ITEM 1. DESCRIPTION OF BUSINESS.
UNLESS OTHERWISE INDICATED, ALL REFERENCES TO OUR COMPANY INCLUDE OUR WHOLLY-OWNED SUBSIDIARIES, MED ENCLOSURE, LLC, A NEVADA LIMITED LIABILITY COMPANY, CPCA 2000, INC., A NEVADA CORPORATION, AND MED CLOSE CORP., A NEVADA CORPORATION.
General - -------
CPC of America, Inc. 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 products. To date, we have completed the development of an external counterpulsation device for the treatment of coronary artery disease known as the CPCA 2000. In March 2003, we received FDA clearance to market the CPCA 2000 counterpulsation unit as a Class III medical device. In addition, through our wholly-owned subsidiary, Med Enclosure, LLC, we are engaged in the business of developing a patented internal puncture closing device and technique known as "MedClose." As of the date of this report, we have not commenced revenue producing operations. Our operations to date have consisted of the design and development of our Med Close device and our counterpulsation units, and the raising of capital.
In November 1999, we acquired a 73.3% interest in Med Enclosure, LLC, 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, we received a 73.3% interest in Med Enclosure in exchange for our promissory note in the original principal amount of $250,000. On April 25, 2000, we retired the note in full by paying $255,208 to Med Enclosure. In September 2002, we increased our percentage interest in Med Enclosure to 80.3% pursuant to a purchase agreement with the minority owner of Med Enclosure by which we acquired from the minority owner an additional 7% membership interest in Med Enclosure in exchange for our issuance of 10,000 shares of our common stock. In November 2004, we acquired from the minority owner an additional 12% membership interest in exchange for $100,000. In February 2005, we acquired the remaining 7.7% membership interest in exchange for our issuance of 4,000 shares of our common stock. Med Enclosure, LLC is now the 100%-owned subsidiary of CPC of America.
In October 2002, we organized MedClose Corp., a wholly-owned Nevada corporation, for purposes of conducting the development and commercialization of non-cardiac applications of the MedClose technology.
Our executive offices are located at 6336 17th Street Circle East, Sarasota, Florida 34243; telephone number (941) 727-4370.
Business of the Issuer - ----------------------
GENERAL
CPC of America is engaged in the business of developing and acquiring cardiology therapeutic and disposable devices and products as well as the manufacture and distribution of these devices and products for the diagnosis and treatment of coronary artery disease. To date, we have completed development of the CPCA 2000 counterpulsation devices and we are currently engaged in the development of the MedClose internal puncture closing device and technique.
Our first product, the CPCA 2000 counterpulsation unit, is a non-invasive, atraumatic and non-toxic method of treating certain coronary disease states. We have completed the development of the CPCA 2000 and, in March 2003, we received FDA clearance to market the CPCA 2000 counterpulsation unit as a Class III medical device. MedClose is an internal puncture closure device and technique that utilizes a human glue deployment to close puncture wounds following surgery. MedClose is in the development stage and has not been approved for sale by the FDA. As of the date of this report, we have not commenced revenue producing operations.
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 plaque can lead to heart attacks, brain failure and eventually death. 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.
A percentage of these patients undergo invasive surgical procedures such as angioplasty, artery bypass surgery or cardiac catheterization, all of which are 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. 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. Many bypass conduits close in the years following surgery requiring a return to medications, angioplasty, or repeat bypass attempts. Cardiac catheterization is 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 and treating coronary artery blockages, it carries a serious risk of hemorrhaging following the procedure at the site where the artery is punctured.
INTERNAL PUNCTURE CLOSURE DEVICE: "MEDCLOSE"
MedClose is a proprietary technique for use during catheterization procedures that is designed to reduce the risk of hemorrhage and speed recovery time for patients following these procedures. MedClose 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. MedClose 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. MedClose 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. We hold three patents for both the instrument and the technique used in connection with MedClose, and we recently filed for a fourth patent with the USPTO.
We believe that a major advantage of MedClose 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 left in the artery. In addition, we believe that MedClose will significantly reduce the recovery time of patients following catheterization procedures. Physicians traditionally have used sutures to close puncture wounds following catheterization procedures. Using sutures requires direct pressure to be applied to the wound for up to 45 minutes and for the patient to remain still for up to 12 hours following the procedure to avoid hemorrhaging. MedClose, by contrast, eliminates the need for direct pressure to be applied to the wound and reduces the recovery time following the procedure to approximately two hours. As a result, MedClose reduces the need for patients to remain completely immobile following the catheterization procedure and limits the recovery time and discomfort associated with the catheterization procedures.
We have engaged Biomed Research, Inc., a medical device design and testing firm located in Lutz, Florida, to conduct the development and testing of the MedClose. As of the date of this report, Biomed has completed the development of a product prototype and in March 2003 successfully concluded animal testing. Since March 2003, we have continued to refine the product design and conduct additional animal testing. On July 12, 2005, we submitted an
Investigational Device Exemption ("IDE") application to the U.S. Food and Drug Administration for the MedClose device in preparation for launching a U.S. IDE clinical study. The clinical study of MedClose, known as the F-A-S-T trial, will be a randomized study involving diagnostic and interventional patients versus manual compression, and will take place at five U.S. sites. We have received conditional IDE approval. The F-A-S-T trial is expected to begin in the second quarter of 2006. Results obtained from the F-A-S-T trial will be used to support a premarket approval application for the MedClose device.
In October 2002, we organized Med Close Corp., a wholly-owned Nevada corporation, for purposes of conducting the development and commercialization of non-cardiac applications of the Med Close technology. Pursuant to a Technology License Agreement dated October 29, 2002 between Med Enclosure and Med Close, Med Enclosure granted Med Close exclusive worldwide rights to the Med Enclosure technology and patents for all non-cardiac applications. Med Close paid to Med Enclosure $100,000 upon execution of the license agreement and has agreed to pay Med Enclosures a royalty in the amount of four percent (4%) on all net sales of Med Close products that incorporate the licensed technology or patents.
COUNTERPULSATION TECHNOLOGY: "CPCA 2000"
We are the developers and owners of a counterpulsation device under the name CPCA 2000. 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. 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. Counterpulsation is significantly less invasive than angioplasty, artery bypass surgery and cardiac catheterization and is designed to reduce the need for these more invasive, complicated and costly procedures.
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 expected cost of $7,500 or less, compares favorably with the higher risk, expense, pain and lost productivity time associated with the invasive angioplasty, coronary bypass or cardiac catheterization procedures.
We have completed the development of the CPCA 2000 and, in March 2003, we received FDA clearance to market the CPCA 2000 counterpulsation unit as a Class III medical device. As of the date of this report, we have not commenced marketing the CPCA 2000. As of the date of this report, we are continuing to analyze the potential sale of CPCA 2000, Inc., our subsidiary that owns our counterpulsation technologies and products. We have conducted preliminary evaluations and discussions concerning the sale of CPCA 2000), Inc. or its assets. However, due to recent declines in the amount of reimbursable patient costs for counterpulsation treatments under the Medicare program, and the resulting negative impact on projected profitability of operations based on our counterpulsation technologies and products, we are unable to predict whether we will be able consummate a sale of CPCA 2000, Inc. or its assets. The Health Care Financing Administration, which administers the Medicare program and sets allowable charges for medicare reimbursement, originally set the allowable charge for angina patients being treated by the counterpulsation at $7,274 for 35 one-hour treatments. Over the succeeding years, the allowable charge has significantly declined with a resulting adverse impact on the commercial potential for counterpulsation technologies, including the CPCA2000.
MARKETING AND DISTRIBUTION
INTERNAL PUNCTURE CLOSURE DEVICE " MEDCLOSE"
We initially intend to market MedClose to both hospitals and to physicians through both national and international distribution agreements. There are no agreements currently in place, however we have commenced discussions with potential distributors and customers. We also intend 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.
We intend to offer our products to potential customers through a marketing campaign consisting of public relations, direct mail and personal selling efforts by our representatives. The public relations campaign will be designed to raise awareness of MedClose and its puncture internal closure device among both industry leaders and the general public. We intend to generate publicity for MedClose through press conferences, television forums, demonstrations and press releases to trade and professional publications.
Although we initially intend to concentrate our marketing efforts on the U.S. domestic market, once domestic operations have been established, we intend to expand our marketing efforts in various international markets. We intend to market our counterpulsation units and puncture closing devices to international customers through affiliations and agreements with international partners.
GOVERNMENT REGULATION AND SUPERVISION
FDA APPROVAL PROCESS
Clinical testing, manufacture and sale of the CPCA 2000 and MedClose 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. Class I devices are subject only to general controls, including labeling, premarket notification and adherence to good manufacturing practices. 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. Class III devices generally include life-sustaining, life-supporting and implantable devices, or new devices which have been found to be substantially equivalent to devices currently on the market. Both the CPCA 2000 and MedClose are considered by the FDA to be Class III devices.
Before a Class III 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. Although Class III devices normally require FDA clearance through the premarket approval process, we were able to obtain FDA premarket approval for our CPCA 2000 as a Class III medical device in March 2003. We believe that we will be able to receive FDA clearance pursuant to a 510(k) premarket notification for MedClose as well. Because puncture closure devices are already on the market, newer versions, similar to the MedClose, have been permitted to be marketed pursuant to the 510(k) premarket notification procedure. However, there is no assurance that we will be eligible to utilize the 510(k) premarket notification process in the future or that the FDA will not in the future require us to submit a premarket application, which would be a more costly, lengthy and uncertain approval process.
Generally, 510(k) premarket notification clearance will be granted if 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 premarket approval applications. 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 12 to 36 months or longer from submission of the product 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 determination that a device is not substantially equivalent to a device already on the market, or a request for additional data, would delay the market introduction of our products and could have a material adverse effect on our business, financial condition and results of operations. For any of our 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 we will obtain 510(k) premarket clearance within the above time frames, if at all, for MedClose or any other device for which we may file a 510(k).
Further, once FDA approval is obtained, our 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. We are also subject to inspection on a routine basis for compliance with the FDA's good manufacturing practices regulations. These regulations impose certain procedural and documentation requirements upon us and the companies with which we contract to manufacture our products. The FDA has recently finalized changes to good manufacturing practice requirements that, among other things, add requirements for design controls and maintenance of service records. These changes are expected to increase the cost of compliance.
THIRD-PARTY COVERAGE
The commercial success of the CPCA 2000 is also dependent upon positive coverage policies by the Health Care Financing Administration, which administers the Medicare program, as well as by other third-party payors. In February 1999, the HCFA extended Medicare coverage to external counterpulsation treatment for patients with disabling angina who, in the opinion of a cardiologist or cardiothoracic surgeon, are not readily amenable to surgical interventions. In November 1999, the Health Care Financing Administration created a new code to describe external counterpulsation technology. This new code, HCPCS code G0166, is specific to Medicare beneficiaries and went into effect on January 1, 2000 for angina patients being treated by the counterpulsation. The allowable charge under this HCPCS code for 35 one-hour treatments was initially $7,274, however the allowable charge has declined the past several years with a resulting adverse impact on the commercial potential for counterpulsation technologies, including the CPCA2000. Certain patients may require additional services, such as evaluation and management, which may be billed separately. We expect third-party insurance companies to follow the lead of Medicare and to adopt similar coverage policies for counterpulsation treatment. Failure by these third-party payors to adopt coverage policies similar to Medicare's, or the elimination of coverage entirely for counterpulsation treatment, would seriously impact the demand for our counterpulsation units.
ANTI-KICKBACK STATUTES
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. Our 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 our 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 our business, financial condition and results of operations.
COMPETITION
INTERNAL PUNCTURE CLOSURE DEVICE " MEDCLOSE"
We have several competitors that manufacture and market in the puncture closure devices, including Kensey Nash, St. Jude Medical, Johnson & Johnson, Abbot Laboratories, Datascope Corp. and Vascular Solutions, Inc. We believe our devices have competitive advantages over other products because our product is superior in delivery of arterial site closures on the basis of safety, variability, shortened time in conducting repuncture post procedures and cost effectiveness. However, all of our competitors have greater marketing and financial resources than we do and, accordingly, there can be no assurance that we will be able to compete effectively, if at all.
COUNTERPULSATION TECHNOLOGY "CPCA 2000"
At present, we are aware of four other companies that are currently producing and marketing counterpulsation device similar to the CPCA 2000: Vasomedical, Inc., Cardiomedics, Inc., Cardio-Vascular Electronics, Inc. and NYCOR, Inc. We are also aware of three other companies that have received FDA clearance to market counterpulsation devices: Solo Medical Devices, LLC, Living Data Technology Corporation and Shanghai First People Hospital. Some of these companies have already begun to market their counterpulsation units in the U.S. and, accordingly, have already obtained some level of market acceptance. We believe 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 we 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.
We estimate that counterpulsation therapy is presently used to treat only a small percentage of all patients with coronary artery diseases. Accordingly, we anticipate that the CPCA 2000 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 patients can be successfully treated using counterpulsation as an alternative to invasive procedures.
PATENTS AND TRADEMARKS
In September 2002, we received three patents from the U.S. Patent and Trademark Office on our CPCA 2000 counterpulsation unit. At present, we have submitted domestic and international applications to patent the CPCA 2000 and our counterpulsation technology and have already received a trademark on the name "CPCA 2000." In addition, our subsidiary, Med Enclosure, LLC, holds three patents from the USPTO for the MedClose device and procedure and a fourth patent is pending before the USPTO. We have also applied for a trademark for the name MedClose. Our ability to compete successfully depends, in part, on our ability to protect the proprietary technology contained in our products. We will rely upon a combination of patent, trade secret and trademark laws, together with non-disclosure agreements, to establish and protect proprietary rights in our counterpulsation devices and other technology, as well as our trade names and other similar property. We also intend to enter into confidentiality agreements with our employees, manufacturers, distributors, customers and suppliers, and will limit access to and distribution of our proprietary information. If and when implemented, these measures will only afford us limited protection, as there can be no assurance that any steps taken by us to protect these proprietary rights will be adequate to prevent misappropriation of our technology or the independent development by others of similar technology. In addition, although we believe that there currently are no infringement claims against us and no grounds for the assertion of such claims, the cost of responding to any claim could be significant.
RESEARCH AND DEVELOPMENT
Since inception through December 31, 2005, our research and development expenses have amounted to approximately $16,410,223, including $1,266,093 and $6,699,714 spent on research and development in 2005 and 2004, respectively. At present, none of these research and development expenses have been borne by customers, as we have not begun to market or sell our products and services.
EMPLOYEES
As of the date of this report, we employ one person consisting of our one executive officer. We contract with various consultants to provide services to us including engineering, software, testing, regulatory, product development, medical and clinical affairs on a project by project basis.
AVAILABLE INFORMATION
We do not have a corporate website. We will make available free of charge copies of our periodic reports filed with the SEC upon request to our executive offices at 6336 17th Street Circle East, Sarasota, Florida 34243; telephone number (941) 727-4370.
ITEM 1A.
ITEM 1A. RISK FACTORS.
We make written and oral statements from time to time regarding our business and prospects, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimates," "projects," "believes," "expects," "anticipates," "intends," "target," "goal," "plans," "objective," "should" or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by officers or other representatives made by us to analysts, stockholders, investors, news organizations and others, and discussions with management and other representatives of us. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement made by or on behalf of us speaks only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement which may be made by or on behalf of us.
In addition to other matters identified or described by us from time to time in filings with the SEC, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement that may be made by or on behalf of us. Some of these important factors, but not necessarily all important factors, include the following:
WE HAVE NOT COMMENCED REVENUE PRODUCING OPERATIONS. We were incorporated in 1996 and to date have not generated any revenues from operations. To date, our activities have included the market analysis and development of our counterpulsation units and MedClose device, and the raising of development and working capital. As a result of the absence of any operating history or revenues, there can be no assurance that we will achieve a significant level of operations and, if so, that such operations can continue to be conducted on a profitable basis.
WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE IN ORDER TO FURTHER DEVELOP OR MARKET OUR PRODUCTS, BUT WE DO NOT HAVE ANY COMMITMENTS TO OBTAIN SUCH CAPITAL AND WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO OBTAIN ADEQUATE CAPITAL AS AND WHEN REQUIRED. As of December 31, 2005, we had working capital of $1,877,046, excluding $1,335,361 of accrued dividends payable on our outstanding preferred shares as of such date. We believe that our working capital on hand as of the date of this report will be sufficient in order to fund our plan of operations over the next 12 months. However, we believe that our ability to achieve commercial success and our continued growth will be dependent on our ability to access to capital within the next 12 to 18 months. We will seek to obtain any required working capital through the sale of our securities. However, we have no agreements or understandings with any third parties at this time for our receipt of additional working capital. Consequently, there can be no assurance we will be able to access to capital as and when needed or, if so, that the terms of any available financing will be subject to commercially reasonable terms.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY OR COMPETITIVE PRESSURES FACED BY US MAY MATERIALLY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS. We expect to face significant competition in connection with the marketing of both our MedClose puncture closing device and counterpulsation units. We have had several competitors that manufacture and market puncture closure devices, including Kensey Nash, St Jude Medical, Johnson & Johnson, Abbott Laboratories, Datascope Corp. and Vascular Solutions, Inc. In addition, we are aware of four other companies that are currently producing and marketing or intending to market a counterpulsation device similar to ours, two of whom have already begun to market their counterpulsation units in the U.S. and, accordingly, have already obtained some level of market acceptance. All of our competitors have greater marketing and financial resources than us and, accordingly, there can be no assurance that we will be able to compete effectively or that competitive pressures faced by us will not materially adversely affect our business, financial condition, and results of operations.
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS AND WE MAY INCUR SIGNIFICANT COSTS IN ATTEMPTING TO DO SO. Our success and ability to compete are dependent to a significant degree on our proprietary technology. We rely on a combination of patent, trade secret and trademark laws, as well as confidentiality and licensing agreements to protect our proprietary rights. However, it may be possible for a third party to copy or otherwise obtain and use our proprietary information without authorization or to develop similar technology independently. In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources, either of which could have a material adverse affect on our business, financial condition and operating results.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY.
Our executive offices are located in Sarasota, Florida and consist of approximately 1,000 square feet. The lease had an initial term of one year, subject to two one-year renewal options, and has since converted to a month to month lease.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Neither the company nor our property is subject to any pending legal proceedings, other than routine litigation incidental to our business .
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to the security holders of the company during the fourth quarter of the fiscal year ended December 31, 2005.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Market Information - ------------------
Our common stock is listed on the OTC Bulletin Board under the symbol "CPCF." Set forth below are high and low closing prices for our common stock for each quarter during the two fiscal years ended December 31, 2005. We consider our 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.
QUARTER ENDED HIGH LOW ------------- ---- ---
March 31, 2004 $42.50 $29.00 June 30, 2004 $39.75 $29.00 September 30, 2004 $36.30 $27.00 December 31, 2004 $37.50 $29.55
March 31, 2005 $41.00 $ 32.50 June 30, 2005 $35.00 $ 22.00 September 30, 2005 $31.50 $ 20.00 December 31, 2005 $20.25 $ 14.00
Holders - -------
As of March 14, 2006, there were 80 record holders of our common stock.
Dividends - ---------
We have not paid any cash dividends on our common stock since our inception and do not contemplate paying dividends in the foreseeable future. It is anticipated that earnings, if any, will be retained for the operation of our business. Pursuant to our certificates of designations, holders of shares of our Series C preferred stock and Series D 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. During 2005, we paid no cash dividends on the shares of our preferred stock.
Securities Authorized for Issuance Under Equity Compensation Plans - ------------------------------------------------------------------
Item 12 of this report includes information about the securities underlying outstanding options and securities remaining available for issuance under our equity compensation plans as of December 31, 2005.
Sales of Unregistered Securities - --------------------------------
None.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The table below sets forth a summary of our selected financial data for each of the years ended December 31:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
To date, our activities have included the market analysis and development of our MedClose device and counterpulsation units and the raising of development and working capital. We have developed and prepared for market our counterpulsation units, including a stand-alone unit known as the CPCA 2000. In March 2003, we received FDA clearance to market the CPCA 2000 counterpulsation unit as a Class III medical device. We are also engaged in the business of developing a patented internal puncture closure device and technique known as "MedClose".
We have not commenced revenue producing operations. As of the date of this report, we are continuing to analyze the potential sale of CPCA 2000, Inc., our subsidiary that owns our counterpulsation technologies and products. We have conducted preliminary evaluations and discussions concerning the sale of CPCA 2000, Inc. or its assets. However, due to recent declines in the amount of reimbursable patient costs for counterpulsation treatments under the Medicare program, and the resulting negative impact on projected profitability of operations based on our counterpulsation technologies and products, we are unable to predict whether we will be able consummate a sale of CPCA 2000, Inc. or its assets.
The MedClose device is a proprietary catheter based system that uses fibrin sealant to rapidly seal arterial puncture sites following angiography and angioplasty. MedClose is not presently available for human use. We have successfully manufactured 800 MedClose units, including the completion of procedures and processes relating to the sterilization, packaging, manufacturing, engineering, and testing of the MedClose device. On July 12, 2005, we submitted an Investigational Device Exemption ("IDE") application to the U.S. Food and Drug Administration for the MedClose device in preparation for launching a U.S. IDE clinical study. The clinical study of MedClose, known as the F-A-S-T trial, will be a randomized study involving diagnostic and interventional patients versus manual compression, and will take place at five U.S. sites. We have received conditional IDE approval. The F-A-S-T trial is expected to begin in the second quarter of 2006. Results obtained from the F-A-S-T trial will be used to support a premarket approval application for the MedClose device.
We expect to commence revenue producing operations subject to FDA approval of MedClose or our decision to move forward with the manufacture and sale of the CPCA 2000. We do not expect to purchase or sell significant plant or equipment during 2006, nor do we expect a significant change in the number of our employees during the year.
RESULTS OF OPERATIONS
During the 2005 fiscal year, we incurred $1,266,093 of research and development expenses compared to $6,699,714 during fiscal 2004. Research and development expenses relate to our ongoing development and testing of our internal puncture closure device and technique known as "Medclose." The amount of research and development declined 2005 due to a decreased level of research and development activity pending FDA approval of our investigative device application. We submitted our IDE application in July 2005. Subject to FDA approval of the IDE application, we expect to initiate human studies, at which time we expect research and development activity to increase.
FINANCIAL CONDITION
As of December 31, 2005, we had working capital of $1,877,046, excluding $1,335,361 of accrued dividends payable on our outstanding preferred shares as of such date. Those dividends are convertible into our common shares at the rate of $3.57 per share in the case of the Series C preferred stock and $6.86 per share in the case of the Series D preferred stock. Assuming that the holders of our outstanding preferred shares elect to receive dividends payable in common shares rather than cash, we believe that our working capital on hand as of the date of this report will be sufficient in order to fund our plan of operations over the next 12 months. However, we believe that our ability to
achieve commercial success and our continued growth will be dependent on our ability to access to capital within the next 12 to 18 months. We will seek to obtain any required working capital through the sale of our securities. However, we have no agreements or understandings with any third parties at this time for our receipt of additional working capital. Consequently, there can be no assurance we will be able to access to capital as and when needed or, if so, that the terms of any available financing will be subject to commercially reasonable terms.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet financing arrangements.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements that are based on our beliefs as well as assumptions and information currently available to us. When used in this report, the words "believe," "expect," "anticipate," "estimate" and similar expressions are intended to identify forward-looking statements. These statements are subject to risks, uncertainties and assumptions, including, without limitation, the risks and uncertainties concerning FDA approval of our products; the risks and uncertainties concerning the acceptance of our services and products by our potential customers; our present financial condition and the risks and uncertainties concerning the availability of additional capital as and when required; the risks and uncertainties concerning technological changes and the competition for our services and products; and the risks and uncertainties concerning 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. We caution you not to place undue reliance on any forward-looking statements, all of which speak only as of the date of this report.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. Market risk is attributed to all market sensitive financial instruments, including long-term debt.
We do not utilize derivative financial instruments or investments in available-for-sale securities. All cash is held in both interest and non-interest bearing accounts. However, we do not believe that our cash accounts would have significant impact as a result of changes in interest rate since we do not rely on earnings from our cash accounts for cash flow.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm......................F-1 Consolidated Balance Sheets at December 31, 2005 and 2004....................F-2 Consolidated Statements of Operations for the three years ended December 31, 2005 and cumulative from inception (April 11, 1996) to December 31, 2005......................................................F-3 Consolidated Statements of Shareholders' Equity (Deficit) from inception (April 11, 1996) to December 31, 2005......................F-4 Consolidated Statements of Cash Flows for the three years ended December 31, 2005 and cumulative from inception (April 11, 1996) to December 31, 2005......................................................F-7 Notes to Consolidated Financial Statements...................................F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------
The Board of Directors and Shareholders CPC of America, Inc.
We have audited the accompanying consolidated balance sheets of CPC of America, Inc. and subsidiaries (a development stage company) (the "Company") as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the years in the three year period ended December 31, 2005 and for the period from inception (April 11, 1996) to December 31, 2005. These 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 standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes, on a test basis, examination of evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2005 and 2004, and the results of its consolidated operations and cash flows for each of the years in the three year period ended December 31, 2005 and for the period from inception (April 11, 1996) to December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
/s/CACCIAMATTA ACCOUNTANCY CORPORATION
Irvine, California February 13, 2006
CPC OF AMERICA, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY)
Consolidated Balance Sheets
CPC OF AMERICA, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005
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. 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. 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 has had no operations.
On November 22, 1999, CPC formed Med Enclosures, LLC, a Nevada limited liability company (MED), with Gene Myers Enterprises, Inc. (GME), a minority shareholder of CPC. CPC received a 73.3% interest in MED for a $250,000 promissory note, which was retired in April 2000. GME contributed two patents it developed that are recorded at GME's carrying value of zero. MED acquired its third patent from GME with the proceeds from the $250,000 promissory note. During 2002, the Company purchased an additional 7% of MED through the issuance of 10,000 shares of common stock valued at $53,500. During 2004, the Company purchased an additional 12% of MED for $100,000, and in January 2005 purchased the remaining 7.7% of MED through the issuance of 4,000 shares of common stock valued at $154,000.
CPC OF AMERICA, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - -----------------------------------------------------------------------------
Organization (continued) ------------------------ During 2002, the Company formed Med Close Corp ("MCC"). In 2004, MCC began research and development activities.
Principles of consolidation --------------------------- The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, DSDS from July 1997 through November 1998, CPCA from June 1998, MED and HeartMed LLC from November 1999, and MCC from 2002. All significant intercompany transactions and balances have been eliminated in consolidation.
Cash and equivalents, short-term investments and other cash flow statement -------------------------------------------------------------------------- supplemental information ------------------------ 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. Short term investments are bank certificates of deposit with original terms in excess of three months. Balances in bank accounts may, from time to time, exceed federally insured limits. The Company believes that its loss exposure is limited.
No income taxes have been paid since inception. Payments of $8,954 for interest have been made since inception; none in 2003, 2004 or 2005.
Patents and trademarks ---------------------- Patents and trademarks are stated at cost and amortized using the straight-line method over their economic useful life, which is estimated at ten and fifteen years, respectively. During 2004, the Company acquired 12% additional interest in MED for $100,000, which was added to patent costs in the accompanying financial statements. In January 2005, the Company acquired the final 7.7% of MED for $154,000, which was added to patent costs in the accompanying financial statements. Amortization expense was $41,770 in 2005 and $20,649 in 2004 and in 2003.
Equipment --------- Depreciation expense is provided over the estimated useful life of 5 years using straight line and accelerated methods. Depreciation expense was $415 in 2005, $598 in 2004 and $625 in 2003.
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.
CPC OF AMERICA, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - -----------------------------------------------------------------------------
Reclassifications ----------------- Certain items in the 2004 and 2003 financial statements have been reclassified to conform to the 2005 presentation.
Intangibles and long-lived assets --------------------------------- Long-lived assets are reviewed annually for impairment whenever events or changes in circumstances indicate that the 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.
2005 2004 2003 -------- -------- -------- Patents Gross carrying amount $557,500 $403,500 $303,500 ======== ======== ======== Accumulated amortization $144,773 $103,561 $ 83,327 ======== ======== ======== Amortization expense $ 41,212 $ 20,234 $ 20,234 ======== ======== ========
Trademark Gross carrying amount $ 6,232 $ 6,232 $ 6,232 ======== ======== ======== Accumulated amortization $ 3,880 $ 3,322 $ 2,907 ======== ======== ======== Amortization expense $ 558 $ 415 $ 415 ======== ======== ========
Amortization of intangibles is expected to be approximately $46,000 in each of the next five years. Both patents and the trademark are being amortized over 15 years.
On October 1, 2005, the Company made a change in estimate for the amortization of its patents. Now all portions of the patents (acquired in increments over the last five years) will be amortized over the remaining life of the first portion acquired. This change in estimate resulted in additional amortization for 2005 of about $1,400 and will result in additional amortization in each of the next 10 years of approximately $5,700 each year.
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".
CPC OF AMERICA, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - -----------------------------------------------------------------------------
Basic and diluted net loss per share ------------------------------------ Net loss per share is calculated in accordance with Statement of Financial Accounting Standards 128, Earnings Per Share ("SFAS 128"). 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. For 2005, 2004 and 2003 all common stock equivalents were anti-dilutive. Incremental common shares not included in the denominator of diluted earnings per share calculation due to their antidilutive nature are as follows:
2005 2004 2003 --------- --------- ---------
Attributable to exercise/conversion of: Outstanding options 4,560,905 5,031,298 4,942,073 Preferred stock 1,653,479 1,811,500 1,876,751 --------- --------- --------- 6,214,384 6,842,798 6,818,824 ========= ========= =========
Stock-based compensation ------------------------ The Company has elected to adopt the disclosure provisions only of SFAS 123 and continues 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," and related interpretations. Stock based compensation issued to persons other than employees is reflected in the financial statements at fair value.
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:
CPC OF AMERICA, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - -----------------------------------------------------------------------------
Stock-based compensation (continued) ------------------------------------ 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 2004, 1998 and 1996, respectively: risk-free interest rate of 3.375%, 6% and 9%; volatility of 20%, 50% and 200%; and a weighted fair value of $11.33, $1.26 and $.001.
Recent accounting pronouncements -------------------------------- In December 2004, the FASB issued SFAS No. 123 (Revised 2004), SHARE-BASED PAYMENTS ("SFAS 123R"). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The Company is required to adopt the new standard in the first interim period beginning after December 15, 2005. When the Company adopts SFAS 123R, the statements of operations in 2006 and 2007 will include additional expenses of $60,060 and $23,063, respectively to reflect the modified prospective application method described in the pronouncement. Any new share-based compensation, whether to employees or non-employees, will be accounted for based on the fair value of the compensation, and the related expense will be recorded in the statement of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" which changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 is effective in fiscal years beginning after December 31, 2005. The Company does not expect the adoption of SFAS No. 154 to have a material effect on the consolidated financial statements.
2. SHAREHOLDERS' EQUITY (DEFICIT) - ------------------------------------
Series A Preferred stock ------------------------ In November 1998, the Company commenced the private placement sale of Series A preferred stock at $8.50 per share. The Company sold 79,293 shares for proceeds of $674,000. The Series A Preferred stock had no voting rights and had a 5% annual dividend 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 adjusted to $4.70 per share. On December 31, 1999, a dividend of $25,725 was paid by issuing 5,474 shares of the Company's common stock. In January 2000, 70,469 Series A shares were converted into 127,447 common shares. In June 2001, the remaining 8,824 Series A shares and related accrued dividends of $1,563 were converted into 16,290 common shares. Additional accrued dividends of $3,750 were paid in cash.
CPC OF AMERICA, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005
2. SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED) - ------------------------------------------------
Series B Preferred stock ------------------------ In April 2000, the Company commenced the private placement sale of Series B preferred stock at $8.75 per share. The Company sold 185,144 shares for proceeds of $1,620,010. The Company recorded a beneficial conversion feature totaling $208,125 in 2000 and $331,636 in 2001 at the date of issuance. The Series B Preferred stock had no voting rights and had a 5% annual dividend payable in cash or common stock. Each Series B share was convertible into one common share until June 30, 2001, when the conversion price was adjusted to the lower of $6.56 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 June 30, 2001, the conversion price was adjusted to $3.20 per share. During the fourth quarter of 2001, 113,715 Series B shares and related accrued dividends of $9,908 were converted into 314,037 common shares. In March 2002, the remaining 71,429 Series B shares were converted into 195,313 common shares. Additional accrued dividends of $53,125 were paid in cash.
Series C Preferred stock ------------------------ In October 2001, the Company commenced the private placement sale of Series C preferred stock at $8.90 per share. The Company sold 359,780 shares for proceeds of $3,202,042. The Company recorded a beneficial conversion feature totaling $1,067,337 at the date of issuance. The Series C Preferred stock has no voting rights and has a 5% annual dividend payable in cash or common stock. Each Series C share was convertible into one common share until June 30, 2002, when the conversion price was adjusted to the lower of $6.68 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 June 30, 2002, the conversion price was adjusted to $3.57 per share. During the fourth quarter of 2002, 18,576 Series C shares and related accrued dividends of $6,625 were converted into 46,314 common shares. During 2003, 26,786 Series C shares and related accrued dividends of $18,071 were converted into 73,689 common shares. During 2004, 11,236 Series C shares and related accrued dividends of $11,758 were converted into 31,304 common shares. During 2005, 6,180 Series C shares and related accrued dividends of $9,500 were converted into 18,068 common shares. Accrued dividends of $490,111 on the 297,002 shares outstanding at December 31, 2005 remain unpaid.
CPC OF AMERICA, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005
2. SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED) - ------------------------------------------------
Series D Preferred stock ------------------------ In November 2002, the Company commenced the private placement sale of Series D preferred stock at $9.15 per share. The Company sold 819,336 shares for proceeds of $7,496,924. The Company recorded a beneficial conversion feature totaling $2,499,111 at the date of issuance. The Series D Preferred stock has no voting rights and has a 5% annual dividend payable in cash or common stock. Each Series D share was convertible into one common share until June 30, 2003, when the conversion price was adjusted to the lower of $6.86 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. Based on the last prices over the applicable period, no adjustment was made to the conversion price and it remains fixed at $6.86 per share. During 2004, 27,873 Series D shares and related accrued dividends of $16,706 were converted into 39,614 common shares. During 2005, 106,922 shares and related accrued dividends of $107,823 were converted into 158,337 common shares. Accrued dividends of $845,249 on the 684,541 outstanding shares remain unpaid at December 31, 2005.
Common stock ------------ During 2005, 6,180 Series C shares and 106,922 Series D shares and related accrued dividends of $117,323 were converted into 176,405 common shares. During 2004, 11,236 Series C shares and 27,873 Series D shares and related accrued dividends of $28,464 were converted into 70,918 common shares. During 2003, 26,786 Series C shares and related accrued dividends of $18,071 were converted into 73,689 common shares. During 2002, 18,576 Series C shares and related accrued dividends of $6,625 were converted into 46,314 common shares.
In March 2002, 71,429 Series B shares were converted into 195,313 common shares.
In October 2002, the Company purchased an additional 7% interest in MED for 10,000 common shares valued at $53,500.
In March 2002, 33,333 common shares were returned for cancelation as part of a lawsuit settlement. In August and November 2002, 502,600 common shares were returned for cancelation as part of the settlement with former consultants of the Company.
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.
CPC OF AMERICA, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005
2. SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED) - ------------------------------------------------
Common stock (continued) ------------------------ In March 1997, the Company commenced the private placement sale of 35 units at $29,000 per unit. Each unit consisted 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. The Company 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 three 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. During 2000, warrants to purchase 365,500 common shares were exercised and the remaining balance of 785,010 at December 31, 2000 were not converted and therefore expired.
In December 1996, the Company issued 4,000 shares of common stock to its attorney for payment of $200 in legal fees. In October 1996, the Company issued 760,000 shares of common stock to related parties in payment of $38,000 in consulting fees rendered in 1996.
In May 1996, the Company sold to its founders 2,400,000 shares of common stock for $.0005 cash per share and 300,000 shares for a $150 note receivable. In September 1996, the Company sold 100,000 shares of common stock for $.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. The following information applies to all options outstanding at December 31, 2005:
Weighted Weighted Average average average Exercise Options remaining exercise Number exercise Price Outstanding life (years) price exercisable price -------- ----------- ------------ -------- ----------- --------- $ 1.125 468,191 1 $ 1.125 468,191 $ 1.125 $ 2.50 3,542,714 3 $ 2.50 2,742,714 $ 2.50 $ 29.12 550,000 5 $ 29.12 550,000 $ 29.12
CPC OF AMERICA, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005
2. SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED) - ------------------------------------------------
Stock options (continued) -------------------------
A summary of stock option activity follows:
CPC OF AMERICA, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005
2. SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED) - ------------------------------------------------
Stock options (continued) ------------------------- The following information applies to employee options outstanding at December 31, 2005:
Weighted Weighted Average average average Exercise Options remaining exercise Number exercise Price Outstanding life (years) price exercisable price - ----------- -------------- ------------ ---------- ------------- ---------
$ 1.125 19 1 $ 1.125 19 $ 1.125 $ 2.50 1,551,412 3 $ 2.50 1,151,412 $ 2.50 $ 29.12 275,000 5 $ 29.12 275,000 $ 29.12
In October 2004, 275,000 options were granted to a consultant at an exercise price of $29.12 for services performed. The options vest immediately and expire on October 11, 2009. The fair value of these options was calculated using the Black-Scholes option pricing model and was determined to be $3,117,034, which was included in the accompanying 2004 statement of operations.
Also in October 2004, 275,000 options were granted to the Company's only employee at an exercise price of $29.12 for services performed. The options vest immediately and expire on October 11, 2009. The fair value of these options was calculated as the difference between the exercise price and $34.25, the selling price of Company's stock at the grant date. A total expense of $1,410,750 is included in the accompanying 2004 statement of operations.
In April 2001, 15,800 options were granted to a consultant at an exercise price of $2.50 for services performed. The fair value of these options was calculated using the Black-Scholes option-pricing model and was determined to be $20,000.
During 2000, 175,000 options were granted to two consultants at exercise prices of $5.00 and $5.75. The fair value of these options was calculated using the Black-Scholes option-pricing model and was determined to be $280,000. The services provided by these consultants are to be performed over two years. The cost of $280,000 is being amortized over two years. During 2002 and 2001, $35,000 and $140,000 were charged to expense and recorded in the statement of operations, respectively. In 2002, 100,000 of these options were cancelled due to non-performance. The fair value of the options issued to non-employees during 1999 and 1998 was determined to be minimal.
CPC OF AMERICA, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005
3. 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. At December 31, 2005 the Company has an estimated net operating loss carryforward for federal tax purposes of $17,400,000, which, if unused to offset future taxable income, will begin to expire in 2012 and continue through 2026. The Company had deferred tax assets of approximately $6,100,000, $5,600,000 and $3,400,000 at December 31, 2005, 2004 and 2003, respectively, relating to its net operating loss. A 100% valuation allowance, which increased by $500,000 in 2005 and $2,200,000 in 2004, has been recognized to offset the entire related deferred tax asset due to the uncertainty of realizing the benefit.
4. COMMITMENTS AND CONTINGENCIES - -----------------------------------
Consulting agreements --------------------- In January 1997, the Company entered into a consulting agreement with its strategic consultant, a related party, for five years at $5,000 per month. The agreement was amended in November 1997 to increase the fees to $8,000 per month, in April 1998 to increase the fees to $10,000 per month and extend the term of the agreement for an additional five years and in April 1999 to provide for increases in compensation based on increases in the consumer price index in the preceding year. Base compensation was $19,250 per month in 2002 and $18,333 per month in 2001. In 2003, the agreement was amended; accordingly, base monthly compensation was $31,797 plus a bonus of $175,000. For 2004, base monthly compensation was $30,323, plus a cash bonus of $58,344 and 275,000 in stock options valued at $3,117,034 (see note 2). The agreement was amended again in 2005; accordingly, annual base compensation for 2005 was increased to $570,194.
In addition, options to purchase 2,000,000 shares of common stock at $2.50 per share were also granted under the April 1998 amendment. The options vest and become exercisable in ten equal installments of 200,000 shares each year starting at the grant date. The options expire on April 22, 2008.
The Company has entered into various agreements with its strategic consultant for the research and development of additional applications of the Company's proprietary intellectual properties. The Company made payments to the strategic consultant amounting the $47,155 in 2005, $1,528,725 in 2004 and $704,307 in 2003.
CPC OF AMERICA, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005
4. COMMITMENTS AND CONTINGENCIES (CONTINUED) - -----------------------------------------------
Employment agreement -------------------- In April 1998, the Company entered into a ten-year employment agreement with its CEO. The agreement provides for a base salary of $10,000 per month beginning May 1998. In December 1998, the CEO elected to contribute his accrued salary of $80,000 to the Company. The agreement was amended in April 1999 to provide for increases in compensation based on increases in the consumer price index in the preceding year. Base monthly compensation was $18,333 in 2001 and $19,250 in 2002. In 2003, the agreement was amended; accordingly, base monthly compensation was $31,797 plus a bonus of $175,000. For 2004, base monthly compensation was $30,323, plus a cash bonus of $58,344 and 275,000 in stock options (see note 2). The agreement was amended again in 2005; accordingly, annual base compensation for 2005 was increased to $570,194.
In addition, options to purchase 2,000,000 shares of common stock at $2.50 per share were granted under the April 1998 agreement. The options vest and become exercisable in ten equal installments of 200,000 shares each year starting at the grant date. The first options expire on April 22, 2008.
Royalty agreements ------------------ In July 2000, the Company entered into royalty agreements with its CEO and its strategic consultant granting each of them royalties equal to .75% on net sales of certain MED products as defined. In July 2001, these agreements were amended to increase the royalties to 1.5% of net sales of certain MED products as defined. In October 2004, the agreements were amended again. Pursuant to that amendment, in the event of a change in control of either MED or CPC of America, MED will be obligate to pay the CEO and the strategic consultant each minimum royalty payments of $4,000,000 per year. To date, MED has not had any sales.
In October 2002, the Company entered into royalty agreements with its CEO and its strategic consultant granting each of them royalties equal to 2.5% of net sales of certain MCC products as defined. To date, MCC has not had any sales.
Office lease ------------ The Company leases its office space under a one-year lease at $1,000 per month from a related party. The lease expired November 30, 2005 and is now on a month-to-month basis. Actual rent expense was $12,000 in 2005, 2004 and 2003.
CPC OF AMERICA, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005
5. RELATED PARTY TRANSACTIONS - --------------------------------
The Company has a consulting agreement with its strategic consultant, a related party. The Company has also entered into various agreements with its strategic consultant for the research and development of additional applications of the Company's proprietary intellectual properties and for office space rent. Expenses to this related party are as follows.
CPC OF AMERICA, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005
6 MAJOR VENDORS - -------------------
In addition to the concentration of expenses to the related party described above, one vendor comprises approximately 39% in 2005, 25% in 2004 and 16% in 2003 of the Company's research and development expenditures to third parties. The loss of this vendor would have an impact on the operations of the Company; however, management does not foresee the loss of this vendor in the near future.
7. SELECTED QUARTERLY DATA (UNAUDITED) - -----------------------------------------
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosure. Our chief executive officer and chief financial officer has reviewed the effectiveness of our disclosure controls and procedures and has concluded that the disclosure controls and procedures are effective as of the end of the period covered by this report. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the last day they were evaluated.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As a small organization with one full time employee, the effectiveness of our controls heavily depends on the direct involvement of our chief executive officer and chief financial officer.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
Set forth below are our directors and officers.
NAME AGE POSITION - --------------------- ------- --------------------------------------------
Rod A. Shipman 55 President, Secretary, Treasurer and Director Rafe Cohen 58 Director William C. Lievense 58 Director
Mr. Shipman has been our president and chief executive officer since January 1997, became secretary in July 1997 and treasurer in September 2000 and has been a director of our 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 general 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 our director since July 1998. Mr. Cohen served as treasurer from July 1998 to September 2000. 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 our director 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.
KEY CONSULTANTS TO THE COMPANY
The CTM Group, Inc., has a consulting contract to provide strategic planning services to our company. Mr. Paul Shabty is the key consultant from the CTM Group, Inc. who provides these consulting services. Mr. Shabty is a founder of our company and served as our 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. We made payments to CTM Group amounting to $644,555 in 2005 and $5,133,719 in 2004.
AUDIT COMMITTEE FINANCIAL EXPERT
We do not have an audit committee nor do we have a financial expert.
CODE OF ETHICS
We have adopted a code of ethics that applies to the principal executive officer and principal financial and accounting officer. We will provide to any person without charge, upon request, a copy of our code of ethics. Requests may be directed to our principal executive offices at 6336 17th Street Circle East, Sarasota, Florida 34243.
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, 2005, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
CASH COMPENSATION OF EXECUTIVE OFFICERS. The following table sets forth the cash compensation paid by the company to its chief executive officer for services rendered during the fiscal years ended December 31, 2005, 2004 and 2003.
(1) Based on a closing price of $15.55 per share for our common stock as quoted on the OTC Bulletin Board on December 30, 2005.
COMPENSATION OF DIRECTORS. At the present time, directors receive no compensation for serving as directors of the company, however, we may in the future begin to compensate our non-officer directors. All directors receive reimbursement for out-of-pocket expenses in attending board of directors meetings. From time to time, we may engage certain members of our board of directors to perform services on our behalf and will compensate such persons for the services which they perform.
EMPLOYMENT AGREEMENTS. On April 23, 1998, we entered into an Employment Agreement with Rod A. Shipman to serve as our president and chief executive officer. Pursuant to the terms of that employment agreement, Mr. Shipman received an annual salary of $120,000. Effective April 1, 1999, Mr. Shipman and we 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. Effective January 1, 2003, Mr.
Shipman and we further amended the agreement to increase annual compensation to $354,312. In May 2005, Mr. Shipman and we further amended the agreement to provide for annual increases in annual compensation as follows: to $570,194 effective as January 1, 2005; to $627,213 effective as of January 1, 2006; and to $689,934 effective as January 1, 2007.
Pursuant to his employment agreement with us, in April 1998 Mr. Shipman received options to purchase 2,000,000 shares of our common stock at an exercise price of $2.50 per share, which vest and first become exercisable in 200,000 share installments commencing on April 22, 1998 and on each of the next nine anniversaries of such date. The options expire on April 22, 2008. The Employment Agreement is for a term of ten years, subject to automatic renewals for additional five year periods unless either party elects not to renew the agreement.
In July 2000, our board of directors approved, and caused our subsidiary, Med Enclosure LLC, to award, a bonus to Mr. Shipman in the form of a royalty on the net sale of products of Med Enclosure derived from two of its three patents. Mr. Shipman was to initially will receive a royalty in the amount of three-quarters of one percent (.75%) on all net sales of products subject to the royalty agreement. In July 2001, our board of directors approved an amendment to the royalty agreement increasing the royalty payable to Mr. Shipman to one and one-half percent (1.5%) on all net sales. In October 2004, our board of directors approved a further amendment to the royalty agreement between Med Enclosure and Mr. Shipman. Pursuant to that amendment, in the event of a change in control of either Med Enclosure or CPC of America, Med Enclosure shall be obligated to pay Mr. Shipman minimum royalty payments of $4,000,000 per year. In October 2002, our board of directors approved, and caused our wholly-owned subsidiary, Med Close Corp., to award a bonus to Mr. Shipman in the form of a royalty in the amount of two and one-half percent (2.5%) on all net sales of products of Med Close Corp.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial ownership of the shares of our common stock as of March 3, 2006 by (i) each person who is known by us to be the beneficial owner of more than five percent (5%) of the issued and outstanding shares of our common stock, (ii) each of our directors and executive officers and (iii) all directors and executive officers as a group.
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OWNED ------------------ ---------------------
Rod A. Shipman(1) (2) 1,745,402 19.1% Rafe Cohen(1) 60,000 (*) William C. Lievense(1) 65,000 (*) CTM Group, Inc.(3)(4) 3,165,416 32.4% Leslie J. Kessler(5) 544,568 7.1% All officers and directors as a group (three persons) 1,870,402 20.4% _______________
(1) Address is 6336 17th Street Circle East, Sarasota, Florida 34243.
(2) Includes options granted to Mr. Shipman to purchase 1,426,431 shares of common stock. Does not include options to purchase 400,000 shares of common stock, which are subject to vesting.
(3) Address is 1350 East Flamingo, #800, Las Vegas, Nevada 89119.
(4) Includes options granted to the CTM Group to purchase 2,043,331 shares of common stock. Does not include options to purchase 400,000 shares of common stock, which are subject to vesting.
(5) Address is 11 Hedgerow Lane, Jericho, New York 11753.
(*) Less than one percent.
Equity Compensation Plans - -------------------------
The following table sets forth certain information as of December 31, 2005 concerning our equity compensation plans:
- ----------------------- (1) Represents shares of common stock issuable to Rod Shipman and CTM Group, Inc. pursuant to option agreements entered into with us.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In 1998, we entered into a Consulting Agreement with CTM Group, Inc. In May 2005, CTM Group and we amended the consulting agreement to provide for annual increases in annual compensation as follows: to $570,194 effective as January 1, 2005; to $627,213 effective as of January 1, 2006; and to $689,934 effective as January 1, 2007.
In July 2000, our board of directors approved, and caused our subsidiary, Med Enclosure LLC, to award, bonuses to our chief executive officer, Rod A. Shipman and CTM Group, Inc in the form of a royalty on the net sale of products of Med Enclosure derived from two of its three patents. Under the original royalty agreements, Mr. Shipman and CTM Group were to each receive a royalty in the amount of three-quarters of one percent (.75%) on all net sales of products subject to the royalty agreement. In July 2001, our board of directors approved amendments to the royalty agreements increasing the royalties payable to Mr. Shipman and CTM Group to one and one-half percent (1.5%) on all net sales. In October 2004, our board of directors approved further amendments to the royalty agreements with Mr. Shipman and CTM Group. Pursuant to those amendments, in the event of a change in control of either Med Enclosure or CPC of America, Med Enclosure shall be obligated to pay Mr. Shipman and CTM Group each minimum royalty payments of $4,000,000 per year. CTM Group beneficially owns approximately 32.4% of our outstanding common shares.
In October 2002, our board of directors approved, and caused our wholly-owned subsidiary, Med Close Corp., to award a bonus to Mr. Shipman and CTM Group each in the form of a royalty in the amount of two and one-half percent (2.5%) on all net sales of products of Med Close Corp.
During 2002 and 2003, we entered into various agreements with CTM Group for research and development of additional various applications of our proprietary intellectual property. We made payments to CTM Group amounting to $644,555 in 2005 and $5,133,719 in 2004.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our board of directors has selected Cacciamatta Accountancy Corporation as our independent accountants to audit our consolidated financial statements for the fiscal year 2005. Cacciamatta Accountancy Corporation previously audited our consolidated financial statements for the two fiscal years ended December 31, 2004 and 2003.
AUDIT AND NON-AUDIT FEES
Aggregate fees for professional services rendered to us by Cacciamatta Accountancy Corporation for the years ended December 31, 2005 and 2004 were as follows:
Services Provided 2005 2004 ------------------------------------- ---------- ------------ Audit Fees........................... $63,000 $63,000 Audit Related Fees................... -0- -0- Tax Fees............................. -0- -0- All Other Fees....................... -0- -0- ---------- ------------ Total........................ $63,000 $63,000
AUDIT FEES. The aggregate fees billed for the years ended December 31, 2005 and 2004 were for the audits of our financial statements and reviews of our interim financial statements included in our annual and quarterly reports.
AUDIT RELATED FEES. There were no fees billed for the years ended December 31, 2005 and 2004 for the audit or review of our financial statement that are not reported under Audit Fees.
TAX FEES. There were no fees billed for the years ended December 31, 2005 and 2004 for professional services for tax compliance, tax advice and tax planning.
ALL OTHER FEES. There were no billed for the years ended December 31, 2005 and 2004 for services other than the services described above.
PRE-APPROVAL POLICIES AND PROCEDURES
We have implemented pre-approval policies and procedures related to the provision of audit and non-audit services. Under these procedures, our board of directors pre-approves all services to be provided by Cacciamatta Accountancy Corporation and the estimated fees related to these services.
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) LIST OF FINANCIAL STATEMENTS.
Report of Independent Registered Public Accounting Firm........F-1 Consolidated Balance Sheets at December 31, 2005 and 2004......F-2 Consolidated Statements of Operations for the three years ended December 31, 2005 and cumulative from inception (April 11, 1996) to December 31, 2005.......................F-3 Consolidated Statements of Cash Flows for the three years ended December 31, 2005 and cumulative from inception (April 11, 1996) to December 31, 2005.......................F-4 Notes to Consolidated Financial Statements.....................F-5
(b) INDEX TO EXHIBITS
3.1 Articles of Incorporation of the Company (1)
3.2 Certificate of Amendment of Articles of Incorporation (2)
3.3 Bylaws of the Company (1)
4.1 Specimen of Common Stock Certificate (1)
4.2 Certificate of Designations of the Company's Series A Preferred Stock (5)
4.3 Certificate of Designations of the Company's Series B Preferred Stock (8)
4.4 Certificate of Designations of the Company's Series C Preferred Stock (8)
4.5 Certificate of Designations of the Company's Series D Preferred Stock (10)
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 (3)
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. (3)
10.6 Agreement dated November 17, 1998 between the Company and Automated Specialties Enterprises, Inc. (4)
10.7 Agreement dated November 17, 1998 between the Company and Metropolitan Health Services, Inc. (4)
10.8 Amendment to Employment Agreement dated April 1, 1999 between the Company and Rod A. Shipman (5)
10.9 Amendment to Consulting Agreement dated April 1, 1999 between the Company and CTM Group, Inc. (5)
10.10 Letter Agreement between the Company and Leslie J. Kessler dated May 18, 1999 (6)
10.11 Amended and Restated Operating Agreement for Med Enclosures LLC (7)
10.12 Royalty Agreement dated July 28, 2000 between Med Enclosures LLC and Rod A. Shipman (7)
10.13 Royalty Agreement dated July 28, 2000 between Med Enclosures LLC and CTM Group, Inc. (7)
10.14 Amendment No. 1 dated July 13, 2001 to Royalty Agreement between Med Enclosure LLC and Rod A. Shipman (8)
10.15 Amendment No. 1 dated July 13, 2001 to Royalty Agreement between Med Enclosure LLC and CTM Group, Inc. (8)
10.16 Product Development Services Agreement between Biomed Research, Inc. and Med Enclosure LLC (9)
10.17 Membership Interest Purchase Agreement dated September 30, 2002 between Gene Myers Enterprises, Inc. and the Company (10)
10.18 Amendment No. 2 to Royalty Agreement dated October 29, 2002 between Med Enclosure, LLC and CTM Group, Inc. (10)
10.19 Amendment No. 2 to Royalty Agreement dated October 29, 2002 between Med Enclosure, LLC and Rod A. Shipman (10)
10.20 Royalty Agreement dated October 29, 2002 between MED Close Corp. and CTM Group, Inc. (10)
10.21 Royalty Agreement dated October 29, 2002 between MED Close Corp. and Rod A. Shipman (10)
10.22 Agreement dated October 29, 2002 between Med Close Corp. and Med Enclosure LLC (10)
10.23 Amendment No. 2 dated January 1, 2003 to Employment Agreement dated April 23, 1998 between the Company and Rod A. Shipman (11)
10.24 Amendment No. 2 dated January 1, 2003 to Consulting Agreement dated April 23, 1998 between the Company and CTM Group, Inc. (11)
10.25 Amendment No. 3 dated October 15, 2004 to Royalty Agreement between Med Enclosure, LLC and Rod A. Shipman (12)
10.26 Amendment No. 3 dated October 15, 2004 to Royalty Agreement between Med Enclosure, LLC and CTM Group, Inc. (12)
10.27 Membership Interest Purchase Agreement dated November 30, 2004 between Gene Myers Enterprises, Inc. and the Company (13)
10.28 Membership Interest Purchase Agreement dated January 31, 2005 between Gene Myers Enterprises, Inc. and the Company (13)
10.29 Amendment No. 3 dated May 31, 2005 to Employment Agreement dated April 23, 1998 between the Company and Rod A. Shipman
10.30 Amendment No. 3 dated May 31, 2005 to Consulting Agreement dated April 23, 1998 between the Company and CTM Group, Inc.
21.1 List of Subsidiaries
23.1 Consent of Independent Certified Public Accountants
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
_______________
(1) Previously filed as part of the Company's registration statement on Form 10-SB 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 filed with the Securities and Exchange Commission on August 14, 1998.
(3) Previously filed as part of the Company's registration statement on Form S-8 filed with the Securities and Exchange Commission on July 14, 1998.
(4) Previously filed as part of the Company's annual report on Form 10-KSB for the year ended December 31, 1998 filed with the Securities and Exchange Commission on March 31, 1999.
(5) Previously filed as part of the Company's quarterly report on Form 10-QSB for the quarter ended March 31, 1999 filed with the Securities and Exchange Commission on May 17, 1999.
(6) Previously filed as part of the Company's quarterly report on Form 10-QSB for the quarter ended June 30, 1999 filed with the Securities and Exchange Commission on August 9, 1999.
(7) Previously filed as part of the Company's annual report on Form 10-KSB for the year ended December 31, 2000 filed with the Securities and Exchange Commission on April 17, 2001.
(8) Previously filed as part of the Company's quarterly report on Form 10-QSB for the quarter ended September 30, 2001 filed with the Securities and Exchange Commission on November 11, 2001.
(9) Previously filed as part of the Company's annual report on Form 10-KSB for the year ended December 31, 2001 filed with the Securities and Exchange Commission on April 1, 2002.
(10) Previously filed as part of the Company's quarterly report on Form 10-QSB for the quarter ended September 30, 2002 filed with the Securities and Exchange Commission on November 19, 2002.
(11) Previously filed as part of the Company's annual report on Form 10-KSB for the year ended December 31, 2002.
(12) Previously filed as part of the Company's quarterly report on Form 10-QSB for the quarter ended September 30, 2004 filed with the Securities and Exchange Commission on November 15, 2004.
(13) Previously filed as part of the Company's current report on Form 8-K filed with the Securities and Exchange Commission on February 22, 2005.
(c) FINANCIAL STATEMENT SCHEDULES
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CPC OF AMERICA, INC.
Date: March 20, 2006 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.