. In addition, federal regulations establish certain
"safe harbors" from liability under the anti-kickback statute, including further
refinements of the exceptions for discounts and employee compensation. The
Company's future practices, in some cases, may not meet all of the criteria for
a safe harbor from anti-kickback law liability. Other provisions of state and
federal law provide civil and/or criminal penalties for presenting or causing to
be presented for payment claims 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.
Competition
Counterpulsation Technology "CPCA2000"
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., and Cardio-Vascular Electronics, Inc. The Company believes
that these 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 could 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.
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Puncture Closure Device "The Myers Solution"
The Company has several competitors that manufacture and market in the
puncture closure devices, including Perclose, Inc., Kensey Nash, Datascope Corp.
and Vascular Solutions, Inc. Management of the Company believes it has
competitive advantage over other products because its product is superior in
delivery of arterial site closures that are safe, variable and cost effective.
However, all of the Company's competitors have greater marketing and financial
resources than the Company and, accordingly, there can be no assurance that the
Company will be able to compete effectively, if at all.
Patents and Trademarks
Counterpulsation Technology "CPCA2000"
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.
Puncture Closure Device "The Myers Solution"
The first patent awarded to Gene Myers, MD by the United States Patent
Office ("PTO") on January 23, 1996, Patent # 5,486,195 was for the "Method and
Apparatus for Arteriotomy Closure". The second patent awarded to Dr. Myers was
on August 24, 1999; Patent # 5,941,897 was for the Energy Activated Fibrin Plug.
The Company has filed a trademark application with the PTO for the trademark
"The Myers Solution."
Research and Development
Since inception, the Company's research and development expenses have
amounted to approximately $1,867,000. 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. The Myers
Solution technology was purchased by the Company.
Employees
As of the date of this report, the Company and its subsidiaries
employed two persons consisting of its two executive officers. Neither of these
employees is 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. The Company
contracts with various consultants to provide services to including engineering,
software, testing, regulatory, legal, accounting, financial, product
development, investor relations, medical and clinical affairs on a project by
project basis.
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.
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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 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, as well as monetary damages for the
legal malpractice the Company believes to have been committed by O'Rourke while
serving as counsel to the Company. 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.
In February 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 November 1999, the Company settled the dispute over the HeartMed LLC joint
venture, on mutually agreeable terms, under which all litigation has been
dismissed, no money has been paid, and HeartMed has become the wholly owned
subsidiary of CPC of America, Inc. HeartMed, LLC is planned for future
endeavors when deemed appropriate.
In March 1999, the Company was named as a defendant in a lawsuit
brought by Nancy Lee, a former consultant for the Company, in the United States
District Court for the Central District of California. In her complaint, Ms. Lee
alleged that the Company prohibited Ms. Lee from selling the balance of the
shares after selling Common Stock she acquired as a founder of the Company. Ms.
Lee seeks a judicial declaration from the court that she is the rightful owner
of the shares. The Company has filed an answer and a counterclaim against Ms.
Lee seeking the return of the shares of Common Stock on the grounds that Ms. Lee
failed to provide adequate consideration for the securities. The Company intends
to vigorously defend against Ms. Lee'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. The matter has been transferred to New
York federal courts and consolidated with the O'Rourke and Rubin matters.
In April 1999, the Company was named as a defendant in a lawsuit
brought by Carepoint Network, Inc. in the Third Judicial District Court of Salt
Lake County, State of Utah. Carepoint alleges that the Company entered into a
contract with Carepoint to purchase all of the issued and outstanding capital
stock of Carepoint and that the Company breached this contract by failing to
consummate the transaction. In February 2000, the Company agreed to settle this
matter for $50,000 in cash and 33,333 shares of Common Stock.
In August, 1999, the Company was named and served as a defendant in a
lawsuit brought by Richard E. Rubin, M.D., a former officer and director of the
Company, in the United States District Court for the District of Maryland,
Southern Division. Rubin alleges that the Company breached an employment
contract with Rubin and prevented him from selling his shares or exercising
options in the Company. Rubin seeks damages in excess of $5,000,000. The
company has filed an answer denying any and all liability to Rubin. The Company
has interposed counterclaims against Rubin seeking recovery of the shares and
options the Company believes are unlawfully held by Rubin, or in the
alternative, monetary damages. The Company believes that the allegations of
Rubin's complaint are without merit and, accordingly, the Company intends to
vigorously defend this case. The Company believes that a determination of the
lawsuit adverse to the Company will not have a material adverse effect on the
financial condition or operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
-8-
<PAGE>
There were no matters submitted to the security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 1999.
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, 1999. 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:
Quarter Ended High Low
------------- ---- ---
March 31, 1999 $11.50 $4.625
June 30 , 1999 $8.875 $ 5.25
September 30, 1999 $10.37 $ 5.25
December 31, 1999 $ 8.62 $ 4.75
As of March 31, 2000, there were 59 record holders and approximately
560 beneficial owners of the Company's Common Stock.
The Company has not paid any cash dividends on its common stock 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. Pursuant to its Certificate of
Designations, holders of shares of Series A Preferred Stock are entitled to
dividends at a rate of 5% per annum, payable at the option of the holders, in
either cash or shares of Common Stock. As of March 31, 2000, the Company has
issued 4,551shares of Common Stock as payment of dividends on the Series A
Preferred Stock. No cash dividends have been paid on the shares of Series A
Preferred Stock.
Item 6. Recent Sales of Unregistered Securities
During the fiscal year ended December 31, 1999, the Company sold
unregistered shares of its Common Stock in the following transactions:
A. From November 1998 to November 1999, the Company conducted a
private placement of shares of its Series A Preferred Stock at a price of $8.50
per share. In the private placement, the Company sold 79,293 shares of Series A
Preferred Stock for the aggregate proceeds of $674,000. The private placement
was conducted pursuant to Rule 506 under the 1933 Act. There is no underwriter
involved in the private placement.
B. Between February 1999 and December 1999, the Company issued an
aggregate of 209,490 shares of Common Stock upon the exercise of outstanding
warrants with an exercise price of $1.75 per share. The issuances were conducted
pursuant to Rule 506 under the 1933 Act. There were no underwriters involved
with these issuances.
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, acquisition of Med Enclosures,
LLC, and the raising of development and working capital. The Company has
developed and prepared for market 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
-9-
<PAGE>
Company has financed its activities to date through the sale of its securities.
See "Item 6, Part II - "Recent Sales of Unregistered Securities" for a
description of the Company's sale of shares of its securities in 1999. The
Company intends to commence revenue producing operations in the fourth quarter
of 2000, subject to FDA approval of its counterpulsation units. The Company
intends to submit for "The Myers Solution" FDA approval in the fourth quarter of
2000 and to commence commercial operations of the product in the fourth quarter
of 2001.
The Company recently commenced a private placement offering of shares of
its Series B Preferred Stock, $.001 par value per share ("Series B Preferred
Stock"). In the private placement, the Company intends to offer up to 228,571
shares of Series B Preferred Stock at a price of $8.75 per share for the gross
offering amount of $2,000,000. The Series B Preferred Stock are convertible into
shares of Common Stock and holders thereof are entitled to an annual dividend of
5%, payable in either cash or shares of Common Stock. The Series B Preferred
Stock is being offered pursuant to Rule 506 under the Act solely to "accredited
investors" as that term is defined in Rule 501 under the Act. As of the date of
this report, no shares of Series B Preferred Stock have been sold.
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 $2,000,000 of
capital in order to fund its plan of operations over the next 12 months as well
as an additional $4,000,000 to fund the FDA approval process for The Myers
Solution. The Company expects to funds its working capital requirement over the
next 12 months from its private placement of shares of Series B Preferred Stock
as well as from the continuing exercising of both the outstanding warrants and
options. See Item 1, "Description of Business - Business Development." The
Company expects to obtain the capital to fund the FDA approval process for the
Myers Solution from either the sale of its equity securities or from the sale of
interests in Med Enclosures.
There can be no assurance, however, that the Company will be able to obtain
sufficient additional capital, either through the present private placement of
Series B Preferred Stock, from other outside investors, the exercise of warrants
and options or otherwise, in order to fund the Company's working capital
requirements in a timely manner or to fund the FDA approval process for The
Myers Solution. Under the terms of the Operating Agreement for Med Enclosures,
the Company could lose its entire interest in Med Enclosures if it does not
raise at least $4,000,000 for Med Enclosures by November 2000. The report of
the Company's independent accountants for the fiscal year ended December 31,
1999 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.
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.
-10-
<PAGE>
Item 7. Financial Statements
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.................................................. 18
Consolidated Balance Sheet at December 31, 1999..................................................... 19
Consolidated Statements of Operations for the years ended December 31, 1999 and 1998
and cumulative from inception (April 11, 1996) to December 31, 1999............................... 20
Consolidated Statements of Shareholders' Equity (Deficit)
from inception (April 11, 1996) to December 31, 1999.............................................. 21
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998
and cumulative from inception (April 11, 1996) to December 31, 1999............................... 22
Notes to Consolidated Financial Statements.......................................................... 23
</TABLE>
-11-
<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.
Name Age Position
- ----------------------- ----- ----------------------------------
Rod A. Shipman 49 President, Secretary and Director
Rafe Cohen 52 Treasurer and Director
William C. Lievense 52 Director
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. From August 1994 to September 1999, Mr.
Shipman was 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. He currently serves as a director on
several small privately held companies in real estate and environmental
companies
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. Mr.
Lievense was the President and Chief Executive Officer of Columbia/Doctors
Hospital of Sarasota, Florida, and its predecessor, Galen Health Care
Corporation from 1993 to his recent retirement in January 2000. 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.
-12-
<PAGE>
Key Consultants to the Company
The CTM Group, Inc., has a consulting contract to provide strategic
planning services to the Company. Mr. Paul Shabty is the key consultant from
the CTM Group, Inc. who provides these consulting services. Mr. Shabty is a
former founder of the Company and served as its President, Treasurer and
Chairman of the Board from April 1996 to January 1997. Mr. Shabty was a member
of the Board of Trustees of Columbia/Doctors Hospital of Sarasota, Florida. He
is a former director of 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. 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. 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 Myers, M.D. has been the Medical and Clinical Affairs Director of the
Company since July 1998. Dr. Myers has performed medical internships at the
University of Michigan's Department of Internal Medicine and at the University
Health Center of Pittsburgh. Dr Myers was also an Assistant Resident, Research
Cardiology Fellow and Chief Medical Resident at Duke University Hospital, and
has published or presented more than two dozen scientific studies. He received
a Bachelor's degree in Chemistry and Physics from Pennsylvania State University
and his M.D. from the Pennsylvania School of Medicine at the University of
Pennsylvania. Dr. Myers is licensed in three states, and has a thriving
cardiology practice in Sarasota, Florida. He is a member of numerous
professional organizations including the American College of Cardiology, the
American Heart Association, the American College of Nuclear Cardiology and the
American Board of Quality Assurance and Utilization Review.
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 fiscal year ended December 31, 1999, all Section 16(a) filing
requirements applicable to our officers, directors and greater than 10%
beneficial owners were complied with.
-13-
<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, 1999, 1998 and 1997.
<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 Compensation
Granted
(# Shares)
- ------------------------ ----- ---------- ------ -------------- ----------------- ------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rod A. Shipman, President 1999 $195,000 -0- -0- -0- -0- -0-
and Secretary 1998 -0- -0- -0- -0- (1) 2,000,000 -0-
1997 -0- -0- -0- -0- -0- -0-
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Name Shares Acquired on Value Realized ($) Number of Securities Value of Unexercised
Exercise (#) Underlying In-the-Money
Unexercised Options/SARs at
Options/SARs at FY-End ($)(1)
FY-End (#) Exercisable/
Exercisable/ Unexercisable
Unexercisable
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rod A. Shipman 110,770 $520,596 1,269,230/1,600,000 $5,686,246/$1,400,000
President and Secretary 0
</TABLE>
(1) Based on a price of $6.00 per share for the Common Stock as quoted on the
OTC Bulletin Board on December 31, 1999.
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.
Employment Agreements. On April 23, 1998, the Company entered into an
Employment Agreement with Rod A. Shipman to serve as President and Chief
Executive Officer of the Company. Pursuant to the terms of that employment
agreement, Mr. Shipman received an annual salary of $120,000. Effective April 1,
1999, the Company and Mr. Shipman amended the terms of his employment agreement
to increase annual compensation to $220,000 and to permit Mr. Shipman to use his
accrued salary to pay the exercise price on his outstanding options. Pursuant to
his employment agreement with the Company, Mr. Shipman received options to
purchase 2,000,000 shares of Common Stock at an exercise price of $2.50 per
share, of which options to purchase 200,000 were immediately exercisable and
options to purchase 200,000 shares vest and first become exercisable on April 23
on each of the next nine anniversaries of the date of grant. The options expire
on April 22, 2008. The Employment Agreement is for a term of ten years.
-14-
<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 March 31, 2000 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> <CAPTION>
Name and Address Number of Shares Percentage Owned
------------------------------ ----------------
<S> <C> <C>
Rod A. Shipman(1) (2) 1,659,042 28.4%
Rafe Cohen(1) 37,000 (3)
Dr. Richard E. Rubin(4) 456,666 10.4%
William C. Lievense(1) 40,000 (3)
CTM Group, Inc.(5) (6) 2,277,867 39.5%
Leslie J. Kessler(7) (8) 950,000 19.5%
All officers and directors as a group 1,736,042 29.7%
</TABLE>
_______________
(1) Address is 1133 Fourth Street, Suite 200, Sarasota, Florida 34236.
(2) Includes options granted to Mr. Shipman to purchase 1,469,230 shares of
Common Stock. Does not include options to purchase 1,400,000 shares of
Common Stock, which are subject to annual 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 1,590,866 shares of
Common Stock. Does not include options to purchase 1,400,000 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 490,000 shares of
Common Stock at $1.125 per share for a ten-year period ending May 2, 2006.
-15-
<PAGE>
Item 12. Certain Relationships and Related Transactions.
In April 1999, the Company amended the terms of its Employment
Agreement with its President and Chief Executive Officer, Rod A. Shipman. See
Item 11, Executive Compensation, for a description of the terms of the amended
employment agreement.
Item 13. Exhibits and Reports on Form 8-K.
<TABLE>
<CAPTION>
(a) Index To Exhibits Page
----
<S> <C>
3.1 Articles of Incorporation of the Company.(1)
3.2 Bylaws of the Company.(1)
4.1 Specimen of Common Stock Certificate.(1)
4.2 Certificate of Designations of the Company.(4)
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 Automated
Specialties Enterprises, Inc.(3)
10.7 Agreement dated November 17, 1998. (3)
10.8 Amendment to Employment Agreement dated April 1, 1999 between the Company
and Rod A. Shipman (4)
10.9 Amendment to Consulting Agreement dated April 1, 1999 between the Company
and CTM Group, Inc. (4)
10.10 Letter Agreement between the Company and Leslie J. Kessler dated May
18, 1999. (5)
10.11 Operating Agreement for Med Enclosures LLC
21.1 List of Subsidiaries.
27.1 Financial Data Schedule
</TABLE>
______________
(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.
(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.
(3) Previously filed as part of the Company's annual report on Form 10-KSB (SEC
File No. 0-24053) for the year ended December 31, 1998 filed with the
Securities and Exchange Commission on March 31, 1999.
-16-
<PAGE>
(4) Previously filed as part of the Company's quarterly report on Form 10-QSB
(SEC File No. 0-24053) for the quarter ended March 31, 1999 filed with the
Securities and Exchange Commission on May 17, 1999.
(5) Previously filed as part of the Company's quarterly report on Form 10-QSB
(SEC File No. 0-24053) for the quarter ended June 30, 1999 filed with the
Securities and Exchange Commission on August 9, 1999.
(b) Reports on Form 8-K.
None.
-17-
<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, 1999, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for each of the two years in the
period ended December 31, 1999 and for the period from inception (April 11,
1996) to December 31, 1999. 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 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, 1999, and the results of their
consolidated operations and cash flows for each of the two years in the period
ended December 31, 1999 and for the period from inception (April 11, 1996) to
December 31, 1999, 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 consolidated 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 22, 2000
18
<PAGE>
CPA OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31,
1999
------------------
<S> <C>
ASSETS
Current assets:
Cash and equivalents $ 104,962
Prepaid and other 186,145
------------------
Total current assets 291,107
Equipment, net of accumulated depreciation of $7,265 8,155
Trademark, net of accumulated amortization of $1,246 4,985
------------------
$ 304,247
==================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 67,823
Accrued legal settlement 250,000
------------------
Total current liabilities 317,823
------------------
Commitments and contingencies -
Shareholders' deficit:
Preferred stock, 5,000,000 shares authorized, $.001 par value,
Series A - 79,293 shares issued and outstanding 79
Common stock, 20,000,000 shares authorized, $.0005 par value,
4,129,533 shares issued and outstanding 2,065
Additional paid-in capital - preferred 898,407
Additional paid-in capital - common 1,822,900
Deficit accumulated during the development stage (2,737,027)
------------------
Total shareholders' deficit (13,576)
------------------
$ 304,247
==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Cumulative
from inception
(April 11, 1996)
Year ended December 31, to December 31,
--------------------------------------
1999 1998 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Costs and expenses:
Research and development $ 886,127 $ 531,807 $ 1,867,187
General and administrative 444,547 116,256 620,803
Depreciation and amortization 3,707 4,947 22,151
---------------- ---------------- ----------------
Operating loss (1,334,381) (653,010) (2,510,141)
---------------- ---------------- ----------------
Other income (expense):
Interest expense - - (7,000)
Interest income 5,053 11,790 29,205
---------------- ---------------- ----------------
5,053 11,790 22,205
---------------- ---------------- ----------------
Loss before minority interest (1,329,328) (641,220) (2,512,936)
Minority interest - 640 1,120
---------------- ---------------- ----------------
Net loss $ (1,329,328) $ (640,580) $ (2,511,816)
================ ================ ================
Basic and diluted net loss per share $ (0.38) $ (0.16)
================ ================
Basic and diluted weighted average number
of common shares outstanding 4,104,371 4,285,471
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<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, 1999
<TABLE>
<CAPTION>
Series A 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 - - -
Valuation of beneficial conversion
feature on Series A Preferred - - - - - -
Contribution of officer's salary - - - - - -
Net loss for 1998 - - - - - -
------------- ------------- ------------- -------------
Balance, December 31, 1998 8,824 9 4,327,666 2,164
Exercise of warrants - - - 209,490 1.75 105
Exercise of options - - - 146,903 1.21 73
Issuance of preferred stock for cash 70,469 8.50 70 - - -
Preferred stock dividend - - 5,474 4.70 3
Valuation of beneficial conversion
feature on Series A Preferred - - - - -
Repurchase of common shares - - (560,000) 0.0005 (280)
Net loss for 1999 - - - -
------------- ------------- ------------- -------------
Balance, December 31, 1999 79,293 $ 79 4,129,533 $ 2,065
============= ============= ============= =============
<CAPTION>
Deficit
Note Additional Additional Accumulated
Receivable Paid-in Paid-in During the Net
from Capital- Capital- Development Shareholders'
Shareholder Common Preferred Stage Equity(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
Valuation of beneficial conversion
feature on Series A Preferred - - 25,000 (25,000) -
Contribution of officer's salary - 80,000 - - 80,000
Net loss for 1998 - - - (640,580) (640,580)
------------- ------------- ------------- ------------- ---------------
Balance, December 31, 1998 - 1,253,386 99,991 (1,182,488) 173,062
Exercise of warrants - 366,503 - - 366,608
Exercise of options - 177,289 - - 177,362
Issuance of preferred stock for cash - - 598,930 - 599,000
Preferred stock dividend - 25,722 - (25,725) -
Valuation of beneficial conversion
feature on Series A Preferred - - 199,486 (199,486) -
Repurchase of common shares - - - (280)
Net loss for 1999 - - - (1,329,328) (1,329,328)
------------- ------------- ------------- ------------- ---------------
Balance, December 31, 1999 $ - $ 1,822,900 $ 898,407 $ (2,737,027) $ (13,576)
============= ============= ============= ============= ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Cumulative
from inception
(April 11, 1996)
Year ended December 31, to December 31,
----------------------------------
1999 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,329,328) $ (640,580) $ (2,486,816)
Adjustments to reconcile net loss to net cash
used by operating activities:
Minority interest - (640) (1,120)
Depreciation and amortization 3,707 4,947 22,151
Contribution of officer's salary - 80,000 80,000
Gain on disposition of Tercero - - (15,679)
Issuance of common stock for services - - 38,200
Sale of Tercero - assignment of payables - - 55,678
Increase in other assets (39,050) (62,000) (132,376)
Increase in accounts payable 27,079 28,072 68,303
(Decrease)/ increase in accrued expenses 250,000 (10,000) 266,000
Increase in accrued interest - - 7,000
--------------- --------------- ---------------
Net cash used by operating activities (1,087,592) (600,201) (2,098,659)
--------------- --------------- ---------------
Cash flows from investing activities:
Tercero acquisition/sale - - (49,999)
DSDS acquisition - (18,000) (79,000)
Capital expenditures - - (15,420)
--------------- --------------- ---------------
Net cash used by investing activities - (18,000) (144,419)
--------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from notes to shareholders - - 73,000
Proceeds from note receivable from shareholder - - 150
Payments on note payable to shareholder - - (3,000)
Exercise of options and warrants 543,970 115,000 688,970
Issuance of preferred stock 599,000 75,000 674,000
Issuance of common stock - 58,000 915,200
Repurchase of common stock (280) - (280)
--------------- --------------- ---------------
Net cash provided by financing activities 1,142,690 248,000 2,348,040
--------------- --------------- ---------------
Net increase (decrease) in cash 55,098 (370,201) 104,962
Cash, beginning of period 49,864 420,065 -
--------------- --------------- ---------------
Cash, end of period $ 104,962 $ 49,864 $ 104,962
=============== =============== ===============
Non-cash investing and financing activities:
Issuance of common stock for note receivable $ - $ - $ 150
Debt to equity conversion $ - $ - $ 77,000
Acquisition of minority interest $ 18,000 $ 33,250
Sale of Tercero - elimination of goodwill $ - $ - $ (40,000)
Preferred dividends paid through issuance of common stock $ 25,725 $ - $ 25,725
Acquisition of Med Enclosures for note payable $ 250,000 $ - $ 250,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A Development Stage Company)
December 31, 1999
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 had no operating history and its only assets
consisted of two patents relating to a self-destructing single-use syringe.
The patents had 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 provided $60,000 worth of consulting services to the
Company through May 1999.
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.
On February 1, 1999, the Company filed a lawsuit against Partner Provider
Health, Inc. (PPH) alleging breach of contract, misrepresentation and fraud
relating to its joint venture with HeartMed LLC. Under terms of a November
1999 settlement, CPC dropped its lawsuit and received the remaining interest
in HeartMed LLC making it a wholly owned subsidiary of CPC. HeartMed LLC had
no operations or assets during 1999.
On November 22, 1999, CPC formed Med Enclosures, LLC, a Nevada Limited
Liability Corporation, (MED) with Gene Myers Enterprises, Inc., (GME) a
minority shareholder of CPC. CPC received a 73.3% interest in MED for a
$250,000 note payable due November 5, 2000. GME contributed two patents,
developed by GME, to MED, that are recorded at GME's carrying value of zero.
Med Enclosures had no operations from November 22, 1999 through December 31,
1999. If CPC fails to raise $4,000,000 for MED by November 2000 to fund the
FDA approval process for "The Myers Solution" procedure, its interest in Med
Enclosures converts to GME.
Principles of consolidation
---------------------------
The accompanying consolidated financial statements include the amounts of the
Company and its subsidiaries, DSDS, from July 1997 through November 1998,
CPCA, from June 1998, and MED and HeartMed LLC from November 1999. All
significant intercompany transactions and balances have been eliminated in
consolidation.
23
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A Development Stage Company)
1. Organization and summary of significant accounting policies (continued)
---------------------------------------------------------------------------
Cash and equivalents
--------------------
The Company considers all liquid investments with a maturity of three months
or less from the date of purchase that are readily convertible into cash to
be cash equivalents. Balances in bank accounts may, from time to time,
exceed federally insured limits.
Trademarks
----------
The trademark is stated at cost and is amortized 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.
Intangibles and long-lived assets
---------------------------------
Long-lived assets are reviewed annually for impairment whenever events or
changes in circumstances indicate that carrying amount of an asset may not be
recoverable. Impairment is necessary when the undiscounted cash flows
estimated to be generated by the asset are less than the carrying amount of
the asset.
Income taxes
------------
The Company reports certain expenses differently for financial and tax
reporting purposes and, accordingly, provides for the related deferred taxes.
Income taxes are accounted for under the liability method in accordance with
SFAS 109.
Research and development costs
------------------------------
Costs and expenses that can be clearly identified as research and development
are charged to expense as incurred in accordance with FASB Statement No. 2,
"Accounting for Research and Development Costs".
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.
24
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A Development Stage Company)
Stock-based compensation
------------------------
During 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which defines a fair value based method of accounting for
stock-based compensation. However, SFAS No. 123 allows an entity to continue
to measure compensation cost related to stock and stock options issued to
employees using the intrinsic method of accounting prescribed by Accounting
Principles Board Opinion No. 25 ("APB25") , "Accounting for Stock Issued to
Employees." Entities electing to remain with the accounting method of APB 25
must make pro forma disclosure of net income and earnings per share, as if
the fair value method of accounting defined in SFAS No. 123 had been applied.
The Company has elected to account for its stock-based compensation to
employees under APB 25.
2. Shareholders' equity (deficit)
- ---------------------------------
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 November 15, 1999, the
Company sold 79,293 shares for net proceeds of $674,000. The Series A
Preferred stock has no voting rights and has a 5% annual dividend which may
be payable in cash or common stock. Each Series A share was convertible into
one common share until December 31, 1999, when the conversion price was
adjusted to the lower of $6.38 or 75% of the average last sale price of the
common stock for the 30 trading days immediately preceding such date as
reported on any stock exchange, according to the terms of the original
agreement. At December 31, 1999 the conversion price was calculated at $4.70
per share. On December 31, 1999, the dividend of $25,725 was paid by issuing
5,474 shares of the Company's common stock. No shares were converted in 1999.
Common stock
------------
In the second quarter of 1999, the Company reached an agreement with one of
its shareholders to repurchase 560,000 shares at par. These shares were
originally issued for services and the Company claimed that the services had
not been provided. In addition, options to purchase 490,000 common shares
held by the shareholder were canceled.
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 statements 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 had sold 34 units, including 3 units in conversion of a
note 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. During
1999, warrants to purchase 209,490 common shares were exercised and warrants
to purchase 1,150,510 common shares were outstanding at December 31, 1999.
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.
25
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A Development Stage Company)
2. Shareholders' equity (deficit) (continued)
- ----------------------------------------------
Common stock (continued)
------------------------
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 $.05 cash per share to one of its founders.
Stock options
-------------
The Company has granted options to purchase its common stock. 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>
Exercise
Number of Price
Options Per Share Expiration
------------------ ------------------ ---------------
<S> <C> <C> <C>
Inception (April 11, 1996) - - -
Granted 4,420,000 $1.125 - 1.25 1997 - 2006
------------------ ------------------
Outstanding at December 31, 1996 4,420,000 $1.125 - 1.25 1997 - 2006
------------------ ------------------
Exercised (26,666) $ 1.125
Expired (200,000) $ 1.18
------------------ ------------------
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
Canceled (1,173,334) $ 1.125
------------------ ------------------
Outstanding at December 31, 1998 7,115,000 $1.125 - 9.00 2003 - 2008
Granted 125,000 $ 5.50 2004
Exercised (146,903) $1.125 - 2.50
Canceled (490,000) $ 1.125
------------------ ------------------
Outstanding at December 31, 1999 6,603,097 $1.125 - 9.00 2003 - 2008
================== ================== ===============
Exercisable at December 31, 1999 3,354,198 $1.125 - 9.00 2003 - 2008
================== ================== ===============
</TABLE>
26
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A Development Stage Company)
2. Shareholders' equity (deficit) (continued)
- ----------------------------------------------
Stock options (continued)
-------------------------
The following information applies to all options outstanding at December 31,
1999:
<TABLE>
<CAPTION>
Weighted Weighted
Average average average
Exercise Options remaining exercise Number exercise
Price Outstanding life (years) price exercisable price
-------------- ---------------- ---------------- ------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
$ 1.125 2,326,097 6 $1.125 2,326,097 $1.125
$ 2.50 4,000,000 8 $ 2.50 800,000 $ 2.50
$ 2.50 137,000 3 $ 2.50 105,000 $ 2.50
$4.63 - 5.50 130,000 4 $ 5.46 30,000 $ 5.35
$ 9.00 10,000 4 $ 9.00 10,000 $ 9.00
</TABLE>
Included in total options granted in 1998 and 1996 are 2,000,0 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.
The following information applies to employee options outstanding at December
31, 1999:
<TABLE>
<CAPTION>
Weighted Weighted
Average average average
Exercise Options remaining exercise Number exercise
Price Outstanding life (years) price exercisable price
------------ --------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.125 879,230 6 $1.125 879,230 $1.125
$ 2.50 2,000,000 8 $ 2.50 400,000 $ 2.50
</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.
27
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A Development Stage Company)
2. Shareholders' equity (deficit) (continued)
- ----------------------------------------------
Stock options (continued)
-------------------------
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>
1999 1998
-------------------- ------------------
<S> <C> <C>
Net loss
As reported $(1,329,328) $ (640,580)
Pro forma $(1,858,328) $(1,514,580)
Basic and fully diluted loss per share
As reported $ (0.38) $ (0.16)
Pro forma $ (0.51) $ (0.36)
</TABLE>
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.
28
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A Development Stage Company)
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Basic and diluted loss per share:
---------------------------------
Numerator
---------
Net loss $ (1,329,328) $ (640,580)
Preferred dividend (25,725) -
Beneficial conversion feature preferred stock (199,486) (25,000)
------------------- ---------------
$ (1,554,539) $ (665,580)
=================== ===============
Denominator
-----------
Basic and diluted weighted average number of
common shares outstanding during the period 4,104,371 4,285,471
=================== ===============
Basic and diluted loss per share $ (0.38) $ (0.16)
=================== ===============
Incremental common shares (not included in denominator
of diluted earnings per share calculation due to their
antidilutive nature) attributable to exercise of:
Outstanding options 6,603,097 7,115,000
Outstanding warrants 1,150,510 1,360,000
Preferred stock 143,404 -
------------------- ---------------
7,897,011 8,475,000
=================== ===============
</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 1999 and 1998 there is no difference between income
tax expense and the amount computed by applying the federal statuatory income
tax rate.
At December 31, 1999, the Company has a net operating loss carryforward for
federal tax purposes of $2,667,000 which, if unused to offset future taxable
income, will expire in 2012 through 2014.
The Company had deferred tax assets of $930,000 and $405,000 at December 31,
1999 and 1998, respectively, relating to its net operating loss. A valuation
allowance has been recognized to offset all of the related deferred tax asset
due to the uncertainty of realizing the benefit.
5. Commitments and contingencies
- --------------------------------
Lease
-----
The Company leases office space on a month-to-month basis at $95 per month.
Actual rent expense was $1,649 in 1999 and $1,860 in 1998.
Consulting agreements
---------------------
29
<PAGE>
CPC OF AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(A Development Stage Company)
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, in April 1998 to
$10,000 per month and for an additional five years and in April 1999 to
$18,333 per month. Options to purchase 2,000,000 shares of common stock at an
exercise price of $2.50 per share were also granted under the April 1998
revision agreement. The options vest and become exercisable in ten equal
installments of 200,000 shares each year starting on the grant date and are
exercisable for ten years. As of December 31, 1999, the Company prepaid a
company controlled by this related party $177,000 for research and
development costs to be provided in the year 2000.
In April 1998, the Company entered into an employment agreement with its
President and CEO for ten years. 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
2,000,000 shares of common stock at an exercise price of $2.50 per share were
granted under the agreement. The options vest and become exercisable in ten
equal installments of 200,000 shares each year starting on the grant date and
are exercisable for ten years. The employment agreement was revised in April
1999 to $18,333 per month.
Litigation
----------
In settlement of its lawsuit with Carepoint Networks, Inc., in February 2000
the Company agreed to pay $50,000 cash and to issue 33,333 common shares
valued at the then current market price of $6.00 per share. The total
settlement amount of $250,000 is included in the consolidated statement of
operations under general and administrative expenses.
Other
-----
As part of the formation of MED, CPC agreed it would raise $4,000,000 for MED
by November 2000 to fund the FDA approval process of "The Myers Solution"
procedure. If CPC fails to raise the necessary funds, GME has the right to
purchase the Company's 73.3% interest in MED for $1.00.
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.
Management anticipates that it will need to raise an additional $2,000,000 in
order to fund its operations over the next 12 months. In addition, CPC needs
to raise $4,000,000 as described in Notes 1 and 5 in order to maintain its
interest in Med Enclosuress, LLC.
CPC intends to offer up to 228,571 shares of its Series B Preferred Stock,
$.001 par value per share ("Series B") in a private placement. The offering
price will be $8.75 per share for a gross offering amount of $2,000,000. The
Series B will be convertible into one share of common stock until June 30,
2001, when the conversion price will be adjusted to the lower of 75% of the
average ask price of the common stock for the 30 trading days immediately
preceeding such date as reported on any stock exchange or $6.56 per share.
Holders are entitled to an annual dividend of 5%, payable in either cash or
shares of common stock.
In addition to the private placement, the Company expects to obtain working
capital from the sale of equity securities as well as the exercise of common
stock options and warrants. The Company expects to fund the FDA approval
process for the Myers Solution from either the sale of its equity securities
or from the sale of interests in MED. There can be no assurance, however,
that the Company will be able to obtain sufficient additional capital, either
through the private placement of Series B, from other outside investors, the
exercise of options and warrants, or otherwise, in order to fund the
Company's working capital requirements in a timely manner.
30
<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: April 14, 2000 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ ROD A. SHIPMAN President, Chief Financial Officer, April 14, 2000
- ------------------------------------ Secretary and Principal Accounting
ROD A. SHIPMAN Officer and Director
/s/ RAFE COHEN Treasurer and Director April 14, 2000
- ------------------------------------
RAFE COHEN
/s/ WILLIAM LIEVENSE Director April 14, 2000
- ------------------------------------
WILLIAM LIEVENSE
</TABLE>
<PAGE>
EXHIBIT 10.11
OPERATING AGREEMENT
FOR
MED ENCLOSURES, LLC
A NEVADA LIMITED LIABILITY COMPANY
This Operating Agreement (this "Agreement") is made as of November 5, 1999
by and between CPC OF AMERICA, INC., a Nevada corporation ("CPC"), and GENE
MYERS ENTERPRISES, INC., a Florida corporation (collectively referred to as the
"Members" or individually as a "Member").
A. The Members will cause to be filed the Articles of Organization (the
"Articles") for Med Enclosures, LLC (the "Company"), a limited liability company
under the laws of the State of Nevada, with the Nevada Secretary of State.
B. The Members desire to adopt and approve an operating agreement for the
Company under the Nevada Limited Liability Company Act (the "Act").
NOW, THEREFORE, the Members by this Agreement set forth the operating
agreement for the Company upon the terms and subject to the conditions of this
Agreement.
ARTICLE I
ORGANIZATIONAL MATTERS
1.1 Name. The name of the Company shall be "Med Enclosures, LLC." The
----
Company may conduct business under that name or any other name approved by the
Members.
1.2 Term. The term of the Company shall commence as of the date of the
----
filing of the Certificate and, unless sooner terminated under Section 9.1, shall
terminate on December 31, 2023.
1.3 Office and Agent. The Company shall continuously maintain an office
----------------
and registered agent in the State of Nevada as required by the Act. The
principal office of the Company shall be at 1133 Fourth Street, Suite 200,
Sarasota, Florida 34236 or such location as the Members may determine. The
registered agent shall be as stated in the Articles or as otherwise determined
by the Members.
1.4 Business of the Company. The principal purpose of the Company is to
-----------------------
manufacture, market and develop puncture closing devices and procedures for
arterial closures, including the patented procedure known as the "Myers
Solution," as well as such other activities directly related to the foregoing
business as may be necessary, advisable or appropriate, in the reasonable
opinion of the Managing Member to further the foregoing business.
ARTICLE II
CAPITAL CONTRIBUTIONS
<PAGE>
2.1 Capital Contributions. Each Member shall make an initial contribution
---------------------
to the capital of the Company shown opposite the Member's name on Exhibit A
attached hereto. No Member shall be required to make any additional
contributions to the capital of the Company. Additional contributions to the
capital of the Company shall be made only with the unanimous consent of the
Members. If additional contributions to the capital of the Company are required
by such unanimous consent, the Members shall have the right, but shall not be
obligated, to make additional contributions to the Company's capital, if they
wish to do so, to preserve the level of their Membership Interests (as defined
in Section 2.2). Immediately following any such additional capital
contributions, the Membership Interests shall be adjusted by the Manager to
reflect the new relative proportions of the Capital Accounts (as defined in
Section 2.2) of the Members. Except as provided in this Agreement, no Member
may withdraw his or her capital contribution.
2.2 Capital Accounts. The Company shall establish an individual capital
----------------
account ("Capital Account") for each Member. The Company shall determine and
maintain each Capital Account in accordance with Treasury Regulations Section
1.704-1(b)(2)(iv). Each Member shall have a membership interest ("Membership
Interest") in the Company, which shall consist of a Member's entire interest in
the Company, including the Member's economic interest and the Member's right to
vote and participate in the management. A Member's Membership Interest shall be
determined by dividing the total dollar amount of the Member's Capital Account
by the total dollar amount of all Capital Accounts of all Members. Upon a valid
transfer of a Member's Membership Interest in accordance with Article VI, such
Member's Capital Account shall carry over to the new owner.
2.3 Other Classes of Interests. The Company is authorized to issue
--------------------------
additional classes of Membership Interests upon such terms and conditions as the
Manager may from time to time determine.
2.4 No Interest. The Company shall not pay any interest on capital
-----------
contributions.
ARTICLE III
MEMBERS
3.1 Admission of Additional Members. Additional Members may be admitted
-------------------------------
with the consent of the Members holding a majority of the Membership Interests,
provided that such terms shall not give the additional Member greater rights
than the existing Members have unless such rights are also extended to the
existing Members on the same terms as such rights are offered to the additional
Members. Additional Members will participate in the "Net Profits", "Net Losses"
(as such terms are defined in Section 5.1), and distributions of the Company on
such terms as are determined by the Members. Exhibit A shall be amended upon
the admission of an additional Member to set forth such Member's name and
capital contribution.
3.2 Withdrawals or Resignations. Any Member who is under an obligation to
---------------------------
render services to the Company may withdraw or resign as a Member at any time
upon 90 days prior written notice to the Company, without prejudice to the
rights, if any, of the Company or the other Members under any contract to which
the withdrawing Member is a party. In the event of such withdrawal, such
Member's Membership Interest shall be terminated, such Member shall thereafter
only have the rights of a transferee as described in Section 6.3 and such
Membership
-2-
<PAGE>
Interest shall be subject to purchase and sale as provided in Section 7.2. No
other Member may withdraw, retire or resign from the Company
3.3 Payments to Members. Except as specified in this Agreement or
-------------------
pursuant to a transaction permitted by Section 4.9, no Member or person or
entity controlled by, controlling or under common control with the Member (each
such person or entity is defined as an "Affiliate"), is entitled to remuneration
for services rendered or goods provided to the Company. However, the Company
shall reimburse the Members and their Affiliates for organizational expenses
(including, without limitation, legal and accounting fees and costs) incurred to
form the Company, prepare the Articles and this Agreement and, as approved by
the Manager, for the reasonable and actual out-of-pocket expenses incurred on
behalf of the Company.
ARTICLE IV
MANAGEMENT AND CONTROL OF THE COMPANY
4.1 Management of the Company by the Manager.
----------------------------------------
A. Exclusive Management by the Manager. The business, property and
-----------------------------------
affairs of the Company shall be managed exclusively by the Manager. Except for
situations in which the approval of the Members is expressly required by the
Certificate or this Agreement, the Manager shall have full, complete and
exclusive authority, power, and discretion to manage and control the business,
property and affairs of the Company, to make all decisions regarding those
matters and to perform any and all other acts customary or incident to the
management of the Company's business, property and affairs.
B. Election of the Initial Manager. CPC is hereby designated as the
-------------------------------
initial Manager.
C. Agency Authority of the Manager. The Manager is authorized to
-------------------------------
endorse checks, drafts, and other evidences of indebtedness made payable to the
order of the Company and to sign contracts and obligations on behalf of the
Company.
4.2 Election of the Manager.
-----------------------
A. Number, Term, and Qualifications. The Company shall have one
--------------------------------
Manager. Unless CPC (or any successor Manager) resigns or is removed, the
Manager shall hold office until a successor shall have been elected and
qualified. Subject to Section 4.5, the Manager shall be elected by the
affirmative vote or written consent of Members holding a majority of the
Membership Interests.
B. Resignation. The Manager may resign at any time by giving written
-----------
notice to the Members without prejudice to the rights, if any, of the Company
under any contract to which the Manager is a party. The resignation of the
Manager shall take effect upon receipt of that notice or at such later time as
shall be specified in the notice; and, unless otherwise specified in the notice,
the acceptance of the resignation shall not be necessary to make it effective.
The resignation of the Manager who is also a Member shall not affect the
Manager's rights as a Member and shall not constitute a withdrawal of a Member.
-3-
<PAGE>
C. Removal. The Manager may be removed at any time, with or
-------
without cause, by the affirmative vote of the Members holding a majority of the
Membership Interests at a meeting called expressly for that purpose, or by the
written consent of the Members holding a majority of the Membership Interests.
Any removal shall be without prejudice to the rights, if any, of the Manager
under any employment contract and, if the Manager is also a Member, shall not
affect the Manager's rights as a Member or constitute a withdrawal of a Member.
D. Vacancies. Any vacancy occurring for any reason in the
---------
position of Manager may be filled by the affirmative vote or written consent of
Members holding a majority of the Membership Interests.
4.3 Powers of the Manager. Without limiting the generality of Section
---------------------
4.1A, but subject to Section 4.4 and to the express limitations set forth
elsewhere in this Agreement, the Manager shall have all necessary powers to
manage and carry out the purposes, business, property, and affairs of the
Company, including, without limitation, the power to exercise on behalf and in
the name of the Company all of the powers described in Section 86-281 of the
Act.
4.4 Limitations on Power of the Manager. Notwithstanding any other
-----------------------------------
provision of this Agreement, the Manager shall not have authority to cause the
Company to engage in the following transactions without first obtaining the
approval of the Members holding a majority of the Membership Interests.
(i) The sale, exchange or other disposition of all, or
substantially all, of the Company's assets occurring as part of a single
transaction or plan, or in multiple transactions over a twelve (12) month
period, except in the orderly liquidation and winding up of the business of the
Company upon its duly authorized dissolution.
(ii) The merger of the Company with another limited liability
company or corporation, general partnership, limited partnership or other
entity.
(iii) An alteration of the authorized businesses of the Company as
set forth in Section 1.4.
(iv) Any act which would make it impossible to carry on the ordinary
business of the Company.
(v) The confession of a judgment against the Company.
(vi) Any other transaction described in this Agreement as requiring
the approval, consent or vote of the Members holding a majority of the
Membership Interests.
4.5 Salaries. No Member or Manager may receive a salary unless the
--------
Members holding a majority of the membership Interests agree to such salary.
Otherwise, all payments or distributions shall be made to Members in accordance
with their Percentage Interests.
4.6 Member Approval. No annual or regular meetings of the Members are
---------------
required to be held. However, if such meetings are held, such meetings shall be
noticed, held and conducted pursuant to the Act. In any instance in which the
approval of the Members is required under this Agreement, such approval may be
obtained in any manner permitted by the Act. Unless
-4-
<PAGE>
otherwise provided in this Agreement, approval of the Members shall mean the
approval of Members holding a majority of the Membership Interests.
4.7 Devotion of Time. Each Member shall devote whatever time or effort as
----------------
he or she deems appropriate for the furtherance of the Company's business.
4.8 Competing Activities; Confidentiality.
-------------------------------------
A. Competing Activities. Until the occurrence of a Dissolution
--------------------
Event (as defined in Section 7.1), neither the Members nor their Affiliates may
engage, participate or invest in any activity that might be in direct or
indirect competition with the Company, except as expressly provided herein.
Nothing in this Agreement shall in any way prevent or limit the Members
from engaging in any commercial activity following a Dissolution Event that
competes with the business of another Member or with the business of the
Company. Further, nothing in this Agreement shall in any way prevent or limit
Former Members (as defined in Section 7.1) from engaging in any commercial
activity that competes with the business of another Member or with the business
of the Company.
B. Confidentiality. Prior to a Dissolution Event, each Member
---------------
agrees not to disclose or provide any Confidential Information to any third
party without the consent of the Manager and each Member agrees to take all
necessary measures to prevent any such disclosure by their respective officers,
directors, managers, employees, agents or representatives. For purposes of this
Agreement, the term "Confidential Information" shall refer to the terms of this
Agreement and all information which is directly or indirectly disclosed by one
Member to another during the negotiation or performance of this Agreement,
regardless of the form in which it is disclosed, relating in any way to any
Member's markets, customers, products, patents, inventions, proprietary
information, procedures, processes, methods, designs, strategies, know-how,
plans, assets, liabilities, costs, expenses, revenues, profits, organization,
officers, directors, employees, representatives, agents or business in general.
Any information which a party considers or treats as confidential or is
obligated to treat as confidential will be deemed Confidential Information.
4.9 Transactions between the Company and the Members. Notwithstanding
------------------------------------------------
that it may constitute a conflict of interest, the Members and their Affiliates
may engage in any transaction with the Company so long as such transaction is
not expressly prohibited by this Agreement and so long as the terms and
conditions of such transaction, on an overall basis, are fair and reasonable to
the Company and are at least as favorable to the Company as those that are
generally available from persons capable of similarly performing them or if
Members holding a majority of the Membership Interests having no interest in
such transaction (other than their interests as Members) approve the transaction
in writing after full disclosure.
ARTICLE V
ALLOCATIONS OF NET PROFITS AND NET LOSSES AND DISTRIBUTIONS
5.1 Definitions. When used in this Agreement, the following terms shall
-----------
have the meanings set forth below:
-5-
<PAGE>
"Code" shall mean the Internal Revenue Code of 1986, as amended from
----
time to time, the provisions of succeeding law, and to the extent applicable,
the Treasury Regulations.
"Company Minimum Gain" shall have the meaning ascribed to the term
--------------------
"Partnership Minimum Gain" in the Treasury Regulations Section 1.704-2(d).
"Member Nonrecourse Debt" shall have the meaning ascribed to the term
-----------------------
"Partner Nonrecourse Debt" in Treasury Regulations Section 1.704-2(b)(4).
"Member Nonrecourse Deduction" shall mean items of Company loss,
----------------------------
deduction, or Code Section 705(a)(2)(B) expenditures which are attributable to
Member Nonrecourse Debt.
"Net Profit" and "Net Loss" shall mean the income, gain, loss,
---------- --------
deductions, and credits of the Company in the aggregate or separately stated, as
appropriate, determined in accordance with the method of accounting at the close
of each fiscal year employed on the Company's information tax return filed for
federal income tax purposes.
"Nonrecourse Liability" shall have the meaning set forth in Treasury
---------------------
Regulations Section 1.752-1(a)(2).
"Treasury Regulations" shall mean the final or temporary regulations
--------------------
that have been issued by the U.S. Department of Treasury pursuant to its
authority under the Code, and any successor regulations.
5.2 Allocations of Net Profit and Net Loss.
--------------------------------------
A. Net Loss. Net Loss shall be allocated to the Members in
--------
proportion to their Membership Interest. Notwithstanding the previous sentence,
loss allocations to a Member shall be made only to the extent that such loss
allocations will not create a deficit Capital Account balance for that Member in
excess of an amount, if any, equal to such Member's share of Company Minimum
Gain that would be realized on a foreclosure of the Company's property. Any loss
not allocated to a Member because of the foregoing provision shall be allocated
to the other Members (to the extent the other Members are not limited in respect
of the allocation of losses under this Section 5.2A). Any loss reallocated under
this Section 5.2A shall be taken into account in computing subsequent
allocations of income and losses pursuant to this Article V, so that the net
amount of any item so allocated and the income and losses allocated to each
Member pursuant to this Article V, to the extent possible, shall be equal to the
net amount that would have been allocated to each such Member pursuant to this
Article V if no reallocation of losses had occurred under this Section 5.2A.
Notwithstanding any other provision of this Agreement, Local Partner shall not
be responsible for funding any portion, proration or allocation of any operating
loss incurred by the Company beyond or exceeding its initial capital
contribution.
B. Net Profit. Net Profit shall be allocated to the Members in
----------
proportion to their Membership Interests.
5.3 Special Allocations. Notwithstanding Section 5.2.
-------------------
A. Minimum Gain Chargeback. If there is a net decrease in Company
-----------------------
Minimum Gain during any fiscal year, each Member shall be specially allocated
items of
-6-
<PAGE>
Company income and gain for such fiscal year (and, if necessary, in subsequent
fiscal years) in an amount equal to the portion of such Member's share of the
net decrease in Company Minimum Gain that is allocable to the disposition of
Company property subject to a Nonrecourse Liability, which share of such net
decrease shall be determined in accordance with Treasury Regulations Section
1.704-2(g)(2). Allocations pursuant to this Section 5.3A shall be made in
proportion to the amounts required to be allocated to each Member under this
Section 5.3A. The items to be so allocated shall be determined in accordance
with Treasury Regulations Section 1.704-2(f). This Section 5.3A is intended to
comply with the minimum gain chargeback requirement contained in Treasury
Regulations Section 1.704-2(f) and shall be interpreted consistently therewith.
B. Chargeback of Minimum Gain Attributable to Member Nonrecourse
-------------------------------------------------------------
Debt. If there is a net decrease in Company Minimum Gain attributable to a
- ----
Member Nonrecourse Debt, during any fiscal year, each member who has a share of
the Company Minimum Gain attributable to such Member Nonrecourse Debt (which
share shall be determined in accordance with Treasury Regulations Section 1.704-
2(i)(5)) shall be specially allocated items of Company income and gain for such
fiscal year (and, if necessary, in subsequent fiscal years) in an amount equal
to that portion of such Member's share of the net decrease in Company Minimum
Gain attributable to such Member Nonrecourse Debt that is allocable to the
disposition of Company property subject to such Member Nonrecourse Debt (which
share of such net decrease shall be determined in accordance with Treasury
Regulations Section 1.704-2(i)(5)). Allocations pursuant to this Section 5.3B
shall be made in proportion to the amounts required to be allocated to each
Member under this Section 5.3B. The items to be so allocated shall be determined
in accordance with Treasury Regulations Section 1.704-2(i)(4). This Section 5.3B
is intended to comply with the minimum gain chargeback requirement contained in
Treasury Regulations Section 1.704-2(i)(4) and shall be interpreted consistently
therewith.
C. Nonrecourse Deductions. Any nonrecourse deductions (as defined
----------------------
in Treasury Regulations Section 1.704-2(b)(1) for any fiscal year or other
period shall be specifically allocated to the Members in proportion to their
Membership Interests.
D. Member Nonrecourse Deductions. Those items of Company loss,
-----------------------------
deduction, or Code Section 705(a)(2)(B) expenditures which are attributable to
Member Nonrecourse Debt for any fiscal year or other period shall be
specifically allocated to the Member who bears the economic risk of loss with
respect to the Member Nonrecourse Debt to which such items are attributable in
accordance with Treasury Regulations Section 1.704-2(i).
E. Qualified Income Offset. If a Member unexpectedly receives any
-----------------------
adjustments, allocations, or distributions described in Treasury Regulations
Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), or any other event creates a
deficit balance in such Member's Capital Account in excess of such Member's
share of Company Minimum Gain, items of Company income and gain shall be
specially allocated to such Member in an amount and manner sufficient to
eliminate such excess deficit balance as quickly as possible. Any special
allocations of items of income and gain pursuant to this Section 5.3E shall be
taken into account in computing subsequent allocations of income and gain
pursuant to this Article V so that the net amount of any item so allocated and
the income, gain, and losses allocated to each Member pursuant to this Section
5.3E to the extent possible, shall be equal to the net amount that would
-7-
<PAGE>
have been allocated to each such Member pursuant to the provisions of this
Article V if such unexpected adjustments, allocations, or distributions had not
occurred.
5.4 Code Section 704(c) Allocations. Notwithstanding any other provisions
-------------------------------
in this Article V, in accordance with Code Section 704(c) and the Treasury
Regulations promulgated thereunder, income, gain, loss, and deduction with
respect to any property contributed to the capital of the Company shall, solely
for tax purposes, be allocated among the Members so as to take account of any
variation between the adjusted basis of such property to the Company for federal
income tax purposes and its fair market value on the date of contribution.
Allocations pursuant to this Section 5.4 are solely for purposes of federal,
state and local taxes. As such, they shall not affect or in any way be taken
into account in computing a Member's Capital Account or share of profits,
losses, or other items of distributions pursuant to any provision of this
Agreement.
5.5 Distribution of Assets by the Company. Subject to applicable law and
-------------------------------------
any limitations contained elsewhere in this Agreement, Members holding a
majority of the Membership Interests may elect from time to time to cause the
Company to make distributions. Distributions shall be first to the Members in
proportion to their unreturned capital contributions until each Member has
recovered his or her capital contributions, and then to the Members in
proportion to their Membership Interests.
ARTICLE VI
TRANSFER AND ASSIGNMENT OF INTERESTS
6.1 Transfer and Assignment of Interests. No Member shall be entitled to
------------------------------------
transfer, assign, convey, sell, encumber or in any way alienate all or any part
of his or her Membership Interest (collectively, "transfer") except with the
prior approval of the Manager, which approval may be given or withheld in the
manager's sole discretion.
6.2 Substitution of Members. A transferee of a Membership Interest shall
-----------------------
have the right to become a substitute Member only if (i) consent of the
remaining Members is given in accordance with Section 6.1, (ii) such person
executes an instrument satisfactory to the remaining Members agreeing to all of
the provisions of this Agreement, and (iii) such person pays any reasonable
expenses in connection with his or her admission as a new Member. The admission
of a substitute Member shall not release the Member who assigned the Membership
Interest from any liability that such Member may have to the Company.
6.3 Transfers in Violation of this Agreement and Transfers of Partial
-----------------------------------------------------------------
Membership Interests. Upon a transfer in violation of this Article VI, the
- --------------------
transferee shall have no right to vote or participate in the management of the
Company or to exercise any rights of a Member. Such transferee shall only be
entitled to receive the share of the Company's Net Profits, Net Losses and
distributions of the Company's assets to which the transferor would otherwise be
entitled. Notwithstanding the immediately preceding sentences, if, in the
determination of the remaining Member, a transfer in violation of this Article
VI would cause the termination of the Company under the Code, in the sole
discretion of the remaining Member, the transfer shall be null and void.
-8-
<PAGE>
6.4 Right to Purchase. If, as of November 5, 2000, the gross offering
-----------------
proceeds received by the Company from the private placement of its Membership
Interests is less than $4,000,000, then Myers shall have the right to purchase
CPC's entire Membership Interest for the purchase price of $1.00 effective upon
60 days' prior written notice.
ARTICLE VII
CONSEQUENCES OF DISSOLUTION EVENTS AND
TERMINATION OF MEMBERSHIP INTEREST
7.1 Dissolution Event. Upon the occurrence of the death, withdrawal,
-----------------
resignation, retirement, insanity, bankruptcy or dissolution of any Member or
the termination of this Agreement pursuant to Section 1.2 ("Dissolution Event"),
the Company shall dissolve unless the remaining Members ("Remaining Members")
holding all of the remaining Membership Interests consent within ninety (90)
days of the Dissolution Event to the continuation of the business of the
Company. If the Remaining Members so consent, the Company and/or the Remaining
Members shall have the right to purchase, and if such right is exercised, the
Members (or his or her legal representative) whose actions or conduct resulted
in the Dissolution Event ("Former Member") shall sell, the Former Member's
Membership Interest ("Former Member's Interest") as provided in this Article
VII.
7.2 Withdrawal. Notwithstanding Section 7.1, upon the withdrawal by a
----------
Member in accordance with Section 3.2 such Member shall be treated as a Former
Member, and, unless the Company dissolves as a result of such withdrawal, the
Company and/or the Remaining Members shall have the right to purchase, and if
such right is exercised, the Former Member shall sell, the Former Member's
Interest as provided in this Article VII.
7.3 Purchase Price. The purchase price for the Former's Member's Interest
--------------
shall be the fair market value of the Former Member's Interest as determined by
an independent appraiser jointly selected by the Former Member and by the
Remaining Members. The Company and the Former Member shall each pay one-half of
the cost of the appraisal. Notwithstanding the foregoing, if the Dissolution
Event results from a breach of this Agreement by the Former Member, the purchase
price shall be reduced by an amount equal to the damages suffered by the Company
or the Remaining Members as a result of such breach.
7.4 Notice of Intent to Purchase. Within thirty (30) days after the fair
----------------------------
market value of the Former Member's Interest has been determined in accordance
with Section 7.3, each Remaining Member shall notify the Members in writing of
his or her desire to purchase a portion of the Former Member's Interest. The
failure of any Remaining Member to submit a notice within the applicable period
shall constitute an election on the part of the Member not to purchase any of
the Former Member's Interest. Each Remaining Member so electing to purchase
shall be entitled to purchase a portion of the Former Member's Interest in the
same proportion that the Membership Interest of the Remaining Member bears to
the aggregate of the Membership Interests of all of the Remaining Members
electing to purchase the Former Member's Interest.
7.5 Election to Purchase Less Than All of the Former Member's Interest.
------------------------------------------------------------------
If any Remaining Member elects to purchase none or less than all of his or her
pro rata share of the Former Member's Interest, then the Remaining Members may
elect to purchase more than their
-9-
<PAGE>
pro rata share. If the Remaining Members fail to purchase the entire interest of
the Former Member, the Company may purchase any remaining share of the Former
Member's Interest. Any purchase of a Former Member's Interest must be the entire
interest.
7.6 Payment of Purchase Price. The Company or the Remaining Members, as
-------------------------
the case may be, shall pay at the closing one-fifth (1/5) of the purchase price
and the balance of the purchase price shall be paid in four equal annual
principal installments, plus accrued interest, and be payable each year on the
anniversary date of the closing. The unpaid principal balance shall accrue
interest at the current applicable federal rate as provided in the Code for the
month in which the initial payment is made, but the Company and the Remaining
Members shall have the right to prepay in full or in part at any time without
penalty. The obligation of each purchasing Remaining Member, and the Company,
as applicable, to pay its portion of the balance due shall be evidenced by a
separate promissory note executed by the respective purchasing Remaining Member
or the Company, as applicable. Each such promissory note shall be in an
original principal amount equal to the portion owed by the respective purchasing
Remaining Member and shall be secured by a pledge of that portion of the Former
Member's Interest purchased by such Remaining Member.
7.7 Closing of Purchase of Former Member's Interest. The closing for the
-----------------------------------------------
sale of a Former Member's Interest pursuant to this Article VII shall be held at
10:00 a.m. at the principal office of Company no later than sixty (60) days
after the determination of the purchase price, except that if the closing date
falls on a Saturday, Sunday, or Federal legal holiday, then the closing shall be
held on the next succeeding business day. At the closing, the Former Member
shall deliver to the Company or the Remaining Members an instrument of transfer
(containing warranties of title and no encumbrances) conveying the Former
Member's Interest. The Former Member, the Company and the Remaining members
shall do all things and execute and deliver all papers as may be reasonably
necessary fully to consummate such sale and purchase in accordance with the
terms and provisions of this Agreement.
ARTICLE VIII
ACCOUNTING, RECORDS, REPORTING BY MEMBERS
8.1 Books and Records. The books and records of the Company shall be kept
-----------------
in accordance with generally accepted accounting principles, consistently
applied. The Company shall also obtain an audit (at the Company's expense) of
its annual financial statements by an independent certified public accountant.
The Company shall maintain at its principal office in Florida all of the
following:
A. A current list of the full name and last known business or
residence address of each Member, together with the capital contributions,
capital account and Membership Interest of each Member;
B. A copy of the Articles and any and all amendments thereto
together with executed copies of any powers of attorney pursuant to which the
Articles or any amendments thereto have been executed;
C. Copies of the Company's federal, state and local income tax or
information returns and reports, if any, for the six (6) most recent taxable
years;
-10-
<PAGE>
D. A copy of this Agreement and any and all amendments thereto
together with executed copies of any powers of attorney pursuant to which this
Agreement or any amendments thereto have been executed;
E. Copies of the financial statements of the Company, if any, for
the six (6) most recent fiscal years; and
F. The Company's books and records as they relate to the internal
affairs of the Company for at least the current and past four (4) fiscal years.
8.2 Reports. The Company shall cause to be filed, in accordance with the
-------
Act, all reports and documents required to be filed with any governmental
agency. The Company shall cause to be prepared at least annually information
concerning the Company's operations necessary for the completion of the Members'
federal and state income tax returns. The Company shall send or cause to be
sent to each member within ninety (90) days after the end of each taxable year
(i) such information as is necessary to complete the Members' federal and state
income tax or information returns and (ii) a copy of the Company's federal,
state, and local income tax or information returns for the year.
8.3 Bank Accounts. The Members shall maintain the funds of the Company in
-------------
one or more separate bank accounts in the name of the Company, and shall not
permit the funds of the Company to be commingled in any fashion with the funds
of any other person. Any Member, acting alone, is authorized to endorse checks,
drafts, and other evidences of indebtedness made payable to the order of the
Company, but only for the purpose of deposit into the Company's accounts. All
checks, drafts, and other instruments obligating the Company to pay money shall
be signed by CPC (or any successor Manager), except as otherwise provided in
Section 4.1A above.
8.4 Tax Matters for the Company. CPC is designated as "Tax Matters
---------------------------
Partner" (as defined in Code Section 6231), to represent the Company (at the
Company's expense) in connection with all examination of the Company's affairs
by tax authorities and to expend Company funds for professional services and
costs associated therewith.
ARTICLE IX
DISSOLUTION AND WINDING UP
9.1 Conditions of Dissolution. The Company shall dissolve upon the
-------------------------
occurrence of any of the following events:
A. Upon the happening of any event of dissolution specified in the
Articles;
B. Upon the unanimous vote of Members;
C. The occurrence of a Dissolution Event and the failure of the
Remaining Members to consent in accordance with Section 7.1 to continue the
business of the Company within ninety (90) days after the occurrence of such
event; or
D. The sale of all or substantially all of the assets of the
Company.
-11-
<PAGE>
9.2 Winding Up. Upon the dissolution of the Company, the Company's assets
----------
shall be disposed of and its affairs wound up. The Company shall give written
notice of the commencement of the dissolution to all of its known creditors.
9.3 Order of Payment of Liabilities Upon Dissolution. After determining
------------------------------------------------
that all the known debts and liabilities of the Company have been paid or
adequately provided for, the remaining assets shall be distributed to the
Members in accordance with their positive Capital Account balances, after taking
into account income and loss allocations for the Company's taxable year during
which liquidation occurs; provided, however, that after distributions are made
which reduce the positive Capital Account balances of the Members to zero, all
additional distributions shall be made to the Members in accordance with their
Membership Interests.
9.4 Limitations on Payments Made in Dissolution. Except as otherwise
-------------------------------------------
specifically provided in this Agreement, each Member shall be entitled to look
only to the assets of the Company for the return of his or her positive Capital
Account balance and shall have no recourse for his or her Capital Contribution
and/or share of Net Profits against any other Member except as provided in
Article X.
9.5 Certificates. The Company shall file with the Nevada Secretary of
------------
State Articles of Dissolution upon the dissolution of the Company and a
Certificate of Cancellation upon the completion of the winding up of the
Company's affairs.
ARTICLE X
INDEMNIFICATION AND INSURANCE
10.1 Indemnification of Agents. The Company shall indemnify the Manager
-------------------------
and each Member and may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding by reason of the fact that he or she is or was a Manager,
Member, officer, employee or other agent of the Company or that, being or having
been such a Manager, Member, officer, employee or agent, he or she is or was
serving at the request of the Company as a manager, director, officer, employee
or another agent of another limited liability company, corporation, partnership,
joint venture, trust or other enterprise (all such persons being referred to
hereinafter as an "agent"), to the fullest extent permitted by applicable law in
effect on the date hereof and to such greater extent as applicable law may
hereafter from time to time permit.
10.2 Insurance. The Company shall have the power to purchase and maintain
---------
insurance on behalf of any person who is or was an agent of the Company against
any liability asserted against such person and incurred by such person in any
such capacity, or arising out of such person's status as an agent, whether or
not the Company would have the power to indemnify such person against such
liability under the provisions of Section 10.1 or under applicable law.
ARTICLE XI
MISCELLANEOUS
11.1 Counsel to the Company. Counsel to the Company ("Company Counsel")
----------------------
may also be counsel to any Member or any Affiliate of a Member. The Members may
execute on behalf of the Company and the Members any consent to the
representation of the Company that
-12-
<PAGE>
Company Counsel may request pursuant to the California and Nevada Rules of
Professional Conduct or similar rules in any other jurisdiction ("Rules"). Each
Member acknowledges that Company Counsel shall not represent any Member in the
absence of a clear and explicit agreement to such effect between the Member and
Company Counsel, and that in the absence of any such written agreement Company
Counsel shall owe no duties directly to a Member. Notwithstanding any adversity
that may develop, in the event any dispute or controversy arises between the
Members and the Company, then each Member agrees that Company Counsel may
represent either the Company or such Member in any such dispute or controversy
to the extent permitted by the Rules, and each Member hereby consents to such
representation; provided that if the Company Counsel represents a Member in such
dispute, such Member shall take all steps necessary or appropriate to allow the
Company to select and retain its own independent counsel for such dispute, which
counsel such Member shall not participate in selecting or retaining for the
Company.
11.2 Complete Agreement. This Agreement and the Articles constitute the
------------------
complete and exclusive statement of agreement among the Members with respect to
the subject matter herein and therein and replace and supersede all prior
written and oral agreements among the Members with respect to the subject matter
of this Agreement and the Articles. To the extent that any provision of the
Articles conflict with any provision of this Agreement, the Articles shall
control.
11.3 Binding Effect. Subject to the provisions of this Agreement relating
--------------
to transferability, this Agreement shall will be binding upon and inure to the
benefit of the Members and their respective successors and assigns.
11.4 Interpretation. All pronouns shall be deemed to refer to the
--------------
masculine, feminine, or neuter, singular or plural, as the context in which they
are used may require. All headings herein are inserted only for convenience and
ease of reference and are not to be considered in the interpretation of any
provision of this Agreement. Numbered or lettered articles, sections and
subsections herein contained refer to articles, sections and subsections of this
Agreement unless otherwise expressly stated. In the event any claim is made by
any Member relating to any conflict, omission or ambiguity in this Agreement, no
presumption or burden of proof or persuasion shall be implied by virtue of the
fact that this Agreement was prepared by or at the request of a particular
Member or his or her counsel.
11.5 Jurisdiction. Each Member hereby consents to the exclusive
------------
jurisdiction of the state and federal courts sitting in Florida in any action on
a claim arising out of, under or in connection with this Agreement or the
transactions contemplated by this Agreement. Each Member further agrees that
personal jurisdiction over him or her may be effected by service of process by
registered or certified mail addresses as provided in Section 11.8 of this
Agreement, and that when so made shall be as if served upon him or her
personally within Florida.
11.6 Arbitration. Except as otherwise provided in this Agreement, any
-----------
controversy between the parties arising out of this Agreement shall be submitted
to the American Arbitration Association for arbitration in Florida. The costs
of the arbitration, including any American Arbitration Association
administration fee, the arbitrator's fee, and costs for the use of facilities
during the hearings, shall be borne equally by the parties to the arbitration.
Attorneys' fees may be awarded to the prevailing or most prevailing party at the
discretion of the arbitrator. The
-13-
<PAGE>
discovery rules of Florida shall apply to the arbitration. The arbitrator shall
not have any power to alter, amend, modify or change any of the terms of this
Agreement nor to grant any remedy which is either prohibited by the terms of
this Agreement or not available in a court of law sitting in Florida and
applying Florida substantive law.
11.7 Severability. If any provision of the Agreement or the application
------------
of such provision to any person or circumstance shall be held invalid, the
remainder of this Agreement or the application of such provision to persons or
circumstances other than those to which it is held invalid shall not be affected
thereby.
11.8 Notices. Any notice to be given or to be served upon the Company or
-------
any party hereto in connection with this Agreement must be in writing (which may
include facsimile) and shall be deemed to have been given and received when
delivered to the address specified by the party to receive the notice. Such
notices shall be given to a Member at the address specified in Exhibit A hereto.
Any party may, at any time by giving five (5) days prior written notice to the
other Members, designate any other address in substitution of the foregoing
address to which such notice shall be given.
11.9 Amendments. This Agreement may be amended only by a written
----------
instrument signed by all of the Members.
11.10 Multiple Counterparts. This Agreement may be executed in two or
---------------------
more counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
11.11 Attorneys' Fees. In the event that any dispute between the Company
---------------
and the Members or among the Members should result in litigation or arbitration,
the prevailing party in such dispute shall be entitled to recover from the other
party or parties all reasonable fees, costs and expenses of enforcing any right
of the prevailing party, including without limitation, reasonable attorneys'
fees and expenses, all of which shall be deemed to have accrued upon the
commencement of such action and shall be paid whether or not such action is
prosecuted to judgment. Any judgment or order entered in such action shall
contain a specific provision providing for the recovery of attorneys' fees and
costs incurred in enforcing such judgment and an award of prejudgment interest
from the date of the act or omission giving rise to the claim at the maximum
rate allowed by law. For the purposes of this Section: (a) attorneys' fees
shall include, without limitation, fees incurred in the following: (1)
postjudgment motions; (2) contempt proceedings; (3) garnishment, levy, and
debtor and third party examinations; (4) discovery; and (5) bankruptcy
litigation; and (b) prevailing party shall mean the party who is determined in
the proceeding to have prevailed or who prevails by dismissal, default or
otherwise.
11.12 Remedies Cumulative. The remedies under this Agreement are
-------------------
cumulative and shall not exclude any other remedies to which any person may be
lawfully entitled.
IN WITNESS WHEREOF, all of the Members of Med Enclosures, LLC, A Delaware
Limited Liability Company, have executed this Agreement, effective as of the
date written above.
CPC OF AMERICA, INC.,
-14-
<PAGE>
a Nevada corporation
By:__________________________________
Rod A. Shipman, President
GENE MYERS ENTERPRISES, INC.,
a Florida Corporation
By:__________________________________
Gene Myers, M.D., President
-15-
<PAGE>
EXHIBIT A
---------
CAPITAL CONTRIBUTION AND ADDRESS OF MEMBERS
AS OF
NOVEMBER 5, 1999
<TABLE>
<CAPTION>
Member's Capital Membership
Member's Name Member's Address Contribution Interest
- ----------------------- ---------------------------------- --------------------------- ------------------
<S> <C> <C> <C>
CPC of America, Inc. 1133 Fourth Street, Suite 200 Secured Promissory Note 73.3%
Sarasota, Florida 34236 in the original
principal amount of
$250,000
Gene Myers 2540 S. Tamiami Trail All rights to the "Myers 26.7%
Enterprises, Inc. Sarasota, Florida 34239 Solution" products and
procedures for arterial
closures, including U.S.
Patent Nos. 5,486,195
and 5,941,897
</TABLE>
-16-
<PAGE>
SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1
CPCA 2000, Inc., a Nevada corporation
HeartMed, LLC, a Delaware limited liability company
Med Enclosures, LLC, a Nevada limited liability company
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 104,962
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 291,107
<PP&E> 15,420
<DEPRECIATION> 7,265
<TOTAL-ASSETS> 304,247
<CURRENT-LIABILITIES> 317,823
<BONDS> 0
0
79
<COMMON> 2,065
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 304,247
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,334,381
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,329,328)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,329,328)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,329,328)
<EPS-BASIC> (.38)
<EPS-DILUTED> (.38)
</TABLE>
