UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14C
Proxy
Statement Pursuant to Section 14(a) of the
Securities
Exchange Act of 1934
(AMENDMENT
NO. 2)
Filed
by
the Registrant x
Filed
by
a Party other than the Registrant ¨
Check
the
appropriate box:
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Preliminary
Proxy Statement
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Confidential,
for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
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Definitive
Proxy Statement
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Definitive
Additional Materials
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Soliciting
Material Pursuant to §240.14a-12
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XCORPOREAL,
INC.
______________________________________________________________________________
(Name
of Registrant as Specified In Its Charter)
______________________________________________________________________________
(Name
of Person(s) Filing Proxy Statement, if other than the
Registrant)
Payment
of Filing Fee (Check the appropriate box):
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Fee
not required.
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| x |
Fee
computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
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(1)
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Title
of each class of securities to which transaction applies: Common
Stock
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(2)
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Aggregate
number of securities to which transaction applies: 14,200,050
shares
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(3)
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Per
unit price or other underlying value of transaction computed pursuant
to
Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is
calculated and state how it was determined): $1.75 (calculated
based on
the last sale in the over-the-counter market on August 21,
2007)
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(4)
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Proposed
maximum aggregate value of transaction: $24,850,088
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(5)
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Total
fee paid: $763
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| x |
Fee
paid previously with preliminary
materials.
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Check
box if any part of the fee is offset as provided by Exchange
Act Rule
0-11(a)(2) and identify the filing for which the offsetting
fee was paid
previously. Identify the previous filing by registration
statement number,
or the Form or Schedule and the date of its
filing.
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(1)
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Amount
Previously Paid:
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(2)
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Form,
Schedule or Registration Statement No.:
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(3)
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Filing
Party:
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Date
Filed:
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THE
INFORMATION IN THIS INFORMATION STATEMENT IS NOT COMPLETE AND MAY BE CHANGED.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS INFORMATION
STATEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING
AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT
TO COMPLETION, DATED AUGUST 22, 2007
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NOTICE
OF ACTION BY WRITTEN CONSENT
WE
ARE NOT ASKING YOU FOR A PROXY AND
YOU
ARE REQUESTED NOT TO SEND US A PROXY.
To
the
Stockholders of Xcorporeal, Inc. and CT Holdings Enterprises, Inc.:
This
information statement is furnished to the stockholders of Xcorporeal, Inc.
and
to the stockholders of CT Holdings Enterprises, Inc. (CTHE) in connection with
the action taken by the written consents of the respective stockholders of
Xcorporeal and CTHE with respect to the transactions contemplated in the merger
agreement dated as of August 10, 2007 by and among Xcorporeal, CTHE, and its
newly-formed, wholly-owned merger subsidiary, XC Acquisition
Corporation. This
information statement is being sent to our stockholders to comply with the
requirements of Section 14(c) of the Securities Exchange Act of 1934, as
amended, or Exchange Act, and Section 228(e) of the Delaware General Corporation
Law, or DGCL. Except as otherwise noted, all references in this information
statement to the “companies,” “we,” “us,” “our,” or the “combined companies”
refers to the combined companies of Xcorporeal and CTHE after the effectiveness
of the merger.
Pursuant
to the merger agreement, the merger subsidiary of CTHE will merge with and
into Xcorporeal, and with Xcorporeal being the surviving corporation and
becoming a wholly-owned subsidiary of CTHE. Each share of Xcorporeal common
stock outstanding immediately prior to the effective time of the merger will
be
converted into one share of CTHE common stock. In addition, CTHE will assume
all
outstanding Xcorporeal options and warrants to purchase Xcorporeal common
stock.
There
is
currently no public market for Xcorporeal common stock. CTHE common stock is
traded on the OTC Bulletin Board under the symbol “CTHE.” Following the merger,
it is anticipated that the combined companies’ common stock will continue to
trade on the OTCBB.
Upon
effectiveness of the merger, CTHE will change its name to “Xcorporeal, Inc.” and
its certificate of incorporation and bylaws will be amended and restated to
read
substantially as Xcorporeal’s immediately prior to the merger. Xcorporeal’s
certificate of incorporation will be amended to change its name to "Xcorporeal
Operations, Inc." All of the officers and directors of CTHE will resign, and
all
of the officers and directors of Xcorporeal shall become officers and directors
of CTHE effective as of the consummation of the merger.
Immediately
prior to the effectiveness of the merger, CTHE shall cause a reverse split
of
its common stock, whereby each 8.27 issued and outstanding shares of its common
stock shall automatically be converted into and become one share of CTHE common
stock. After the reverse stock split, but prior to the merger, there shall
remain a total of approximately 350,000 shares of CTHE common
stock.
CTHE
will
also adopt a 2007 Incentive Compensation Plan substantially identical to
Xcorporeal’s 2006 Incentive Compensation Plan in effect immediately prior to the
merger.
The
holders of 9,600,000 shares, or approximately 68% of the issued and outstanding
common stock of Xcorporeal, considered, voted on and adopted the proposal to
approve entering into the transactions contemplated by the merger agreement,
and
to approve the merger. This consent of stockholders is sufficient to approve
entering into the transactions. Accordingly, the action will not be submitted
to
the other Xcorporeal stockholders for a vote.
The
holders of 2,086,689 shares, or approximately 72% of the issued and outstanding
common stock of CTHE considered, voted on and adopted the proposal to approve
entering into the transactions contemplated by the merger agreement, and to
approve the merger, reverse stock split, and incentive compensation plan. This
consent of stockholders is sufficient to approve entering into the transactions.
Accordingly, the actions will not be submitted to the other CTHE stockholders
for a vote.
2
Under
Section 228 of the DGCL, Xcorporeal and CTHE are required to provide prompt
notice of the taking of any corporate action without a meeting, by less than
unanimous written consent, to those stockholders who have not consented in
writing and who, if the action had been taken at a meeting, would have been
entitled to notice of the meeting if the record date for such meeting had been
the date that written consents signed by a sufficient number of stockholders
to
take the action were delivered to us. On August 10, 2007, there were 14,200,050
shares of Xcorporeal common stock outstanding, each of which would have been
entitled to one vote at a meeting called to approve the merger agreement and
the
transactions. On August 10, 2007, there were 2,894,675 shares of CTHE common
stock outstanding, each of which would have been entitled to one vote at a
meeting called to approve the merger agreement and the
transactions.
The
accompanying information statement describes the merger agreement and proposed
merger in more detail. You are encouraged to read the entire document carefully.
In particular, you should carefully consider the discussion entitled “Risk
Factors.”
Under
Delaware law, holders of Xcorporeal common stock are entitled to dissenters’
rights of appraisal. Any holder of Xcorporeal common stock who did not vote
in
favor of the merger or the merger agreement has the right to demand in writing
from Xcorporeal, within 20 days after receiving notice that the merger has
become effective, payment for his or her shares and appraisal of their value.
Dissenting stockholders must follow the procedures regarding appraisal elements
contained in Section 262 of the DGCL, a copy of which is attached as Annex
B to
this information statement.
Please
note that you should not send stock certificates. There will be no exchange
of
certificates.
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Very
truly yours,
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Terren
S. Peizer
Executive
Chairman
Xcorporeal,
Inc.
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Steven
B. Solomon
Chairman,
President &
Chief
Executive Officer
CT
Holdings Enterprises, Inc.
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THIS
INFORMATION STATEMENT IS DATED AUGUST ___, 2007, AND IS FIRST BEING MAILED
TO
XCORPOREAL STOCKHOLDERS AND CTHE STOCKHOLDERS ON OR ABOUT AUGUST ___, 2007.
3
Summary
Term Sheet for the Merger
The
following is a summary of the principal terms of the merger. This summary does
not contain all information that may be important to you. We encourage you
to
read carefully this information statement, including the annexes and the
documents we have incorporated by reference into this information statement,
in
their entirety.
On
August
10, 2007, Xcorporeal entered into a merger agreement with CTHE and XC
Acquisition Corporation. In connection with the merger:
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Each
issued and outstanding share of Xcorporeal common stock will be converted
into one share of newly issued CTHE common
stock;
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Warrants
and options to purchase common stock of Xcorporeal shall be automatically
converted into warrants and options to purchase common stock of CTHE,
and
CTHE will adopt a 2007 Incentive Compensation
Plan;
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Xcorporeal’s
certificate of incorporation will be amended to change its name to
Xcorporeal Operations, Inc.;
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CTHE
shall cause a reverse stock split immediately prior to the effectiveness
of the merger upon which every 8.27 shares of CTHE common stock shall
be
automatically converted into one share of CTHE common
stock;
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CTHE’s
certificate of incorporation shall be amended and restated to read
substantially as Xcorporeal’s certificate of incorporation read
immediately prior to the effectiveness of the merger, and CTHE’s name will
be changed to Xcorporeal, Inc;
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CTHE’s
bylaws shall be amended and restated to read substantially as Xcorporeal’s
bylaws read immediately prior to the
merger;
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The
officers and directors of CTHE shall resign effective as of the merger,
and the directors and officers of Xcorporeal shall become officers
and
directors of CTHE effective as of the merger;
and
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Dissenters
to the merger shall have dissenters’ rights under Section 262 of the
DGCL.
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4
Table
of Contents
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Page
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QUESTIONS
AND ANSWERS ABOUT THE MERGER
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6
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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8
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SUMMARY
OF THE INFORMATION STATEMENT
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9
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COMPARATIVE
PER SHARE INFORMATION
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19
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MARKET
PRICE INFORMATION AND RELATED STOCKHOLDER MATTERS
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20
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WHERE
YOU CAN FIND MORE INFORMATION
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RISK
FACTORS
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22
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THE
MERGER
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31
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MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
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34
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THE
MERGER AGREEMENT
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39
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2007
INCENTIVE COMPENSATION PLAN
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43
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INFORMATION
ABOUT XCORPOREAL
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47
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INFORMATION
ABOUT CTHE
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63
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COMPARISON
OF RIGHTS OF HOLDERS OF XCORPOREAL COMMON STOCK AND CTHE COMMON
STOCK
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71
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LEGAL
MATTERS
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72
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INTERESTS
OF NAMED EXPERTS AND LEGAL COUNSEL
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72
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INDEX
TO FINANCIAL STATEMENTS OF XCORPOREAL, INC.
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F-1
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INDEX
TO FINANCIAL STATEMENTS OF CT HOLDINGS ENTERPRISES, INC.
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F-26
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ANNEXES
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| ANNEX A Merger Agreement |
A-1
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| ANNEX B Appraisal Rights Under Section 262 of the Delaware General Corporation Law |
B-1
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| ANNEX C 2007 Incentive Compensation Plan of CT Holdings Enterprises, Inc. |
C-1
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| ANNEX D Amended and Restated Certificate of Incorporation of CT Holdings Enterprises, Inc. |
D-1
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5
Questions
and Answers about the Merger
Following
are questions and related answers that address some of the questions you may
have regarding the pending merger transaction between Xcorporeal and CTHE,
the
charter amendment and related matters. These questions and answers may not
contain all of the information relevant to you, do not purport to summarize
all
material information relating to the merger agreement, the charter amendments,
the plan adoption or any of the other matters discussed in this information
statement, and are subject to, and are qualified in their entirety by, the
more
detailed information contained or incorporated by reference in or attached
to
this information statement. Therefore, please carefully read this information
statement, including the attached annexes, in its entirety.
Q:
WHY ARE WE PROPOSING THE MERGER?
A:
We
believe that a merger between Xcorporeal and CTHE presents an opportunity to
enhance stockholder value for both companies. CTHE is a shell corporation with
no active operations, and substantially no operating assets or liabilities.
Its
common stock is traded on the Over-the-Counter Bulletin Board under the
symbol “CTHE,” and has an active trading market. Xcorporeal has substantial
business operations and is fully public reporting, but there is no public market
for its common stock. The combination of the two companies and the access to
an
active trading market could provide liquidity for Xcorporeal investors and
provide Xcorporeal with increased visibility within the investor community.
The
merger will also create a combined company with the potential of raising
additional capital to finance further development of Xcorporeal’s products if
needed. Stockholders of the combined company will be able to participate in
the
growth and opportunities that result from the merger.
To
review
the reasons for the merger in greater detail, see the section entitled “The
Merger - Reasons for the Merger.”
Q:
WHAT WILL HAPPEN IN THE MERGER?
A:
In the
proposed merger, XC Acquisition Corporation, a wholly-owned subsidiary of CTHE,
will merge with and into Xcorporeal and, as a result, Xcorporeal will become
a
wholly-owned subsidiary of CTHE. In connection with the merger, CTHE will change
its name to “Xcorporeal, Inc.” The merger agreement, which governs the merger,
is attached to this information statement as Annex A. You are encouraged to
read
it carefully.
Q:
WHAT WILL I RECEIVE IN THE MERGER?
A:
If the
merger is completed, if you are an Xcorporeal stockholder, each of your
Xcorporeal shares will be converted into one share of CTHE common stock. For
example, if you owned 1,000 shares of Xcorporeal common stock, those shares
will
be converted into 1,000 shares of CTHE common stock after the merger. There
will
be no exchange of stock certificates in connection with the merger. The shares
of CTHE common stock that Xcorporeal stockholders receive will be restricted
under the Securities Act of 1933, as amended (the “Securities Act”), just as
your shares of Xcorporeal common stock were restricted immediately prior to
the
merger. CTHE common stock is listed on Over the Counter Bulletin Board under
the
symbol “CTHE.” There will be no fractional shares exchanged in the merger, and
there will be no need to pay cash in lieu of fractional shares.
If
you
are a CTHE stockholder, immediately prior to the effectiveness of the merger,
pursuant to a reverse stock split, every 8.27 shares of CTHE common stock shall
automatically be converted into one share of CTHE common stock. We will issue
one additional share in the event that you would own a fractional share as
a
result of the reverse stock split.
Q:
WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER ON XCORPOREAL
STOCKHOLDERS?
A:
The
material U.S. federal income tax consequences of the merger are described in
more detail in the section entitled “The Merger — Material United States Federal
Income Tax Consequences”. The tax consequences of the merger to you will depend
upon your particular situation. You should consult your own tax advisor for
a
full understanding of the federal, state, local and foreign income and other
tax
consequences of the merger.
Q:
SHOULD I SEND IN MY XCORPOREAL STOCK CERTIFICATES NOW?
A:
No.
Neither Xcorporeal nor CTHE will be exchanging physical securities after the
merger becomes effective.
6
Q:
WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A:
Xcorporeal and CTHE are working to complete the merger as quickly as
practicable, and expect to complete the merger in the third quarter of 2007;
however, the exact timing cannot be predicted.
Q:
DO I HAVE APPRAISAL OR DISSENTER’S RIGHTS?
A:
Yes.
Holders of Xcorporeal common stock who have not consented to the merger are
entitled to exercise appraisal rights in connection with the merger, subject
to
compliance with applicable procedures under Delaware law, as described in this
information statement. Because
CTHE’s stockholders are not being asked to relinquish their shares in connection
with the merger, they are not entitled to appraisal rights.
The
holders of 9,600,000 shares, or 68% of the issued and outstanding common stock
of Xcorporeal, considered, voted on and adopted the proposal to approve entering
into the transactions contemplated by the Merger Agreement, and to approve
the
merger with and into XC Acquisition Corporation. This consent of stockholders
is
sufficient to approve entering into the transactions. Accordingly, the action
will not be submitted to the other Xcorporeal stockholders for a vote.
Q:
WHOM SHOULD I CALL WITH QUESTIONS?
A:
If you
have any questions about the proposed merger or if you need additional copies
of
the information statement or the enclosed information, please call or write:
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Xcorporeal,
Inc.
11150
Santa Monica Boulevard, Suite 340
Los
Angeles, CA 90025
Attn:
Winson Tang
(310)
424-5668
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CT
Holdings Enterprises, Inc.
2100
McKinney Avenue, Suite 1500
Dallas,
TX 75201
Attn:
Steven B. Solomon
(214)
750-2454
|
Q:
ARE THE CTHE STOCKHOLDERS ALSO REQUIRED TO APPROVE THE MERGER?
A:
Yes.
The holders of 2,086,689 shares, or 72.1% of the issued and outstanding common
stock of CTHE, considered, voted on and adopted the proposal to approve entering
into the transactions contemplated by the Merger Agreement, and to approve
the
merger, the reverse stock split, the charter amendments and the 2007 Incentive
Compensation Plan. This consent of stockholders is sufficient to approve
entering into the transactions. Accordingly, the actions will not be submitted
to the other CTHE stockholders for a vote.
Q:
WILL MY RIGHTS AS AN XCORPOREAL STOCKHOLDER CHANGE AS A RESULT OF THE MERGER?
A:
No.
Because the certificate of incorporation and bylaws of CTHE are being amended
and restated at the time of the merger to read substantially the same as the
certificate and incorporation and bylaws of Xcorporeal, your rights as an
Xcorporeal stockholder will not change. There is a summary comparison of the
rights of stockholders of CTHE and Xcorporeal starting on page ___ of this
information statement.
If
you
are a CTHE stockholder, your rights will change because the certificate of
incorporation and bylaws of CTHE are being amended and restated as described
in
the foregoing paragraph. Additionally, the par value of your shares will change
from $0.01 to $0.0001. Also, as a result of the reverse stock split and merger,
CTHE stockholders will own approximately 350,000 shares in the combined company,
while Xcorporeal stockholders will own approximately 14.2 million shares in
the
combined company. Accordingly, your percentage ownership in CTHE will
substantially decrease to approximately 2.4% as a result of the
merger.
Q:
IS EVERYONE TREATED EQUALLY IN THE MERGER?
A:
No. A
number of directors and officers of Xcorporeal may have interests in the merger
agreement and the merger that are different from those of stockholders who
are
not also directors and officers. In addition, Steven B. Solomon, an officer,
director and majority shareholder of CTHE, owns 50,000 shares of Xcorporeal
which he acquired in a private placement consummated in the fourth quarter
of
2006, on the same terms as all other investors in that offering. Mr. Solomon’s
Xcorporeal shares shall be converted into shares of CTHE on the same terms
and
conditions as all other Xcorporeal shareholders. All options outstanding under
Xcorporeal's 2006 Incentive Compensation Plan will be assumed under CTHE's
2007
Incentive Compensation Plan. Any CTHE options or warrants outstanding prior
to
the merger will be cancelled and not assumed under the 2007 Incentive
Compensation Plan. These differences are explained in more detail on page ___
of
this information statement.
7
Q:
WHAT WILL HAPPEN IF THE MERGER IS NOT COMPLETED?
A:
If the
merger is not completed for any reason, Xcorporeal and CTHE may be subject
to a
number of other risks. Xcorporeal will continue to have no active trading market
for its common stock, which would have an adverse impact on its ability to
avail
itself of the public markets for additional financing. CTHE will have no
operating business and will continue as a shell. Both companies will incur
the
expenses associated with attempting to effectuate the merger and the
transactions. The failure to consummate the merger could have an adverse impact
on the price and trading of the companies’ common stock.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any
statements in this document about expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical facts and are
forward-looking statements. These statements are often, but not always, made
through the use of words or phrases such as “may,” “should,” “could,” “predict,”
“potential,” “believe,” “will likely result,” “expect,” “will continue,”
“anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and
“outlook,” and similar expressions. Accordingly, these statements involve
estimates, assumptions and uncertainties, which could cause actual results
to
differ materially from those expressed in them. Any forward-looking statements
are qualified in their entirety by reference to the factors discussed throughout
this document. The following cautionary statements identify important factors
that could cause Xcorporeal’s, CTHE’s or the combined company’s actual results
to differ materially from those projected in the forward-looking statements
made
in this document. Among the key factors that have a direct bearing on
Xcorporeal’s, CTHE’s or the combined company’s results of operations are:
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general
economic and business conditions; the existence or absence of adverse
publicity; changes in marketing and technology; changes in political,
social and economic conditions;
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competition
in and general risks of the medical products and services
industries;
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success
of acquisitions and operating initiatives; changes in business strategy
or
development plans; management of
growth;
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dependence
on senior management; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit
costs;
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ability
of Xcorporeal to retain and hire key executives, technical personnel
and
other employees;
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ability
of Xcorporeal to manage its growth and the difficulty of successfully
managing a larger, more geographically dispersed
organization;
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ability
of Xcorporeal to manage successfully its changing relationships with
customers, suppliers, value-added resellers and strategic
partners;
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the
impact of government regulation;
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volatility
in the stock price of CTHE;
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the
need and ability of Xcorporeal to obtain sufficient financing to
meet
potential capital requirements;
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market
acceptance of each of the companies’ products and services and the ability
of Xcorporeal’s customers to accept new product and services offerings;
and
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the
timing of, other conditions associated with, the completion of the
merger.
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These
factors and the risk factors referred to below could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by Xcorporeal or CTHE, and you should not place undue reliance
on any such forward-looking statements. Further, any forward-looking statement
speaks only as of the date on which it is made and neither Xcorporeal nor CTHE
undertakes any obligation to update any forward-looking statement or statements
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of unanticipated events. New factors emerge
from time to time, and it is not possible for Xcorporeal or CTHE to predict
which will arise. In addition, neither Xcorporeal nor CTHE can assess the impact
of each factor on Xcorporeal or CTHE or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
those
contained in any forward-looking statements.
8
SUMMARY
OF THE INFORMATION STATEMENT
This
summary highlights selected information from this information statement. It
does
not contain all of the information that is important to you. Xcorporeal and
CTHE
urge you to read carefully the entire information statement and the other
documents referred to in this information statement to fully understand the
merger. In particular, you should read the documents attached to this
information statement, including the merger agreement, which is attached as
Annex
A.
For a guide as to where you can obtain more information on Xcorporeal and CTHE,
see the section entitled “Where You Can Find More Information” beginning on page
[___]. We have included page references parenthetically to direct you to a
more
complete description of the topics presented in this summary of the information
statement. As your approval of the merger and the other matters described in
this information statement is neither required nor requested, we are not asking
you for a proxy and you are requested not to send us a proxy.
The
Companies
(Pages
___)
Xcorporeal,
Inc.
11150
Santa Monica Boulevard, Suite 340
Los
Angeles, CA 90025
Xcorporeal
is a medical device company actively researching and developing an
extra-corporeal platform to perform functions of various human organs. Our
prototype systems apply modern electronics and engineering principals to reduce
the size, cost and power requirements of conventional extra-corporeal therapies
including kidney dialysis and ultrafiltration. We
were
incorporated in the State of Nevada in 2001. to engage in the acquisition,
exploration and development of natural resource properties. On August 31, 2006,
we changed our name to Xcorporeal, Inc. On September 1, 2006, we entered into
a
license agreement to acquire exclusive rights to acquire the technology on
which our business is based.
CT
Holdings Enterprises, Inc.
2100
McKinney Avenue, Suite 1500
Dallas,
TX 75201
Since
1996, CT Holdings has provided management expertise including consulting on
operations, marketing and strategic planning and has been a source of capital
to
early stage technology companies. CT Holdings was incorporated in Delaware
in
1992. On March 13, 2006, CT Holdings changed its name to CT Holdings
Enterprises, Inc. The business model was designed to enable the companies that
CTHE acquired or invested in to become market leaders in their industries.
CTHE’s business strategy since 1996 has led to the development, acquisition and
operation of technology based businesses with compelling valuations and strong
business models. Its goal has been to realize the value of these investments
for
CTHE’s shareholders through a subsequent liquidity event such as a sale, merger,
spin-off or initial public offering of the portfolio companies. Currently,
CTHE
has no active business operations.
XC
Acquisition Corporation
c/o
CT
Holdings Enterprises, Inc.
2100
McKinney Avenue, Suite 1500
Dallas,
TX 75201
CTHE
formed XC Acquisition Corporation solely for the purpose of effecting the
merger. To date, merger subsidiary has not conducted any activities other than
those incidental to its formation and the execution of the merger agreement
and
related documents. Upon completion of the merger, merger subsidiary will be
merged with and into Xcorporeal and the separate existence of merger subsidiary
will end.
Approval
of the Boards of Directors
(Pages
___)
Our
respective boards of directors have determined that the merger is in the best
interests of Xcorporeal and CTHE and their stockholders and unanimously approved
the merger agreement and the transactions contemplated in the merger agreement
and related documents. To review the factors considered by the boards of
directors, see “The Merger - Reasons for the Merger.”
9
Written
Consent; Record Date
(Pages
___)
Under
Delaware corporate law and both companies’ bylaws, the companies’ stockholders
may approve the merger and the transactions contemplated by the merger agreement
by written consent of stockholders holding a majority of outstanding common
stock. On August 10, 2007, certain Xcorporeal stockholders, who together held
approximately 68% of Xcorporeal outstanding common stock as of that date,
executed written consents to approve the merger and any other transactions
contemplated in the merger agreement. August 10, 2007 was the record date for
determining the Xcorporeal stockholders entitled to receive notice of
stockholder action by written consent and receive this information statement.
This was also the record date for determining the number of shares of Xcorporeal
common stock outstanding and therefore the number of votes necessary to adopt
the merger agreement and approve the related transactions. On August 10, 2007,
there were 14,200,050 shares of Xcorporeal’s common stock outstanding and
entitled to vote, with each share entitled to one vote.
On
August
10, 2007, certain CTHE stockholders, who together held approximately 72% of
CTHE's outstanding common stock as of that date, executed written consents
to
approve the merger and any other transactions contemplated in the merger
agreement, including the reverse stock split, the charter amendments and the
2007 Incentive Compensation Plan. August 10, 2007 was the record date for
determining the CTHE stockholders entitled to receive notice of stockholder
action by written consent and receive this information statement. This was
also
the record date for determining the number of shares of CTHE common stock
outstanding and therefore the number of votes necessary to adopt the merger
agreement and approve the related transactions. On August 10, 2007, there were
2,894,675 shares of CTHE common stock outstanding and entitled to vote, with
each share entitled to one vote.
Notwithstanding
the execution and delivery of the written consents, federal securities laws
provide that the merger may not be completed until 20 calendar days after the
date this information statement is mailed to our stockholders. Therefore, the
merger cannot be completed until that time has elapsed. We currently expect
the
merger to be completed as soon as the expiration of that 20 calendar day period,
subject to obtaining all other regulatory approvals.
The
Merger
(Pages
___)
In
the
proposed merger, XC Acquisitions Corporation, a wholly-owned subsidiary of
CTHE
will merge into Xcorporeal, with Xcorporeal as the surviving corporation. As
a
result, Xcorporeal will become a wholly-owned subsidiary of CTHE. Upon the
effectiveness of the merger, CTHE’s name will be changed to “Xcorporeal, Inc.”
THE MERGER AGREEMENT IS ATTACHED TO THIS INFORMATION STATEMENT AS ANNEX A.
YOU
ARE ENCOURAGED TO READ IT CAREFULLY.
What
Will Xcorporeal Shareholders Receive in the Merger
(Pages
___)
In
the
merger, each share of Xcorporeal common stock will be converted into the right
to receive one share of CTHE common stock.
Each
warrant, and each option, to purchase shares of Xcorporeal common stock
outstanding immediately before the completion of the merger will automatically
become a warrant or option, as the case may be, to purchase shares of CTHE
common stock under CTHE's 2007 Incentive Compensation Plan. The number of shares
of CTHE common stock into which warrants and options are exercisable and the
exercise price will not have to be adjusted because the exchange ratio in the
merger is 1:1.
Ownership
of CTHE After the Merger
(Page
___)
Xcorporeal
and CTHE estimate that, after giving effect to the reverse stock split of CTHE
the common stock, the number of shares of CTHE common stock to be issued to
Xcorporeal stockholders in the merger will constitute approximately 97.6% of
the
outstanding common stock of the combined company after the merger, without
giving effect to the exercise of any Xcorporeal stock options or warrants
between the date of this information statement and the closing of the merger.
10
Conditions
to the Consummation of the Merger
(Pages
___)
The
completion of the merger depends on the satisfaction or waiver of a number
of
conditions set forth in the merger agreement, including the following:
|
·
|
The
representations and warranties of Xcorporeal and CTHE contained in
the
merger agreement shall be true and correct as of the closing of the
merger;
|
|
·
|
Xcorporeal
and CTHE shall have performed all covenants contained in the merger
agreement;
|
|
·
|
There
shall be no judgment, order, decree or injunction in effect that
would
prohibit the transactions contemplated by the merger agreement or
adversely affect the rights of parties to the
merger;
|
|
·
|
Xcorporeal
shall not have engaged in any practice or act, or entered into any
transaction outside the ordinary course of business, which results
in a
material adverse effect;
|
|
·
|
The
merger shall have been duly approved by the shareholders of Xcorporeal
and
CTHE;
|
|
·
|
Xcorporeal
and CTHE shall have delivered customary documents and certificates
duly
executed in accordance with the merger agreement;
and
|
|
·
|
The
officers and directors of CTHE shall have resigned effective as of
the
Closing.
|
Termination
of the Merger Agreement
(Pages
___)
|
·
|
Xcorporeal
and CTHE may terminate the merger agreement by mutual written
consent.
|
|
·
|
Xcorporeal
may terminate the merger agreement:
|
|
·
|
in
the event of an uncured breach of the merger agreement by
CTHE;
|
|
·
|
if
Xcorporeal is not reasonably satisfied with the results of its due
diligence regarding CTHE;
|
|
·
|
if
Xcorporeal’s shares become quoted on the OTC Bulletin
Board;
|
|
·
|
if
the closing of the merger has not occurred by the close of business
on
Friday, August 31, 2007; or
|
|
·
|
if
the board of directors of Xcorporeal determines in good faith that
failure
to terminate the merger agreement would constitute a breach of the
fiduciary duties of Xcorporeal’s
directors.
|
|
·
|
CTHE
may terminate the merger agreement upon written notice at any time
prior
to the closing of the merger:
|
|
·
|
in
the event of an uncured breach of the merger agreement by
Xcorporeal;
|
|
·
|
if
CTHE is not reasonably satisfied with the results of its due
diligence;
|
|
·
|
if
the closing of the merger shall not have occurred on or prior to
August
31, 2007; or
|
|
·
|
if
the board of directors or special committee of CTHE determines in
good
faith that failure to terminate the merger agreement would constitute
a
breach of the fiduciary duties of CTHE’s directors or members of the
special committee.
|
| · |
|
Either
Xcorporeal or CTHE may terminate the merger agreement in the
event that a
governmental entity has issued a final non-appealable order
restraining,
enjoining or otherwise prohibiting the transactions contemplated
in the
merger agreement.
|
| · |
In
addition, Xcorporeal may terminate the merger agreement and
rescind the
merger upon written notice to CTHE and the merger subsidiary
within 10
days after the closing of the merger if the shares of CTHE
common stock do
not continue to be quoted on the OTC Bulletin Board immediately
following
the merger.
|
11
Reasons
for the Merger
(Pages
__ )
For
a
description of the reasons considered by the Xcorporeal board of directors,
please see the section entitled “The Merger -Reasons for the Merger” beginning
on page ___.
For
a
description of the reasons considered by the CTHE board of directors and special
committee, please see the section entitled “The Merger -Reasons for the Merger”
beginning on page ___.
Material
United States Federal Income Tax Consequences
(Pages
__ )
The
merger is intended to be treated as a tax-free reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended, in which
case you would not recognize gain or loss on the exchange of Xcorporeal common
stock for CTHE stock. However, neither Xcorporeal nor CTHE intends to request
a
ruling from the Internal Revenue Service, and neither Xcorporeal nor CTHE
intends to request an opinion of their tax advisors, regarding the income or
other tax consequences of the merger. No assurance can be given that the
Internal Revenue Service or the courts will agree that the merger qualifies
as a
tax-free reorganization under Section 368(a). Furthermore, the tax consequences
of the merger to you will depend on your own personal circumstances. Thus,
you
should consult your tax advisor regarding the tax consequences of the
merger.
Accounting
Treatment
(Page
___)
The
merger will be treated as a recapitalization of Xcorporeal. Xcorporeal will
be
deemed the accounting acquirer under generally accepted accounting principles.
The combined companies’ operating results will be consolidated as of the
consummation of the merger.
Interests
of Directors and Officers in the Merger
(Page
___)
Xcorporeal’s
directors and executive officers have interests in the merger that are different
from, or are in addition to, those of other stockholders that may make them
more
likely to approve and adopt the merger agreement and approve the merger. The
merger agreement provides that the officers and directors of CTHE will resign
effective as of the closing of the merger, and that the officers and directors
of Xcorporeal immediately prior to the merger shall become the officers and
directors of CTHE. Specifically, Terren S. Peizer, Marc G. Cummins, Daniel
S.
Goldberger, Victor Gura, M.D., Hervé de Kergrohen,
M.D. Nicholas
S. Lewin, Kelly J. McCrann, and Jay Wolf will become the directors of
CTHE upon the effectiveness of the merger.
The
members of Xcorporeal’s board of directors were aware of, and considered the
interests of, themselves and Xcorporeal’s executive officers in approving the
merger and adopting the merger agreement.
Steven
B.
Solomon, an officer, director and majority shareholder of CTHE owns 50,000
shares of Xcorporeal common stock which he purchased in a private placement
consummated in the fourth quarter of 2006.
The
members of CTHE’s board of directors and special committee were aware of, and
considered the interests of, themselves and CTHE’s executive officers in
approving the merger and adopting the merger agreement.
Dissenters’
or Appraisal Rights
(Pages
___)
Under
the
laws of Delaware, where Xcorporeal is incorporated, holders of Xcorporeal common
stock who have not consented to the merger and comply with the applicable
requirements of Delaware law will have the right to receive an appraisal of
the
value of their shares in connection with the merger and to be paid such value
in
cash. We have included a copy of Section 262 of the Delaware General Corporation
Law — Appraisal Rights as Annex B to this information statement.
12
Quotation
on OTC.BB
(Page
___)
The
common stock of CTHE is currently traded on the “OTC Bulletin Board”under the
symbol “CTHE.”
Risks
of the Merger
(Pages
___ — ___)
We
urge
you to read carefully all of the factors described in “Risk Factors” beginning
on page ___in connection with the transactions contemplated by the merger
agreement.
Related
Agreements
(Pages
___)
Xcorporeal
entered into an indemnity agreement with Steven B. Solomon, an officer, director
and majority shareholder of CTHE. The terms and conditions of each of the
foregoing agreements are described in “Related Agreements” beginning on page
[___].
|
Xcorporeal,
Inc. (a Development Stage Company)
|
|
Selected
Financial Data
|
The
selected consolidated financial data are derived from our audited consolidated
financial statements for the years ended December 31, 2002 through 2006
and
unaudited consolidated financial statements for the six months ended June
30,
2007.
|
Six
Months Ended
|
Year Ended December 31,
|
|||||||||
|
30-Jun-07
|
2006
|
2005
|
||||||||
|
(in
thousands, except per share data)
|
||||||||||
|
Summary
of operations data:
|
||||||||||
|
Revenues
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Operating
(loss)
|
(8,283,805
|
)
|
(4,462,412
|
)
|
(35,753
|
)
|
||||
|
Net
(loss)
|
(7,663,879
|
)
|
(4,380,212
|
)
|
(35,753
|
)
|
||||
|
Basic
and diluted loss per common share
|
(0.54
|
)
|
(0.67
|
)
|
(0.01
|
)
|
||||
|
Shares
used in computing loss per common share
|
14,200,050
|
6,542,312
|
3,820,000
|
|||||||
|
Balance
sheet data:
|
||||||||||
|
Cash
and cash equivalents
|
346,887
|
27,440,987
|
-
|
|||||||
|
Marketable
securities
|
22,676,578
|
-
|
-
|
|||||||
|
Working
capital (deficit)
|
21,959,725
|
25,397,733
|
(52,557
|
)
|
||||||
|
Total
assets
|
23,334,428
|
27,535,543
|
-
|
|||||||
|
Total
stockholders' equity (deficit)
|
22,016,770
|
25,402,061
|
(52,557
|
)
|
||||||
|
Year Ended December 31,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
(in
thousands, except per share data)
|
||||||||||
|
Summary
of operations data:
|
||||||||||
|
Revenues
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Operating
(loss)
|
(23,338
|
)
|
(12,988
|
)
|
(31,268
|
)
|
||||
|
Net
(loss)
|
(23,338
|
)
|
(12,962
|
)
|
(31,268
|
)
|
||||
|
Basic
and diluted loss per common share
|
(0.01
|
)
|
0.00
|
(0.01
|
)
|
|||||
|
Shares
used in computing loss per common share
|
3,820,000
|
3,820,000
|
2,720,000
|
|||||||
|
Balance
sheet data:
|
||||||||||
|
Cash
and cash equivalents
|
576
|
12,499
|
27,983
|
|||||||
|
Working
capital (deficit)
|
(16,804
|
)
|
6,534
|
19,496
|
||||||
|
Total
assets
|
1,376
|
13,232
|
27,983
|
|||||||
|
Total
stockholders' equity (deficit)
|
(16,804
|
)
|
6,534
|
19,496
|
||||||
13
|
CT
Holdings Enterprises, Inc.
|
|
Selected
Financial Data
|
The
selected consolidated financial data are derived from our audited consolidated
financial statements for the years ended December 31, 2002 through 2006
and
unaudited consolidated financial statements for the six months ended June
30,
2007.
|
Six
Months Ended
|
Year Ended December 31,
|
|||||||||
|
30-Jun-07
|
2006
|
2005
|
||||||||
|
(in
thousands, except per share data)
|
||||||||||
|
Summary
of operations data:
|
||||||||||
|
Revenues
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Operating
income (loss)
|
133,034
|
5,325,016
|
(671,972
|
)
|
||||||
|
Loss
from discountinued operations
|
-
|
-
|
-
|
|||||||
|
Net
income (loss)
|
133,034
|
5,325,016
|
(671,972
|
)
|
||||||
|
Basic
and diluted income (loss) per common share
|
0.07
|
5.54
|
(0.70
|
)
|
||||||
|
Shares
used in computing income (loss) per common share
|
1,920,839
|
960,656
|
960,656
|
|||||||
|
Balance
sheet data:
|
||||||||||
|
Cash
and cash equivalents
|
271
|
197
|
197
|
|||||||
|
Working
capital (deficit)
|
(63,239
|
)
|
(455,573
|
)
|
(5,780,589
|
)
|
||||
|
Total
assets
|
271
|
197
|
197
|
|||||||
|
Total
stockholders' equity (deficit)
|
(63,239
|
)
|
(455,573
|
)
|
(5,780,589
|
)
|
||||
|
Year Ended December 31,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
(in
thousands, except per share data)
|
||||||||||
|
Summary
of operations data:
|
||||||||||
|
Revenues
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Operating
income (loss)
|
(4,227,435
|
)
|
1,210,517
|
(5,932,120
|
)
|
|||||
|
Loss
from discountinued operations
|
-
|
-
|
(942,939
|
)
|
||||||
|
Net
income (loss)
|
(4,227,435
|
)
|
1,210,517
|
(7,060,490
|
)
|
|||||
|
Basic
and diluted income (loss) per common share
|
(4.46
|
)
|
1.41
|
(8.97
|
)
|
|||||
|
Shares
used in computing income (loss) per common share
|
947,307
|
855,859
|
786,830
|
|||||||
|
Balance
sheet data:
|
||||||||||
|
Cash
and cash equivalents
|
4,168
|
-
|
-
|
|||||||
|
Working
capital (deficit)
|
(5,379,765
|
)
|
(1,352,330
|
)
|
(3,412,847
|
)
|
||||
|
Total
assets
|
4,168
|
-
|
-
|
|||||||
|
Total
stockholders' equity (deficit)
|
(5,379,765
|
)
|
(1,352,330
|
)
|
(3,412,847
|
)
|
||||
14
Upon
the
consummation of the merger, CTHE will acquire all of the outstanding capital
stock of Xcorporeal in exchange for an equal number of shares of CTHE following
a 1 for 8.27 reverse stock split of CTHE’s common stock. Xcorporeal will become
a wholly-owned subsidiary of CTHE, and the current Xcorporeal stockholders
will
own approximately 97.6% of the post-split, post-merger outstanding shares of
CTHE.
At
closing of the merger, CTHE will cease to be a shell corporation. Since
Xcorporeal will be the sole operating company as of the merger date, the merger
will be accounted for as recapitalization of Xcorporeal. Because CTHE is a
shell
corporation with substantially no assets or liabilities, and Xcorporeal’s
stockholders will own approximately 97.6% of the capital stock following the
merger, CTHE’s financial results will not have a material impact on the
financial statements of Xcorporeal.
The
number of CTHE shares and per share data have been adjusted to give effect
to a 1 for 70 reverse stock split effective in February 2007 but not for
the 1
for 8.27 reverse stock split to be effected in connection with the
merger.
15
Unaudited
pro forma condensed combined financial information
The
unaudited pro forma financial statements reflect the
merger between Xcoporeal and CTHE as though it occurred as of the dates
indicated herein From a legal standpoint, CTHE is considered to be the acquirer.
As the former shareholders of Xcorporeal will end up with 97% of the outstanding
voting common stock of CTHE and CTHE is a public shell company, from an
accounting standpoint the transaction is considered to be a recapitalization
of
Xcorporeal.
The
following unaudited pro forma condensed combined financial statements and
related notes are presented to show the pro forma effects of the
recapitalization of Xcorporeal had the merger been consummated as of June
30,
2007 for the balance sheet and at January 1, 2006 for the year ended December
31, 2006 and the six months ended June 30, 2007.
Pro
forma
data are based on assumptions and include adjustments as explained in the
notes
to the unaudited pro forma combined financial statements. The pro forma data
are
not necessarily indicative of the financial results that would have been
attained had the merger occurred on the dates referenced above and should not be
viewed as indicative of operations in future periods.
The
unaudited pro forma combined financial statements should be read in conjunction
with the notes thereto, the Xcorporeal financial statements as of and for
the
year ended December 31, 2006 included in its annual report on form 10-KSB
for
the year ended December 31, 2006 and the unaudited financial statements as
of
June 30, 2007 and for the six months then ended included in form 10-QSB and
the
financial statements as of and for the years ended December 31, 2006 and
as of
June 30, 2007 and for the six months then ended included on form
10-QSB.
16
|
XCORPOREAL,
INC.
|
|
(formerly
CT Holdings Enterprises, Inc.)
|
|
(a
Development Stage Company)
|
|
UNAUDITED
PROFORMA COMBINED BALANCE SHEET
|
|
June
30, 2007
|
||||||||||||||||
|
Xcorporeal,
Inc.
|
CT
Holdings Enterprises, Inc.
|
Proforma
Adjustments
|
Proforma
Combined
|
|||||||||||||
|
ASSETS
|
||||||||||||||||
|
Current
|
||||||||||||||||
|
Cash
|
$
|
346,887
|
$
|
271
|
$
|
-
|
$
|
347,158
|
||||||||
|
Marketable
securitities, at fair value
|
22,676,578
|
-
|
-
|
22,676,578
|
||||||||||||
|
Restricted
cash
|
83,050
|
-
|
-
|
83,050
|
||||||||||||
|
Prepaids
|
158,802
|
-
|
-
|
158,802
|
||||||||||||
|
Other
current assets
|
12,066
|
-
|
-
|
12,066
|
||||||||||||
|
Total
current assets
|
23,277,383
|
271
|
-
|
23,277,654
|
||||||||||||
|
Property,
plant & equipment, net
|
56,094
|
-
|
-
|
56,094
|
||||||||||||
|
Other
assets
|
951
|
-
|
-
|
951
|
||||||||||||
|
Total
Assets
|
23,334,428
|
271
|
-
|
23,334,699
|
||||||||||||
|
LIABILITIES
|
||||||||||||||||
|
Current
|
||||||||||||||||
|
Accounts
payable
|
455,036
|
57,418
|
225,000
|
(
C)
|
737,454
|
|||||||||||
|
Accrued
professional fees
|
427,259
|
-
|
250,000
|
(
C)
|
|
677,259
|
||||||||||
|
Accrued
royalties
|
208,333
|
-
|
-
|
208,333
|
||||||||||||
|
Accrued
other liabilities
|
111,630
|
-
|
-
|
111,630
|
||||||||||||
|
Other
current liabilities
|
115,400
|
6,092
|
-
|
121,492
|
||||||||||||
|
Total
Current Liabilities
|
1,317,658
|
63,510
|
475,000
|
1,856,168
|
||||||||||||
|
Commitments
and contingencies
|
||||||||||||||||
|
STOCKHOLDERS'
EQUITY (DEFICIENCY)
|
||||||||||||||||
|
Preferred
Stock, $0.001 par value, 10,120,919 shares authorized, none
outstanding
|
-
|
-
|
-
|
-
|
||||||||||||
|
Common
Stock, $0.0001 par value, 47,255,139 shares authorized, 14,350,071
issued
and outstanding at June 30, 2007
|
1,420
|
23,973
|
(23,958
|
)
|
(A)
/ (B)
|
|
1,435
|
|||||||||
|
Additional
paid-in capital
|
34,202,998
|
59,082,536
|
(59,145,790
|
)
|
(A)
/ (B)
|
|
34,139,744
|
|||||||||
|
Deficit
accumulated during the development stage
|
(12,187,648
|
)
|
(59,169,748
|
)
|
59,169,748
|
(12,662,648
|
)
|
|||||||||
|
(475,000
|
)
|
(C)
|
|
|||||||||||||
|
Total
Stockholders' Equity
|
22,016,770
|
(63,239
|
)
|
(475,000
|
)
|
21,478,531
|
||||||||||
|
Total
Liabilities & Stockholders' Equity
|
$
|
23,334,428
|
$
|
271
|
$
|
0
|
$
|
23,334,699
|
||||||||
|
|
Debit
|
Credit
|
||||||||||||||
|
(A)
Common
stock par value
|
23,973
|
|||||||||||||||
|
Additional
paid in capital
|
59,145,775
|
|||||||||||||||
|
Retained
deficit
|
59,169,748
|
|||||||||||||||
|
To
eliminate CTHE's equity and deficit accounts
|
||||||||||||||||
|
(B)
Additional
paid in capital
|
15
|
|||||||||||||||
|
Par
value common stock
|
15
|
|||||||||||||||
|
To
record the par value of the additional shares issues as part
of the merger
with CTHE. 2,894,673 / 8.27 = 350,021 less 200,000 shares of
Xcorporeal
retired for at net of 150,021 shares at $0.0001 per
share.
|
||||||||||||||||
|
(
C) To
accrue estimated merger costs of $250,000 and a one-time signing
bonus of
$225,000.
|
||||||||||||||||
17
|
XCORPOREAL,
INC.
|
|
(formerly
CT Holdings Enterprises, Inc.)
|
|
(a
Development Stage Company)
|
|
UNAUDITED
PROFORMA COMBINED STATEMENT OF
OPERATIONS
|
|
Year
Ended December 31, 2006
|
|||||||||||||
|
Xcorporeal,
Inc.
|
CT
Holdings Enterprises, Inc.
|
Proforma
Adjustments
|
Proforma
Combined
|
||||||||||
|
Operating
Expenses:
|
|||||||||||||
|
Selling,
general and administrative
|
$
|
3,174,995
|
$
|
99,185
|
$
|
-
|
$
|
3,274,180
|
|||||
|
Research
and development
|
1,287,322
|
-
|
-
|
1,287,322
|
|||||||||
|
Depreciation
and amortization
|
95
|
-
|
-
|
95
|
|||||||||
|
Settlement
of litigation
|
-
|
(4,583,852
|
)
|
-
|
(4,583,852
|
)
|
|||||||
|
Gain
on extinguishment of debt from related parties
|
-
|
(1,294,330
|
)
|
-
|
(1,294,330
|
)
|
|||||||
|
Interest
expense
|
-
|
179,262
|
-
|
179,262
|
|||||||||
|
Interest
expense - related party
|
-
|
285,922
|
-
|
285,922
|
|||||||||
|
Income
(loss) before Other Income and Income Tax
|
(4,462,412
|
)
|
5,313,813
|
-
|
851,401
|
||||||||
|
Interest
and Other Income
|
82,200
|
11,203
|
-
|
93,403
|
|||||||||
|
Income
(loss) before income taxes
|
(4,380,212
|
)
|
5,325,016
|
-
|
944,804
|
||||||||
|
Income
taxes
|
-
|
-
|
-
|
-
|
|||||||||
|
Net
Income (loss)
|
$
|
(4,380,212
|
)
|
$
|
5,325,016
|
$
|
-
|
$
|
944,804
|
||||
|
Basic
net income (loss) per share
|
$
|
(0.67
|
)
|
$
|
5.54
|
$
|
0.14
|
||||||
|
Basic
weighted average number of shares outstanding
|
6,542,312
|
960,656
|
6,692,333
|
(D) | |||||||||
|
Diluted
net income per share
|
$
|
(0.67
|
)
|
$
|
5.54
|
$
|
0.14
|
||||||
|
Diluted
weighted average number of shares outstanding
|
6,542,312
|
960,656
|
6,861,381
|
||||||||||
|
(D)
|
Reflects
the reduction in the weighted average number of shares due to
the
cancellation of 200,000 shares of Xcorporeal common stock and
the 350,021
shares of CTHE that remain from the merger transaction for a
net increase
of 150,021 weighted average number of shares.
|
|||||||||
|
(E)
|
Estimated
merger costs of $250,000 and a signing bonus of $225,000 are
excluded from
the statement of operations due to one time non-recurring
charges.
|
|||||||||
18
|
XCORPOREAL,
INC.
|
|
(formerly
CT Holdings Enterprises, Inc.)
|
|
(a
Development Stage Company)
|
|
UNAUDITED
PROFORMA COMBINED STATEMENT OF
OPERATIONS
|
|
For
the Six Months Ended June 30, 2007
|
|||||||||||||
|
Xcorporeal,
Inc.
|
CT
Holdings Enterprises, Inc.
|
Proforma
Adjustments
|
Proforma
Combined
|
||||||||||
|
Operating
Expenses:
|
|||||||||||||
|
Selling,
general and administrative
|
$
|
5,590,288
|
$
|
104,247
|
$
|
-
|
$
|
5,694,535
|
|||||
|
Research
and development
|
2,688,134
|
-
|
-
|
2,688,134
|
|||||||||
|
Depreciation
and amortization
|
5,383
|
-
|
-
|
5,383
|
|||||||||
|
Settlement
of litigation
|
-
|
-
|
-
|
-
|
|||||||||
|
Gain
on debt settlement
|
-
|
(237,281
|
)
|
-
|
(237,281
|
)
|
|||||||
|
Other
Income
|
-
|
-
|
-
|
-
|
|||||||||
|
Income
(loss) before Other Income and Income Tax
|
(8,283,805
|
)
|
133,034
|
-
|
(8,150,771
|
)
|
|||||||
|
Interest
Income
|
619,926
|
-
|
-
|
619,926
|
|||||||||
|
Income
(loss) before income taxes
|
(7,663,879
|
)
|
133,034
|
-
|
(7,530,845
|
)
|
|||||||
|
Income
taxes
|
-
|
-
|
-
|
-
|
|||||||||
|
Net
income (loss)
|
$
|
(7,663,879
|
)
|
$
|
133,034
|
$
|
-
|
$
|
(7,530,845
|
)
|
|||
|
Basic
and diluted net income (loss) per share
|
$
|
(0.54
|
)
|
$
|
0.07
|
$
|
(0.52
|
)
|
|||||
|
Weighted
average number of shares outstanding
|
14,200,050
|
1,920,839
|
14,350,071
|
(D) | |||||||||
|
(D)
|
Reflects
the reduction in the weighted average number of shares due
to the
cancellation of 200,000 shares of Xcorporeal common stock and
the 350,021
shares of CTHE that remain from the merger transaction for
a net increase
of 150,021 weighted average number of shares.
|
|||||||||
|
(F)
|
In
August 2007, CTHE issued 500,000 shares of its stock to an
executive
officer from services rendered. The fair value of these shares
of
approximately $225,000 will be recorded in expense in the third
quarter of
2007 on CTHE financial
statements.
|
|||||||||
19
MARKET
PRICE INFORMATION
AND
RELATED STOCKHOLDER MATTERS
There
has
never a public market for shares of Xcorporeal common stock. As of August
10,
2007, there were approximately 100 holders of record of our common stock.
We
have not paid any cash dividends in the past and do not anticipate paying
any
cash dividends in the foreseeable future. We intend to retain earnings, if
any,
to finance the expansion of our business and fund ongoing operations for
the
foreseeable future.
CTHE’s
common stock trades on the OTC Bulletin Board (“OTCBB”) under the symbol
CTHE (prior to February 2007, CTHE common stock traded under the symbol CITN).
The following table sets forth, for the periods indicated, the high and low
closing sale prices for CTHE common stock as reported by the OTCBB and displayed
on its website. The quotations reflect inter-dealer prices, without retail
markup, markdown or commission, and may not represent actual transactions.
The
historical high and low prices below have been adjusted for the effects of
the 1
for 70 reverse stock split effective February 28, 2007 but do not reflect
the
proposed 1 for 8.27 reverse stock split. Following the merger, we expect
that
CTHE common stock will continue to be quoted and traded on the OTCBB; however,
we anticipate that we will change its trading symbol to “XCOR.”
|
High
|
Low
|
||||||
|
Year
Ended December 31, 2005:
|
|||||||
|
Quarter
ended March 31
|
$
|
1.05
|
$
|
0.35
|
|||
|
Quarter
ended June 30
|
0.56
|
0.42
|
|||||
|
Quarter
ended September 30
|
1.05
|
0.35
|
|||||
|
Quarter
ended December 31
|
1.05
|
0.56
|
|||||
|
Year
Ended December 31, 2006:
|
|||||||
|
Quarter
ended March 31
|
1.05
|
0.70
|
|||||
|
Quarter
ended June 30
|
0.77
|
0.42
|
|||||
|
Quarter
ended September 30
|
1.19
|
0.42
|
|||||
|
Quarter
ended December 31
|
0.63
|
0.35
|
|||||
|
Year
Ended December 31, 2007:
|
|||||||
|
Quarter
ended March 31
|
0.71
|
0.71
|
|||||
|
Quarter
ended June 30
|
0.80
|
0.55
|
|||||
|
Quarter
ending September 30 (through August 21, 2007)
|
2.15
|
0.41
|
|||||
As
of
August 21, 2007, there were approximately 752 holders of record of our common
stock.
On
August
[___], 2007, the latest practicable date before the mailing of this information
statement, the last sale price of our common stock as reported on the OTCBB
was
$[___] per share. On August 10, 2007, the last trading day prior to the public
announcement of the merger, the last sale price of our common stock as reported
on the OTCBB was $0.45 per share.
20
WHERE
YOU CAN FIND MORE INFORMATION
Xcorporeal
and CTHE file annual, quarterly and special reports, information statements
and
other information with the SEC. You may read and copy any reports, statements
or
information that Xcorporeal and CTHE file with the SEC at the SEC’s public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
The public reference room in Washington, D.C. is located at 100 F Street,
N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. The SEC filings of Xcorporeal
and
CTHE are also available to the public from commercial document retrieval
services and at the Internet web site maintained by the SEC at
“http://www.sec.gov.”
Xcorporeal
has supplied all information contained in this information statement relating
to
Xcorporeal. CTHE has supplied all information contained in this information
statement relating to CTHE.
If
you
are an Xcorporeal stockholder, you may obtain, without charge, a copy of
the
Annual Report on Form 10-KSB for the year ended December 31, 2006, and the
most
recent Quarterly Report on Form 10-QSB of Xcorporeal, including the financial
statements required to be filed in such reports with the SEC pursuant to
the
Securities Exchange Act of 1934, as amended. You may also obtain copies of
the
exhibits to such reports, but Xcorporeal will charge a reasonable fee to
stockholders requesting such exhibits. You should direct your request in
writing
to Xcorporeal at the following address:
Xcorporeal,
Inc.
11150
Santa Monica Boulevard, Suite 340
Los
Angeles, CA 90025
Attn:
Winson Tang
If
you
are a CTHE stockholder, you may obtain, without charge, a copy of the Annual
Report on Form 10-KSB for the year ended December 30, 2006, and the most
recent
Quarterly Report on Form 10-QSB of CTHE, including the financial statements
required to be filed in such reports with the SEC pursuant to the Securities
Exchange Act of 1934, as amended. You may also obtain copies of the exhibits
to
such reports, but CTHE will charge a reasonable fee to stockholders requesting
such exhibits. You should direct your request in writing to CTHE at the
following address:
CT
Holdings Enterprises, Inc.
2100
McKinney Avenue
Dallas,
TX 75201
Attn:
Steven B. Solomon
21
Risk
Factors
YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN ADDITION TO THE OTHER
INFORMATION INCLUDED ELSEWHERE IN THIS INFORMATION STATEMENT AND THE DOCUMENTS
THAT XCORPOREAL AND CTHE HAVE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. UNLESS THE CONTEXT REQUIRES OTHERWISE, THE USE OF THE
COMPANIES, THE COMBINED COMPANY, “US,” OR “WE” REFERS TO THE COMBINED COMPANY OF
XCORPOREAL AND CTHE AFTER GIVING EFFECT TO THE MERGER. ADDITIONAL RISKS AND
UNCERTAINTIES NOT PRESENTLY KNOWN TO XCORPOREAL AND CTHE OR THAT ARE NOT
CURRENTLY BELIEVED TO BE IMPORTANT TO YOU, IF THEY MATERIALIZE, ALSO MAY
ADVERSELY AFFECT THE MERGER AND THE PRICE OF OUR STOCK.
Risks
Relating to the Proposed Merger
Xcorporeal
and CTHE may not achieve the benefits they expect from the merger, which
may
have a material adverse effect on the companies’ business, financial, and
operating results.
Xcorporeal
and CTHE entered into the merger agreement with the expectation that the
merger
will result in benefits to the combined company arising out of the combination
of the technology businesses of Xcorporeal and active trading market for
CTHE’s
common stock. To realize any benefits from the merger, the combined company’s
stock must continue to trade on the OTCBB following the merger. In addition,
we
will face the following post-merger challenges:
|
·
|
retaining
the management and employees
Xcorporeal;
|
|
·
|
developing
new products and services that utilize the assets and resources
of
Xcorporeal; and
|
|
·
|
retaining
existing strategic partners and suppliers of
Xcorporeal.
|
If
the
combined company is not successful in addressing these and other challenges,
then the benefits of the merger will not be realized and, as a result, the
combined company’s operating results and the market price of CTHE’s common stock
may be adversely affected. These challenges, if not successfully met by the
combined company, could result in possible unanticipated liabilities,
unanticipated costs, diversion of management attention and loss of personnel.
Neither Xcorporeal nor CTHE can assure you that we will be able to profitably
manage the combined company.
The
issuance of shares of CTHE’s common stock to Xcorporeal stockholders in the
merger will substantially dilute the percentage ownership interests of current
CTHE stockholders.
If
the
merger is completed, it is anticipated that CTHE will issue to Xcorporeal
stockholders approximately 14.2 million shares of CTHE common stock, and
approximately 4.2 million shares will be subject to stock options and
warrants to be issued to Xcorporeal stock option and warrant holders. Upon
completion of the merger, the former Xcorporeal stockholders, together with
the
holders of assumed Xcorporeal stock options and warrants, will be issued
shares
of our common stock, and options and warrants to acquire shares of our common
stock, representing in the aggregate 97.6% of CTHE common stock on a
fully-diluted basis immediately following the merger. The issuance of CTHE
common stock to Xcorporeal stockholders will cause a significant reduction
in
the relative percentage interest of current CTHE stockholders in CTHE’s
earnings, if any, voting power and market capitalization.
If
we proceed with the merger, Xcorporeal stockholders will receive one share
of
CTHE common stock for each share of Xcorporeal common stock regardless of
changes in the market value of CTHE common stock or Xcorporeal common
stock.
Each
share of Xcorporeal common stock will be exchanged for one share of CTHE
common
stock upon completion of the merger. This exchange ratio is a fixed number
and
the merger agreement does not contain any provision to adjust this ratio
for
changes in the market price of either Xcorporeal common stock or CTHE’s common
stock. Neither party is permitted to terminate the merger agreement solely
because of changes in the market price of Xcorporeal or CTHE common stock.
Consequently, the specific dollar value of CTHE’s common stock to be received by
Xcorporeal stockholders will depend on the market value of CTHE common stock
at
the time of completion of the merger and may decrease from the date of the
merger agreement. You are urged to obtain recent market quotations for
Xcorporeal common stock and CTHE common stock. Neither Xcorporeal nor CTHE
can
predict or give any assurances as to the market price of CTHE common stock
at
any time before or after the merger. The prices of Xcorporeal common stock
and
CTHE common stock may vary because of factors such as:
|
·
|
changes
in the business, operating results or prospects of Xcorporeal or
CTHE;
|
22
|
·
|
actual
or anticipated variations in quarterly results of operations of
Xcorporeal
or CTHE;
|
|
·
|
market
assessments of the likelihood that the merger will be
completed;
|
|
·
|
the
timing of the completion of the
merger;
|
|
·
|
sales
of Xcorporeal common stock or CTHE common
stock;
|
|
·
|
additions
or departures of key personnel of Xcorporeal or
CTHE;
|
|
·
|
announcements
of significant acquisitions, strategic partnerships, joint ventures
or
capital commitments by Xcorporeal;
|
|
·
|
conditions
or trends in the medical technology
industry;
|
|
·
|
announcements
of technological innovations, new products or services by Xcorporeal,
or
its competitors;
|
|
·
|
changes
in market valuations of other medical technology
companies;
|
|
·
|
the
prospects of post-merger
operations;
|
|
·
|
regulatory
considerations; and
|
|
·
|
general
market and economic conditions.
|
If
the
merger is successfully completed, holders of Xcorporeal common stock will
become
holders of CTHE common stock. Xcorporeal’s business differs from CTHE’s
business, and Xcorporeal’s results of operations, may be affected by factors
different than those affecting CTHE’s results of operations and the price of
CTHE’s common stock. CTHE does not currently have any active
operations.
If
the costs associated with the merger exceed the benefits, the combined company
may experience adverse financial results, including increased
losses.
Xcorporeal
and CTHE will incur significant transaction costs as a result of the merger,
including legal and accounting fees that may exceed their current estimates.
In
addition, Xcorporeal and CTHE expect that the combined company will incur
consolidation and integration expenses, which they cannot accurately estimate
at
this time. Actual transaction costs may substantially exceed the current
estimates of Xcorporeal and CTHE and may affect the combined company’s financial
condition and operating results negatively. If the benefits of the merger
do not
exceed the costs associated with the merger, including any dilution to CTHE’s
stockholders resulting from the issuance of shares in connection with the
merger, the combined company’s financial results could be adversely
affected, resulting in, among other things, increased losses.
No
Independent Financial Advisor.
Neither
Xcorporeal nor CTHE has engaged an independent financial advisor to consult
on
the relative advantages and disadvantages of the transactions. Therefore,
the
stockholders of both companies are dependent solely on the judgment of the
board
of directors of each company.
The
market price of CTHE’s common stock may decline as a result of the
merger.
The
market price of CTHE’s common stock may decline as a result of the merger for a
number of reasons, including if:
23
|
·
|
the
combined company does not achieve the perceived benefits of the
merger as
rapidly or to the extent anticipated by financial or industry
analysts;
|
|
·
|
the
effect of the merger on the combined company’s financial results is not
consistent with the expectations of financial or industry analysts;
or
|
|
·
|
significant
stockholders of Xcorporeal or CTHE decide to dispose of their stock
following completion of the merger.
|
Sales
of substantial amounts of CTHE common stock in the public market after the
proposed merger could materially adversely affect the market price of CTHE
common stock.
Based
on
the number of shares of Xcorporeal common stock outstanding as of August
10,
2007, and assuming no outstanding options or warrants to purchase Xcorporeal
common stock are exercised before the merger becomes effective, at the closing
of the merger, CTHE will issue approximately 14.2 million shares of CTHE
common
stock to Xcorporeal stockholders in the merger. The sale of substantial amounts
of CTHE common stock may result in substantial fluctuations in the price
of CTHE
common stock. In addition, sales of a substantial number of shares of CTHE
common stock within a short period of time could cause CTHE stock price to
fall.
The sale of these shares could also impair the combined company’s ability to
raise capital through sales of additional common stock.
Failure
to complete the merger could negatively impact Xcorporeal and CTHE, including
the market price CTHE common stock.
The
obligations of CTHE and Xcorporeal to complete the merger are subject to
the
satisfaction or waiver of certain conditions. See “The Merger Agreement —
Conditions to the Consummation of the Merger” on pages [___] to [___] of this
information statement for a discussion of these conditions. If these conditions
are not satisfied or waived, the merger may not be completed. If the merger
is
not completed for any reason, both CTHE and Xcorporeal may be subject to
other
material risks, including:
|
·
|
a
negative effect on the stock trading price of CTHE common stock
to the
extent that the current market price reflects a market assumption
that the
merger will be completed (Xcorporeal does not currently have an
active
trading market for its common
stock);
|
|
·
|
either
party may be required to pay a termination fee;
and
|
|
·
|
costs
related to the merger, such as legal and accounting fees, must
be paid
even if the merger is not
completed.
|
In
addition, if the merger is consummated but CTHE common stock ceases to be
traded
on the OTC Bulletin Board immediately after the effectiveness of the merger,
Xcorporeal may terminate the merger and rescind the merger agreement which
could
result in uncertainty in, or have an adverse impact on, the trading market
for
CTHE common stock.
Xcorporeal’s
officers and directors have interests different from yours that may influence
them to support or approve the merger.
The
terms
of the merger agreement and the agreements contemplated thereby affect the
directors and officers of Xcorporeal in ways that may create interests for
them
in the merger that are different from, or in addition to, yours. These interests
include:
|
·
|
the
existing rights to indemnification benefiting Xcorporeal’s directors and
officers found in Xcorporeal’s certificate of incorporation or bylaws,
applicable law or other sources will be duplicated in CTHE’s certificate
of incorporation and will continue
indefinitely.
|
|
·
|
Messrs.
Terren S. Peizer, Executive Chairman of Xcorporeal, and Robert
Weinstein,
Xcorporeal’s Chief Financial Officer, will enter into employment
agreements with Xcorporeal in connection with closing of the merger.
Each
of these agreements is described in “Related Agreements” beginning on page
[___]; and
|
|
·
|
Steven
B. Solomon, an officer, director and majority shareholder of CTHE,
is the
record owner of 50,000 shares of Xcorporeal common stock which
he
purchased in connection with a private placement consummated in
the fourth
quarter of 2006.
|
24
Uncertainty
regarding the merger and the effects of the merger could cause each company’s
customers or strategic partners to delay or defer
decisions.
Xcorporeal’s
customers and strategic partners, in response to the announcement of the
merger,
may delay or defer decisions, which could have a material adverse effect
on the
business of the relevant company, regardless of whether the merger is ultimately
completed.
The
merger may fail to qualify as a tax-free reorganization for federal income
tax
purposes, resulting in your recognition of taxable gain or loss in respect
of
your Xcorporeal shares.
The
merger is intended to qualify as a tax-free reorganization under Section
368(a)
of the Internal Revenue Code of 1986, as amended. The Internal Revenue Service
will not provide a ruling on the matter, nor will Xcorporeal obtain an opinion
from its legal counsel that the merger will constitute a tax-free reorganization
for federal income tax purposes. No assurance can be given that the Internal
Revenue Service or the courts will agree that the merger qualifies as a tax-free
reorganization under Section 368(a). If the merger fails to qualify as a
reorganization, you generally would recognize gain or loss on each share
of
Xcorporeal common stock surrendered in an amount equal to the difference
between
the sum of the amount of cash and/or the fair market value of CTHE common
stock
received for each such share of Xcorporeal common stock and your adjusted
tax
basis in such share.
Risks
Relating to the Business and Operations of Xcorporeal Following the
Merger
Our
limited operating history may make it difficult to evaluate our business
to date
and our future viability.
We
are in the early stage of operations and development, and have only a limited
operating history on which to base an evaluation of our business and prospects,
having just commenced operations in August 2006 in accordance with our new
business plan and entry into the medical devices industry. In addition, our
operations and developments are subject to all of the risks inherent in the
growth of an early stage company. We will be subject to the risks inherent
in
the ownership and operation of a company with a limited operating history
such
as regulatory setbacks and delays, fluctuations in expenses, competition,
the
general strength of regional and national economies, and governmental
regulation. Any failure to successfully address these risks and uncertainties
would seriously harm our business and prospects. We may not succeed given
the
technological, marketing, strategic and competitive challenges we will face.
The
likelihood of our success must be considered in light of the expenses,
difficulties, complications, problems and delays frequently encountered in
connection with the growth of a new business, the continuing development
of new
technology, and the competitive and regulatory environment in which we operate
or may choose to operate in the future. We have generated no revenues to
date,
and there can be no assurance that we will be able to successfully develop
our
products and penetrate our target markets.\
We
expect to continue to incur operating losses, and if we are not able to raise
necessary additional funds we may have to reduce or stop
operations.
We
have not generated revenues or become profitable, may never do so, and may
not
generate sufficient working capital to cover the cost of operations. No party
has guaranteed to advance additional funds to us to provide for any operating
deficits. Until we begin generating revenue, we may seek funding through
the
sale of equity, or securities convertible into equity, further dilution to
our
then existing stockholders may result. If we raise additional capital through
the incurrence of debt, our business may be affected by the amount of leverage
we incur, and our borrowings may subject us to restrictive covenants. Additional
funding may not be available to us on acceptable terms, or at all. If we
are
unable to obtain adequate financing on a timely basis, we may be required
to
delay, reduce or stop operations, any of which would have a material adverse
effect on our business.
25
Our
success will depend on our ability to retain our managerial personnel and
to
attract additional personnel.
Our
success will depend largely on our ability to attract and retain managerial
personnel. Competition for desirable personnel is intense, and we cannot
guarantee that we will be able to attract and retain the necessary staff.
The
loss of members of managerial, sales or scientific staff could have a material
adverse effect on our future operations and on successful development of
products for our target markets. The failure to maintain our management,
particularly our Executive Chairman and Chief Operating Officer and our Chief
Medical and Scientific Officer, and to attract additional key personnel could
materially adversely affect our business, financial condition and results
of
operations. Although we intend to provide incentive compensation to attract
and
retain our key personnel, we cannot guarantee that these efforts will be
successful.
We
will need to expand our finance, administrative, product development, sales
and
marketing, and operations staff. There are no assurances that we will be
able to
make such hires. In addition, we may be required to enter into relationships
with various strategic partners and other third parties necessary to our
business. Planned personnel may not be adequate to support our future
operations, management may not be able to hire, train, retain, motivate and
manage required personnel or management may not be able to identify, manage
and
exploit existing and potential strategic relationships and market opportunities.
If we fail to manage our growth effectively, it could have a material adverse
effect on our business, results of operations and financial
condition.
We
need to develop our financial and reporting processes, procedures and controls
to support our anticipated growth.
We
have not historically invested significantly in our financial and reporting
systems. To comply with our public reporting requirements, and manage the
anticipated growth of our operations and personnel, we will be required to
improve existing or implement new operational and financial systems, processes
and procedures, and to expand, train and manage our employee base. Our current
and planned systems, procedures and controls may not be adequate to support
our
future operations.
The
laws and regulations affecting public companies, including the provisions
of the
Sarbanes-Oxley Act of 2002 and rules adopted or proposed by the Securities
and
Exchange Commission, will result in increased costs to us as we evaluate
the
implications of any new rules and respond to their requirements. New rules
could
make it more difficult or more costly for us to obtain certain types of
insurance, including director and officer liability insurance, and we may
be
forced to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. We cannot predict or
estimate the amount of the additional costs we may incur or the timing of
such
costs to comply with any new rules and regulations, or if compliance can
be
achieved.
We
cannot assure you that we will be able to complete development and obtain
necessary approvals for our proposed products even if we obtain sufficient
funding.
Even
if we obtain sufficient funding, no assurance can be given that we will be
able
to design or have designed parts necessary for the manufacture of our products
or complete the development of our proposed products within our anticipated
time
frames, if at all. Such a situation could have a material adverse effect
upon
our ability to remain in business.
The
success of our business will depend on our ability to develop and protect
our
intellectual property rights, which could be expensive.
Patent
and other proprietary rights are essential to our business. Our success depends
to a significant degree on our ability to obtain and enforce patents and
licenses to patent rights, both in the U.S. and in other countries. We cannot
be
certain that the patents that we license from others will be enforceable
and
afford protection against competitors. Our patent rights may not provide
us with
proprietary protection or competitive advantages against competitors with
similar technologies. Even if such patents are valid, we cannot guarantee
that
competitors will not independently develop alternative technologies that
duplicate the functionality of our technology.
26
We
also rely on trademarks, copyrights, trade secrets and know-how to develop,
maintain and strengthen our competitive positions. While we protect our
proprietary rights to the extent possible, we cannot guarantee that third
parties will not know, discover or develop independently equivalent proprietary
information or techniques, that they will not gain access to our trade secrets
or disclose our trade secrets to the public. Therefore, we cannot guarantee
that
we can maintain and protect unpatented proprietary information and trade
secrets. Misappropriation of our ual
property would have an adverse effect on our competitive position and may
cause
us to incur substantial litigation costs.
We
may be subject to claims that we infringe the intellectual property rights
of
others, and unfavorable outcomes could harm our business.
Our
future operations may be subject to claims, and potential litigation, arising
from our alleged infringement of patents, trade secrets or copyrights owned
by
other third parties. We intend to fully comply with the law in avoiding such
infringements. However, within the medical devices industry, established
companies have actively pursued such infringements, and have initiated such
claims and litigation, which has made the entry of competitive products more
difficult. We may experience such claims or litigation initiated by existing,
better-funded competitors. Court-ordered injunctions may prevent us from
bringing new products to market, and the outcome of litigation and any resulting
loss of revenues and expenses of litigation may substantially affect our
ability
to meet our expenses and continue operations.
We
compete against other dialysis equipment manufacturers with much greater
financial resources and better established products and customer relationships,
which may make it difficult for us to penetrate the market and achieve
significant sales of our products.
Our
proposed products will compete directly against equipment produced by Fresenius
Medical Care AG, Baxter Healthcare Corporation, Gambro AB, and others, each
of
which markets one or more FDA-cleared medical devices for the treatment of
acute
or chronic kidney failure.
Each
of these competitors offers products that have been in use for a longer time
than our products and are more widely recognized by physicians, patients
and
providers. Most of our competitors have significantly more financial and
human
resources, more established sales, service and customer support infrastructures
and spend more on product development and marketing than we do. Many of our
competitors also have established relationships with the providers of dialysis
therapy. Most of these companies manufacture additional complementary products
enabling them to offer a bundle of products and have established sales forces
and distribution channels that may afford them a significant competitive
advantage.
The
market for our products is competitive, subject to change and affected by
new
product introductions and other market activities of industry participants,
including increased consolidation of ownership of clinics by large dialysis
chains. If we are successful, our competitors are likely to develop products
that offer features and functionality similar to our proposed products.
Improvements in existing competitive products or the introduction of new
competitive products may make it more difficult for us to compete for sales,
particularly if those competitive products demonstrate better safety,
convenience or effectiveness or are offered at lower prices. If we are unable
to
compete effectively against existing and future competitors and existing
and
future alternative treatments and pharmacological and technological advances,
it
will be difficult for us to penetrate the market and achieve significant
sales
of our products.
We
have not commissioned or obtained marketing studies which support the likelihood
of success of our business plan.
No
independent studies with regard to the feasibility of our proposed business
plan
have been conducted by any independent third parties with respect to our
present
and future business prospects and our capital requirements. In addition,
there
can be no assurances that our products or our treatment modality for ESRD
will
find sufficient acceptance in the marketplace to enable us to fulfill our
long
and short term goals, even if adequate financing is available and our products
are approved to come to market, of which there can be no assurance.
27
Material
weaknesses in our internal control over financial reporting may make it
difficult to accurately evaluate our results of operations and financial
condition
In
our annual report report for the year ended December 31, 2006, we reported
material weaknesses in the effectiveness of our internal controls over financial
reporting related to the application of generally accepted accounting principles
arising from (a) our accounting for the transaction by which we ceased to
be a shell corporation, (b) the assumptions used in estimating the fair
value of warrants issued to consultants,
(c) our accounting for research, development and other expenses incurred
pursuant to the License Agreement, and (d) the calculation of the weighted
average number of share outstanding. Despite our substantial efforts to ensure
the integrity of our financial reporting process, we cannot guarantee that
we
will not identify additional weaknesses as we continue to work with the new
systems that we have implemented. Any continuing material weaknesses in our
internal control over financial reporting could result in errors in our
financial statements, which could erode market confidence in our company,
and
make it more difficult to raise needed additional funds, and adversely affect
the market price of our common stock, if such a market ever
develops.
An
unfavorable result in the pending arbitration could have a material adverse
effect on our business.
We
consider the protection of our proprietary technology for treatment of kidney
failure and congestive heart failure to be critical to our business prospects.
We obtained the rights to some of our most significant patented and
patent-pending technologies through a License Agreement with National Quality
Care, Inc. (NQCI). On December 1, 2006 we initiated arbitration against
NQCI for failure to fully perform its obligations under our License Agreement.
NQCI has filed counterclaims seeking to invalidate the License Agreement
and
claiming monetary damages against us. If NQCI were to prevail on some or
all of
its claims, we could be prevented from using some or all of the patented
technology we licensed from it. That could significantly impact our ability
to
use and develop our technologies, which would have a material adverse effect
on
our business and results of operations.
Risks
Related to Our Industry
Our
business will always be strictly regulated by the federal and other governments,
and we cannot assure you that we will remain in compliance with all applicable
regulation.
Clinical
testing, manufacture, promotion and sale of our proposed products are subject
to
extensive regulation by numerous governmental authorities in the U.S.,
principally the FDA, and corresponding foreign regulatory agencies. Changes
in
existing regulations or adoption of new regulations or policies could prevent
us
from obtaining, or affect the timing of, future regulatory approvals or
clearances. We cannot assure you that we will be able to obtain necessary
regulatory clearances or approvals on a timely basis, or at all, or that
we will
not be required to incur significant costs in obtaining or maintaining such
foreign regulatory approvals. Delays in receipt of, or failure to receive,
such
approvals or clearances, the loss of previously obtained approvals or clearances
or the failure to comply with existing or future regulatory requirements
could
have a material adverse effect on our business, financial condition and results
of operations.
Any
enforcement action by regulatory authorities with respect to past or future
regulatory noncompliance could have a material adverse effect on our business,
financial condition and results of operations. Noncompliance with applicable
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal to
authorize the marketing of new products or to allow us to enter into supply
contracts and criminal prosecution.
Even
if our proposed products are approved for market, we will be subject to
continuing regulation. We will continuously be subject to routine inspection
by
the FDA and will have to comply with the host of regulatory requirements
that
usually apply to medical devices marketed in the U.S. including labeling
regulations, GMP requirements, MDR regulation (which requires a manufacturer
to
report to the FDA certain types of adverse events involving its products),
and
the FDA’s prohibitions against promoting products for unapproved or “off-label”
uses. Our failure to comply with applicable regulatory requirements could
result
in enforcement action by the FDA, which could have a material adverse effect
on
our business, financial condition and results of operations.
28
In
addition, failure to comply with applicable international regulatory
requirements can result in fines, injunctions, civil penalties, recalls or
seizures of products, total or partial suspensions of production, refusals
by
foreign governments to permit product sales and criminal prosecution.
Furthermore, changes in existing regulations or adoption of new regulations
or
policies could prevent us from obtaining, or affect the timing of, future
regulatory approvals or clearances. There can be no assurance that we will
be
able to obtain necessary regulatory clearances or approvals on a timely basis,
or at all, or that we will not be required to incur significant costs in
obtaining or maintaining such foreign regulatory approvals. Delays in receipt
of, or failure to receive, such approvals or clearances, the loss of previously
obtained approvals or clearances or the failure to comply with existing or
future regulatory requirements could have a material adverse effect on our
business, financial condition and results of operations.
Any enforcement action by regulatory authorities with respect to past or
future
regulatory noncompliance could have a material adverse effect on our business,
financial condition and results of operations.
Our
failure to respond to rapid changes in technology and its applications and
intense competition in the medical devices industry could make our treatment
system obsolete.
The
medical devices industry is subject to rapid and substantial technological
development and product innovations. To be successful, we must respond to
new
developments in technology, new applications of existing technology and new
treatment methods. Our response may be stymied if we require, but cannot
secure,
rights to essential third-party intellectual property. We may compete against
companies offering alternative treatment systems to ours, some of which have
greater financial, marketing and technical resources to utilize in pursuing
technological development and new treatment methods. Our financial condition
and
operating results could be adversely affected if our medical device products
fail to compete favorably with these technological developments, or if we
fail
to be responsive on a timely and effective basis to competitors’ new devices,
applications, treatments or price strategies.
Product
liability claims could adversely affect our results of
operations
The
risk of product liability claims, product recalls and associated adverse
publicity is inherent in the testing, manufacturing, marketing and sale of
medical products. In an effort to minimize our liability we purchase product
liability insurance coverage. In the future we may not be able to secure
product
liability insurance coverage on acceptable terms or at reasonable costs when
needed. Any liability for mandatory damages could exceed the amount of our
coverage. A successful product liability claim against us could require us
to
pay a substantial monetary award. Moreover, a product recall could generate
substantial negative publicity about our products and business and inhibit
or
prevent commercialization of other future product candidates.
Risks
Related to Our Common Stock
If
a market for our common stock does not develop, our stockholders may be unable
to sell their shares.
There
is currently no market for our common stock and we can provide no assurance
that
a market will develop. If no market is ever developed for our shares, it
will be
difficult for stockholders to sell their stock. In such a case, stockholders
may
find that they are unable to achieve benefits from their
investment.
If
a market for our common stock develops, our stock price may be
volatile.
If
a market for our common stock develops, the price at which our common stock
will
trade may be highly volatile and may fluctuate as a result of a number of
factors, including the number of shares available for sale in the market,
quarterly variations in our operating results, actual or anticipated
announcements of new data, studies, products or services by us or competitors,
regulatory investigations or determinations, acquisitions or strategic alliances
by us or our competitors, recruitment or departures of key personnel, the
gain
or loss of significant customers, changes in the estimates of our operating
performance, market conditions in our industry and the economy as a whole.
Over
68% of our stock is controlled by a single stockholder who has the ability
to
substantially influence the election of directors and the outcome of matters
submitted to stockholders.
As
of December 31, 2006, Consolidated National, LLC (CNL), a limited liability
company whose managing member is our Chairman, directly owned 9,600,000 shares,
which represent 68% of our 14,200,050 shares of outstanding common stock
as of
April 9, 2007. As a result, CNL presently and is expected to continue to
have the ability to determine the outcome of issues submitted to our
stockholders. The interests of this stockholder may not always coincide with
our
interests or the interests of other stockholders, and it may act in a manner
that advances its best interests and not necessarily those of other
stockholders. One consequence to this substantial stockholder’s interest is that
it may be difficult for investors to remove management of the company. It
could
also deter unsolicited takeovers, including transactions in which stockholders
might otherwise receive a premium for their shares over then current market
prices.
29
Investors’
interests in our company will be diluted and investors may suffer dilution
in
their net book value per share if we issue additional shares or raise funds
through the sale of equity securities.
In
the event that we are required to issue any additional shares or enter into
private placements to raise financing through the sale of equity securities,
investors’ interests in our company will be diluted and investors may suffer
dilution in their net book value per share depending on the price at which
such
securities are sold. If we issue any such additional shares, such issuances
also
will cause a reduction in the proportionate ownership and voting power of
all
other stockholders. Further, any such issuance may result in a change in
our
control.
We
have never paid cash dividends and do not intend to do so.
We
have never declared or paid cash dividends on our common stock. We currently
plan to retain any earnings to finance the growth of our business rather
than to
pay cash dividends. Payments of any cash dividends in the future will depend
on
our financial condition, results of operations and capital requirements,
as well
as other factors deemed relevant by our board of directors.
Xcorporeal
will need additional financing.
Xcorporeal
will need additional financing to maintain and expand its business, and such
financing may not be available on favorable terms, if at all. Xcorporeal
intends
to finance the combined business through the private placement and public
offering of equity and debt securities. Xcorporeal has historically financed
its
operations through working capital and from equity investments. If Xcorporeal
needs additional financing, Xcorporeal cannot assure you that it will be
available on favorable terms, if at all. If Xcorporeal needs funds and cannot
raise them on acceptable terms, Xcorporeal may not be able to:
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execute
its growth plan for the Wearable
Kidney;
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take
advantage of future opportunities, including synergistic
acquisitions;
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expand
its manufacturing facilities, if necessary, based on increased
demand for
the Wearable Kidney system;
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respond
to customers and competition; or
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remain
in operation.
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30
THE
MERGER
This
section of the information statement and the next section entitled “The Merger
Agreement” describe the transactions. Although we believe that the description
in this section covers the material terms of the merger and the transactions,
this summary may not contain all of the information that is important to
you.
You should carefully read the entire information statement and the other
documents we refer to or incorporate by reference in this information statement
for a more complete understanding of the merger agreement and the transactions.
General
The
merger agreement provides that, at the effective time of the merger, XC
Acquisition Corporation, a wholly-owned subsidiary of CTHE, will merge with
and
into Xcorporeal, with Xcorporeal continuing in existence as the surviving
corporation and a wholly-owned subsidiary of CTHE. Each share of Xcorporeal
common stock issued and outstanding at the effective time of the merger will
be
converted into one share of CTHE common stock. Upon completion of the merger,
Xcorporeal will be a wholly-owned subsidiary of CTHE.
Any
options or warrants to purchase common stock of Xcorporeal in existence
immediately prior to the merger shall be automatically converted into options
and warrants to purchase common stock of CTHE, on the same terms and conditions
to which they were subject immediately prior to the merger under CTHE's 2007
Incentive Compensation Plan.
In
connection with the merger, CTHE will effect a reverse stock split whereby
immediately prior to the effectiveness of the merger, every 8.27 shares of
CTHE
common stock will be automatically converted into one share of CTHE common
stock. Upon the effectiveness of the merger CTHE will amend and restate its
certificate of incorporation such that it reads substantially the same as
Xcorporeal’s certificate of incorporation immediately prior to the merger, and
to change CTHE’s name to Xcorporeal, Inc. CTHE will also amend and restate its
bylaws to read substantially the same as Xcorporeal’s bylaws immediately prior
to the merger. Xcorporeal will amend its certificate of incorporation to
change
its name to Xcorporeal Operations, Inc. CTHE will adopt the 2007 Incentive
Compensation Plan.
Also
in
connection with the merger, the officers and directors of CTHE will resign
effective as of the merger, and the officers and directors of Xcorporeal
shall
become the officers and directors of CTHE.
Background
of the Merger
On
March
13, 2006, CTHE changed its name to CT Holdings Enterprises, Inc., and on
March
2, 2007, CTHE effected a 1 for 70 reverse stock split. CTHE’s goal was to
realize value for shareholders through a liquidity event such as a sale,
merger
or public offering.
On
August
31, 2006, Xcorporeal changed its name to Xcorporeal, Inc., and then acquired
rights to a congestive heart failure treatment products, Wearable Artificial
Kidney, and other medical devices, thereby becoming a developmental stage
company focused on researching, developing, and commercializing technology
and
products related to the treatment of kidney failure and congestive heart
failure. On October 13, 2006, the company reincorporated to Delaware.
Although
it is fully public reporting, Xcorporeal’s common stock has not been approved by
the NASD for public trading, while CTHE’s common stock is publicly traded on the
OTC Bulletin Board. On August 1, 2007, Xcorporeal’s counsel first contacted
CTHE’s president to explore the potential of a merger. Xcorporeal desired to
effectuate a reverse merger with a Form S-3 eligible shell corporation with
free
trading shares in the public market. CTHE desired to acquire a well-capitalized
operating business with an experienced management team. Following intensive
negotiations over the following week, the boards of directors (and in the
case
of CTHE, a special committee of the board of directors) approved the merger
agreement, and the parties executed the merger agreement and related
documentation on August 10, 2007.
Reasons
for the Merger
In
reaching the decision to adopt the merger agreement and recommend it for
approval by the respective stockholders of Xcorporeal and CTHE, the boards
of
directors consulted with respective management, as well as legal advisors.
As
discussed in greater detail below, these consultations included discussions
regarding Xcorporeal’s strategic business plan, the costs and risks of executing
that business plan as an independent company, its past and current business
operations and financial condition, and its future prospects, the strategic
rationale for the potential transaction with CTHE, and the terms and conditions
of the merger agreement.
31
In
approving the merger agreement, the boards of directors of Xcorporeal and
CTHE
considered reasons why the merger should be beneficial to the respective
companies and their stockholders. In the case of CTHE, references to the
board
of directors include the special committee convened to evaluate the merger.
These potential benefits included the following:
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the
merger into CTHE, which is listed on the “OTC Bulletin Board”and which has
an active trading market, could provide Xcorporeal with access
to an
active trading market which could in turn increase the liquidity
of its
investors’ shares and provide increased exposure for Xcorporeal within the
investor community;
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the
ability of the combined company to secure investor capital and
financing
for expansion of Xcorporeal’s
business;
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dissenters’
rights would be available to our stockholders under applicable
state
law;
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market
potential for Xcorporeal’s
technology;
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Xcorporeal’s
success and potential in establishing an extra-corporeal platform
technology;
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Xcorporeal’s
financial condition;
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apart
from the approval by our stockholders, completion of the merger
would not
require any material consents or approvals;
and
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based
on our historical efforts to pursue alternative transactions and
familiarity with the companies in our industry, our management
did not
believe we would be able to complete a transaction that would provide
the
same or greater value to our stockholders within a reasonable time
frame.
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CTHE
also
considered the following additional factors:
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the
historical, current and prospective financial condition, results
of
operations and cash flows of CTHE, taking into account the current
lack of
an operating business;
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CTHE’s
dependence on financing from its largest shareholder to meet operating
costs and the lack of commitment from that shareholder that such
financing
will continue, with the result that CTHE could be forced to cease
operations if funds were not made available;
and
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the
remote likelihood that potential alternative transactions will
be
available to CTHE, or if available, such transactions would be
acceptable
to CTHE.
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In
the
course of deliberations, Xcorporeal’s board reviewed its historical, present and
projected financials under various scenarios, and its historical and short
and
long-term strategic objectives, the opportunities in the marketplace that
Xcorporeal is pursuing and the risks associated therewith. The board also
reviewed with Xcorporeal’s legal counsel a number of additional factors relating
to the merger, as follows:
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Xcorporeal’s
prospects to continue as an independent
company:
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the
negative effects of and limitations resulting from the absence
of an
active trading market for Xcorporeal common stock,
including:
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reduced
market liquidity;
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low
trading volume;
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lack
of analyst coverage;
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reduced
investor interest and difficulty in purchasing the stock;
and
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Xcorporeal’s
inability to use its common stock to attract potential acquisition
candidates;
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the
costs of continued research and development of our
technology;
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Xcorporeal’s
small size, both in terms of revenue and market capitalization;
and
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the
challenges faced by Xcorporeal’s competing in the medical technology
business versus significantly larger
companies;
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32
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information
concerning the medical technology industry
generally;
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historical
information concerning the business, financial condition, results
of
operations, technology, competitive position, industry trends and
prospects for Xcorporeal;
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the
likelihood that the merger would be
completed;
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the
expectation that the merger should qualify as a tax-free
reorganization;
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views
concerning the financial condition, results of operations and businesses
of the combined companies before and after giving effect to the
merger
based on due diligence and publicly available earnings
estimates;
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·
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terms
and conditions of the merger agreement, including the closing
conditions;
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·
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the
belief that the terms of the merger agreement, including the parties’
representations, warranties and covenants and the conditions to
the
parties’ respective obligations, are
reasonable;
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·
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the
impact of the merger on Xcorporeal’s ability to raise capital to finance
the development of our medical technology;
and
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·
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current
and historical market data with respect to the trading of Xcorporeal’s
common stock.
|
The
boards of Xcorporeal and CTHE also considered a number of potentially negative
factors in its deliberations:
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·
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the
loss of control by CTHE stockholders over the future operations
of the
combined company;
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·
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that,
while the transaction is expected to be completed, there can be
no
assurance that all conditions to the parties’ obligations to complete the
transaction would be met, and as a result, it is possible that
the
transaction may not be completed even if approved by the companies’
respective stockholders (see “Conditions to Consummation of the Merger,”
beginning on page (___);
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that,
if the transaction does not close, the parties would have significant
expenses and that the respective management teams would have expended
extensive efforts to attempt to complete the
transaction;
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the
risk that the potential benefits of the merger might not be achieved
and
that Xcorporeal’s cash requirements could adversely affect the operations
of the combined company; and
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other
risk factors described under the section entitled “Risk
Factors.”
|
In
addition to the factors considered above, in coming to its determinations,
our
board of directors was aware of the interests that some of our executive
officers and directors have with respect to the transaction in addition to
their
interests as our stockholders generally. See “Interests of Our Executive
Officers and Directors in the Merger,” beginning on page [___].
The
foregoing discussion of the information and factors discussed and considered
by
the respective boards of directors is not meant to be exhaustive, but includes
the material factors considered by the boards of directors. In view of the
wide
variety of factors considered in connection with its evaluation of the merger
and the complexity of these matters, the boards of directors did not find
it
practicable to, and did not, quantify or otherwise assign relative weight
to the
individual factors considered in reaching its determination. In considering
the
factors listed above, individual members of the boards may have given different
weight to different factors. However, each board of directors concluded that
the
potential benefits of the transaction outweighed the potential negative factors
and that, overall, the proposed transaction had greater potential benefits
for
each of Xcorporeal and CTHE and its stockholders than other strategic
alternatives.
Recommendation
of the Boards
Taking
into account all of the material facts, matters and information, including
those
described above, our respective boards of directors believe that the merger
agreement is advisable and fair to and in the best interests of each of
Xcorporeal and CTHE and their respective stockholders.
33
No
Independent Financial Advisor
Neither
Xcorporeal nor CTHE has engaged an independent financial advisor to consult
on
the relative advantages and disadvantages of the transactions.
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
General
The
following discussion summarizes certain material United States federal income
tax consequences of the merger and the reverse stock split assuming that
the
merger is effected as described in the merger agreement and this information
statement. The following discussion is based on currently existing provisions
of
the Internal Revenue Code of 1986, as amended (the “Code”), existing Treasury
Regulations promulgated under the Code, and current administrative rulings
and
court decisions, all of which are subject to change. Any such change, which
may
or may not be retroactive, could alter the tax consequences of the reverse
stock
split and the merger.
Any
discussion of federal tax issues in this information statement is not intended
or written to be used as tax advice. To ensure compliance with IRS Circular
230,
shareholders are hereby notified that: (A) any discussion of federal tax
issues
in this information statement is not intended or written to be used, and
it
cannot be used by shareholders, for the purpose of avoiding penalties that
may
be imposed on them under the Internal Revenue Code; (B) such discussion is
written to support the transactions or matters addressed herein; and (C)
shareholders should seek advice based on their particular circumstances from
an
independent tax advisor.
The
discussion set forth below does not address all U.S. federal income tax
considerations that may be relevant to Xcorporeal and CTHE stockholders in
light
of their particular circumstances, and does not apply to stockholders that
are
subject to special rules under U.S. federal income tax laws, such as:
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·
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foreign
persons;
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financial
institutions, insurance companies, mutual funds, retirement plans,
dealers
in securities or foreign currencies, tax-exempt organizations and
stockholders subject to the alternative minimum
tax;
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stockholders
who hold Xcorporeal common stock as part of a hedge, straddle,
constructive sale or conversion transaction, or other risk reduction
arrangement;
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·
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stockholders
who acquired their Xcorporeal common stock through stock option
or stock
purchase programs or otherwise as compensation;
and
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·
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stockholders
whose functional currency is not the U.S.
dollar.
|
In
addition, this discussion does not consider the tax treatment of Xcorporeal
and
CTHE stockholders that hold their Xcorporeal shares through a partnership
or other pass-through entity and it does not address the tax consequences
of the
merger under foreign, state or local tax laws or U.S. federal estate tax
laws.
The
summary is limited to taxpayers who (i) hold their shares of Xcorporeal common
stock as “capital assets” (generally, held for investment) and (ii) are U.S.
holders for federal income tax purposes. You are a U.S. holder for U.S. federal
income tax purposes if you are:
(1)
an
individual citizen or resident of the United States;
(2)
a
corporation created or organized in the United States or under the laws of
the
United States or of any state (including the District of Columbia);
(3)
an
estate whose income is subject to U.S. federal income tax regardless of its
source, or
(4)
a
trust if (x) a United States court can exercise primary supervision over
the
trust’s administration and one or more United States persons are authorized to
control all substantial decisions of the trust or (y) certain circumstances
apply and the trust has validly elected to be treated as a United States
person.
This
discussion assumes that the merger constitutes a tax-free reorganization
within
the meaning of Section 368(a) of the Code. However, neither CTHE nor Xcorporeal
has requested nor will either request a ruling from the Internal Revenue
Service
or an opinion of counsel with regard to any of the tax consequences of the
merger. The Internal Revenue Service may assert a contrary position, and
it is
possible that the Internal Revenue Service may successfully assert a contrary
position in litigation or other proceedings.
34
Xcorporeal
and CTHE shareholders are urged to consult their own tax advisors as to the
U.S.
federal income tax consequences of the merger based on their own circumstances,
as well as the effects of state, local, non-U.S. tax laws and U.S. tax laws
other than income tax laws.
Exchange
of Xcorporeal Stock
Based
on
the assumption that the merger will constitute a tax-free reorganization
within
the meaning of Section 368(a) of the Internal Revenue Code, and subject to
the
limitations and qualifications set forth in this discussion, the following
U.S.
federal income tax consequences will result from the merger:
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·
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an
Xcorporeal stockholder will not recognize gain or loss on the exchange
of
Xcorporeal common stock for CTHE common stock pursuant to the
merger;
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·
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the
aggregate tax basis of the shares of CTHE stock received by an
Xcorporeal
stockholder in the merger will be equal to the aggregate tax basis
of the
shares of Xcorporeal common stock surrendered in exchange
therefor;
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·
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the
holding period of the CTHE common stock received by an Xcorporeal
stockholder in the merger will include the holding period of the
Xcorporeal common stock surrendered therefor;
and
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·
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Xcorporeal
will recognize no gain or loss as a result of the
merger.
|
We
cannot
assure you that the conclusions contained in this discussion will not be
challenged by the Internal Revenue Service or sustained by a court if
challenged. If the Internal Revenue Service were to assert successfully that
the
merger is not a tax-free reorganization within the meaning of Section 368(a)
of
the Code, then each Xcorporeal stockholder would be required to recognize
gain
or loss equal to the difference between: (i) the sum of the fair market value
of
the CTHE common stock received in the exchange, and (ii) the stockholder’s tax
basis in the Xcorporeal stock surrendered therefor. In such event, an Xcorporeal
stockholder’s tax basis in the CTHE common stock received would be equal to its
fair market value at the effective time of the merger, and the stockholder’s
holding period for the CTHE common stock would begin on the day after the
merger. The gain or loss recognized would be long-term capital gain or loss
if
the Xcorporeal stockholder’s holding period for the Xcorporeal common stock was
more than one year.
Cash
Instead of Fractional Shares
Because
there will be no fractional shares transferred in the exchange of Xcorporeal
common stock for CTHE common stock, there will be no cash paid in lieu of
fractional shares.
Backup
Withholding of U.S. Federal Income Tax
A
noncorporate holder of Xcorporeal shares may be subject to backup withholding
at
the then applicable rate with respect to the amount of cash, if any, received
instead of fractional share interests, unless the stockholder: (i) provides
a
correct taxpayer identification number (which, for an individual stockholder,
generally is the stockholder’s social security number) and certifies that he,
she or it is not subject to backup withholding on the substitute W-9 that
will
be included as part of the transmittal letter, or (ii) otherwise is exempt
from
backup withholding. Backup withholding will not apply to an Xcorporeal
stockholder who completes and signs the substitute Form W-9 that is included
as
part of the transmittal letter, or who otherwise proves to CTHE and its exchange
agent that it is exempt from backup withholding. An Xcorporeal stockholder
who
does not provide a correct taxpayer identification number may be subject
to
penalties imposed by the Internal Revenue Service. Backup withholding is
not an
additional tax and may be claimed as a credit against an Xcorporeal
stockholder’s federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
Reporting
and Record Keeping
An
Xcorporeal stockholder is required to retain records of the transaction,
and to
attach to the stockholder’s federal income tax return for the year of the merger
a statement setting forth all relevant facts with respect to the non-recognition
of gain or loss in the exchange. At a minimum, the statement must include:
(i)
the stockholder’s tax basis in the Xcorporeal common stock surrendered, and (ii)
the fair market value, as of the time of the effective date of the merger,
of
the CTHE common stock received in the exchange therefor.
35
The
preceding discussion does not purport to be a complete analysis of all potential
tax consequences of the merger that may be relevant to a
particular Xcorporeal stockholder. Holders of Xcorporeal common stock
are urged to consult their own tax advisors regarding the specific tax
consequences to them of the merger, including the applicability and effect
of
foreign, state, local and other tax laws.
Federal
Income Tax Consequences of the Reverse Stock Split and Merger to CTHE
Stockholders
No
gain
or loss will be recognized by a CTHE stockholder upon his or her exchange
of CTHE common stock pursuant to the reverse stock split (except in
the case of the portion of whole shares attributable to the rounding up of
fractional shares, as discussed herein). A CTHE stockholder's tax basis in
the
shares received as a result of the reverse split will be equal, in the
aggregate, to his or her basis in the CTHE common stock exchanged, increased
by
the income or gain attributable to the rounding up of fractional shares,
as
described herein. New CTHE common stock attributable to the rounding up of
fractional shares to the nearest whole number of shares will be treated for
tax
purposes as if the fractional shares constitute a disproportionate dividend
distribution. Such CTHE stockholders generally will recognize ordinary income
to
the extent of earnings and profits of CTHE allocated to the portion of each
whole share attributable to the rounding up process. If CTHE has no earnings
and
profits, the amount deemed distributed will be treated as a return of basis,
and
the remainder of the amount deemed distributed, if any, will be treated as
gain
from the sale of property. The CTHE stockholder's holding period for the
CTHE
common stock will include the period during which he or she held the pre-split
shares surrendered in the reverse split. The portion of the CTHE common stock
received by a CTHE stockholder that are attributable to rounding up for
fractional shares will have a holding period commencing on the effective
date of
the reverse split. The reverse split would constitute a reorganization within
the meaning of Section 368(1)(E) of the Internal Revenue Code of 1986, as
amended, and CTHE will not recognize any gain or loss as a result of the
reverse split.
We
expect
that there will be no material federal income tax consequences of the merger
on
CTHE stockholders.
This
discussion regarding the tax consequence of the reverse stock split and merger
are not binding upon the Internal Revenue Service or the courts, and there
can
be no assurance that the Internal Revenue Service or the courts will accept
the
positions expressed above. The state and local tax consequences of the reverse
stock split and merger may vary significantly as to each stockholder, depending
upon the state in which he or she resides.
The
preceding discussion does not purport to be a complete analysis of all
potential
tax consequences of the reverse stock split and merger that may be relevant
to a particular CTHE stockholder. Holders of CTHE common stock are
urged to consult their own tax advisors regarding the specific tax consequences
to them of the reverse stock split and merger, including the applicability
and
effect of foreign, state, local and other tax laws.
Accounting
Treatment
It
is
anticipated that the merger will be treated as a recapitalization of Xcorporeal
under generally accepted accounting principles. CTHE will consolidate the
operating results of Xcorporeal with those of its own, beginning as of the
date
the parties complete the merger.
Interests
of Xcorporeal Directors and Officers in the Merger
Under
the
merger agreement, all of the officers and directors of CTHE will resign upon
the
effectiveness of the merger, and all of the Xcorporeal directors, Terren
S.
Peizer, Marc G. Cummins, Daniel S. Goldberger, Victor Gura, M.D., Herve de
Kergrohen, M.D., Kelly J. McCrann, and Jay A. Wolf, are to be appointed to
the
board of directors of CTHE. Terren S. Peizer, Jay A. Wolf and Marc G. Cummins,
each a director of Xcorporeal, hold significant equity positions in Xcorporeal,
all of which will be exchanged for equity positions in CTHE. In addition,
all of
the officers of Xcorporeal will be appointed as officers of CTHE upon closing
of
the merger.
In
addition, Steven B. Solomon owns 50,000 shares of Xcorporeal common stock
purchased in a private placement during the fourth quarter of 2006.
36
Dissenters’
Appraisal Rights
Delaware
law entitles the holders of record of shares of Xcorporeal stock who follow
the
procedures specified in Section 262 of the Delaware General Corporation Law
to
have their shares appraised by the Delaware Court of Chancery and to receive
the
“fair value” of those shares, as of the effective time of the merger, as
determined by the court in place of the consideration that the holder would
otherwise receive in the merger. In order to exercise appraisal rights, a
stockholder must demand and perfect the rights in accordance with Section
262 of
the Delaware General Corporation Law. The following is a summary of Section
262
and is qualified in its entirety by reference to Section 262, a copy of which
is
attached hereto as Annex B. Xcorporeal stockholders should carefully review
Section 262 of the Delaware General Corporation Law as well as information
discussed below to evaluate and, if they wish, perfect their rights to
appraisal.
Under
the
law of Delaware, where Xcorporeal is incorporated, holders of Xcorporeal
common
stock who have not consented to the merger and comply with the applicable
requirements of Delaware law will have the right to receive an appraisal
of the
value of their shares in connection with the merger and to be paid such value
in
cash.
Under
Sections 228(e) and 262(d)(2) of the DGCL, Xcorporeal is required to mail
to
each holder of Xcorporeal common stock who has not consented in writing to
the
adoption and approval of the merger agreement and the merger and the
transactions contemplated thereby a notice of corporate action taken without
a
meeting and notice of availability of appraisal rights. The notice of corporate
action taken without a meeting, notice of availability of appraisal rights
and a
copy of Section 262 of the DGCL must be delivered to the applicable Xcorporeal
stockholders by either Xcorporeal following receipt of the requisite approval
of
the adoption and approval of the merger agreement, the merger and the
transactions contemplated thereby, or by Xcorporeal within 10 days following
the
effective date of the merger. Such notice, if given on or after the effective
date of the Merger, must also notify the stockholders of the effective date
of
the Merger. Any stockholder entitled to appraisal rights may, on or before
20
days after the date of mailing of the notice of corporate action taken without
a
meeting and notice of availability of appraisal rights, demand in writing
from
Xcorporeal an appraisal of his, her or its shares of Xcorporeal common stock.
Such demand will be sufficient if it reasonably informs Xcorporeal of the
identity of the stockholder and that the stockholder intends to demand an
appraisal of the stockholder’s shares. Failure to make such a demand on or
before the expiration of such 20-day period will foreclose a stockholder’s
rights to appraisal. If the notice of corporate action taken without a meeting
did not notify the stockholders of the effective date of the Merger, either
(i)
Xcorporeal must send a second notice before the effective date of the Merger
notifying each stockholder entitled to appraisal rights of the effective
date of
the Merger or (ii) Xcorporeal will send such second notice to each stockholder
entitled to appraisal rights on or within ten days after the effective date
of
the Merger, provided, however, that if such second notice is sent more than
twenty days following the sending of the first notice, such second notice
need
only be sent to those stockholders entitled to appraisal rights and who have
demanded appraisal rights of their shares in accordance with Section
262(d).
All
written demands for appraisal should be addressed to: Winson Tang, Xcorporeal,
Inc., 11150 Santa Monica Boulevard, Suite 340, Los Angeles, CA 90025. Only
the
holder of record of shares of Xcorporeal common stock is entitled to seek
appraisal of the fair value of the shares registered in the holder’s name. The
demand for appraisal must be executed by or for the holder of record, fully
and
correctly, as such holder’s name appears on the holder’s stock certificates. If
the stock is owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, the demand should be made in that capacity, and if
the
stock is owned of record by more than one person, as in a joint tenancy or
tenancy in common, the demand should be made by or for all owners of record.
An
authorized agent, including one or more joint owners, may execute the demand
for
appraisal for a holder of record; however, such agent must identify the record
owner or owners and expressly disclose in such demand that the agent is acting
as agent for the record owner or owners.
A
record
holder, such as a broker who holds shares of Xcorporeal common stock as nominee
for beneficial owners, some of whom desire to demand appraisal, must exercise
appraisal rights on behalf of such beneficial owners with respect to the
stock
held for such beneficial owners. In such case, the written demand for appraisal
should set forth the number of shares covered by the demand. Unless a demand
for
appraisal specifies a number of shares, such demand will be presumed to cover
all shares held in the name of such record owner.
37
If
the
merger is completed, Xcorporeal, will, within 10 days after the effective
time
of the merger, give written notice of the effective time to each holder of
Xcorporeal common stock who has satisfied the requirements of Section 262
of the
Delaware General Corporation Law. A person who elects to exercise appraisal
rights under Section 262 is called a “dissenting stockholder.” Within 120 days
after the effective time, Xcorporeal or any dissenting stockholder may file
a
petition in the court demanding a determination of the fair value of the
shares
of Xcorporeal common stock of all dissenting stockholders. Any dissenting
stockholder desiring the filing of such petition is advised to file such
petition on a timely basis, unless the dissenting stockholder receives notice
that Xcorporeal or another dissenting stockholder has filed such a
petition.
If
a
petition for appraisal is timely filed, the court will determine which
stockholders are entitled to appraisal rights and thereafter will determine
the
fair value of the shares of Xcorporeal common stock held by dissenting
stockholders, exclusive of any element of value arising from the accomplishment
or expectation of the merger, but together with a fair rate of interest,
if any,
to be paid on the amount determined to be fair value. In determining such
fair
value, the court will take into account all relevant factors. The court may
determine such fair value to be more than, less than or equal to the
consideration that such dissenting stockholder would otherwise be entitled
to
receive pursuant to the merger agreement. If a petition for appraisal is
not
timely filed, then the right to an appraisal terminates.
The
costs
of the appraisal proceeding will be determined by the court and taxed against
the parties as the court determines to be equitable under the circumstances.
Upon the application of any dissenting stockholder, the court may determine
the
amount of interest, if any, to be paid upon the value of the stock of dissenting
stockholders entitled thereto. Upon application of a dissenting stockholder,
the
court may order all or a portion of the expenses incurred by any dissenting
stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorneys’ fees and the fees and expenses of experts, to
be charged pro rata against the value of all shares entitled to
appraisal.
After
the
effective time of the merger, no dissenting stockholder will have any rights
of
an Xcorporeal stockholder with respect to such holder’s shares for any purpose,
except to receive payment to which Xcorporeal stockholders of record as of
a
date prior to the effective time are entitled, if any. If a dissenting
stockholder delivers to Xcorporeal a written withdrawal of the demand for
an
appraisal within 60 days after the effective time of the merger or thereafter
with the written approval of Xcorporeal, or if no petition for appraisal
is
filed within 120 days after the effective time, then the right of such
dissenting stockholder to an appraisal will cease and such dissenting
stockholder will be entitled to receive only the shares of common stock of
CTHE
as provided in the merger agreement.
The
foregoing is only a summary of Section 262 of the Delaware General Corporation
Law and is qualified in its entirety by reference to the full text of Section
262, which is included in Annex B.
Charter
Amendments
Upon
the
effectiveness of the merger, Xcorporeal will amend its certificate of
incorporation to change its name to Xcorporeal Operations, Inc.
Immediately
prior to the effectiveness of the merger, CTHE will amend its certificate
of
incorporation to effect a stock split whereby every 8.27 shares of CTHE common
stock will be automatically converted to one share of CTHE common
stock.
Upon
the
effectiveness of the merger, CTHE will amend and restate its certificate
of
incorporation to read substantially the same as the certificate of incorporation
of Xcorporeal immediately prior to the merger. The amendment to CTHE’s
certificate of incorporation shall also include changing CTHE’s name to
“Xcorporeal, Inc.” Upon the effectiveness of the merger, the bylaws of CTHE will
also be amended and restated to read substantially the same as the bylaws
of
Xcorporeal immediately prior to the merger. The Amended and Restated Certificate
of Incorporation is attached to this Information Statement as Annex
D.
Stock
Options and Warrants
Upon
the
effectiveness of the merger, options and warrants to purchase common stock
of
Xcorporeal shall automatically be converted into options and warrants to
purchase common stock of CTHE, on the same terms and conditions to which
they
were subject immediately prior to the merger under the 2007 Incentive
Compensation Plan. All outstanding warrants and options of CTHE will be
cancelled upon effectiveness of the merger.
38
Officers
and Directors
The
officers and directors of CTHE shall resign as of the effectiveness of the
merger, and the officers and directors of Xcorporeal shall become the officers
and directors of CTHE. Specifically, Terren S. Peizer, Marc G. Cummings,
Daniel
S. Goldberger, Victor Gura, M.D., Herve de Kergrohen, M.D., Kelly J. McCrann,
and Jay Wolf will become the directors of CTHE upon the effectiveness of
the
merger.
Deregistration
of Xcorporeal Common Stock
If
the
merger is completed, Xcorporeal will undertake to have its common stock
deregistered under the Securities Exchange Act of 1934, as amended.
Federal
Securities Laws Consequences
The
shares of CTHE common stock to be issued to Xcorporeal stockholders in the
merger will not be registered under the Securities Act of 1933, as amended,
or
the Securities Act. These shares (which do not include any shares that may
be
issued upon exercise of the Xcorporeal warrants or options to be assumed
by CTHE
following the effective time of the merger) will be restricted just as the
shares of Xcorporeal were restricted immediately prior to the merger.
Stockholders may not sell their CTHE common stock acquired in the merger,
except
pursuant to:
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an
effective registration statement under the Securities Act covering
the
resale of those shares;
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·
|
an
exemption under Rule 145 under the Securities Act (or Rule 144
under the
Securities Act, if these persons are or become affiliates of Xcorporeal);
or
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·
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any
other applicable exemption under the Securities
Act.
|
THE
MERGER AGREEMENT
This
section is a summary of the material terms and provisions of the merger
agreement, a copy of which is incorporated by reference and attached as Annex
A
to this information statement. The following description is not intended
to be a
complete description of all the terms of the merger agreement. You should
refer
to the full text of the merger agreement for details of the merger and the
terms
and conditions of the merger agreement. Xcorporeal and CTHE encourage you
to
carefully read the complete merger agreement for the precise legal terms
of the
merger agreement and other information that may be important to you.
The
Merger
The
merger agreement provides that upon the closing, XC Acquisition Corporation,
will be merged with and into Xcorporeal, with Xcorporeal as the surviving
corporation. As a result of the merger, Xcorporeal will become a wholly-owned
subsidiary of CTHE. The merger will become effective on the date of filing
of a
certificate of merger with the Secretary of State of the State of Delaware,
which the parties have agreed to file as soon as practicable after the closing.
This is referred to as the “effective time” of the merger. Following the merger,
the certificate of incorporation and bylaws of the Xcorporeal will become
the
certificate of incorporation and bylaws of the merger subsidiary and CTHE,
and
the directors and officers of the Xcorporeal will become the directors and
officers of the merger subsidiary and CTHE. CTHE will also change its name
to
“Xcorporeal, Inc.,” and Xcorporeal will change its name to “Xcorporeal
Operations, Inc.”
The
Exchange Ratio and Treatment of Securities
Immediately
prior to the effective time of the merger, CTHE shall effect a reverse stock
split, whereby every 8.27 shares of its common stock shall be automatically
converted into one share of CTHE common stock.
At
the
effective time of the merger:
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each
share of Xcorporeal common stock issued and outstanding immediately
prior
to the effective time, other than dissenting shares, shares of
Xcorporeal
common stock held in the treasury of Xcorporeal or that are owned
by
Xcorporeal, or any of their respective wholly-owned subsidiaries
(other
than those held in a fiduciary capacity for the benefit of third
parties),
will cease to be outstanding and will be converted into one share
of CTHE
common stock;
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39
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·
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each
outstanding option to purchase Xcorporeal common stock issued and
outstanding immediately prior to the effective time will be converted
into
an option to purchase CTHE common stock on the same terms and conditions
as were applicable under the option to purchase Xcorporeal common
stock
before the merger; and
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·
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each
outstanding warrant to purchase Xcorporeal common stock issued
and
outstanding immediately prior to the effective time will be converted
into
a warrant to purchase CTHE common stock on the same terms and conditions
as were applicable under the warrant to purchase Xcorporeal common
stock
before the merger.
|
No
Exchange of Certificates
Neither
Xcorporeal nor CTHE will be exchanging new stock certificates in connection
with
the merger.
HOLDERS
OF XCORPOREAL COMMON STOCK SHOULD NOT SEND IN THEIR CERTIFICATES.
Because
CTHE will be issuing one share of its common stock for each share of Xcorporeal
common stock held of record, CTHE will not have to issue any fractional shares
in the merger. Accordingly, there will be no need to pay cash in lieu of
fractional shares.
Following
the merger, ComputerShare will continue to act as the transfer agent for
the
combined company.
Transfer
of Shares
The
stock
transfer books of Xcorporeal will be closed immediately upon the effective
time
and no transfers of shares of Xcorporeal common stock will be made or recorded
on the stock transfer books after the effective time of the merger.
Representations
and Warranties of Xcorporeal and CTHE
The
merger agreement contains customary representations and warranties on behalf
of
Xcorporeal, the merger subsidiary and CTHE relating to, among other things:
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corporate
organization and qualification;
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capitalization;
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corporate
power and authority;
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absence
of conflicts and required filings and
consents;
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SEC
filings and reports;
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financial
statements;
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absence
of material adverse changes;
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litigation
and liabilities;
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compliance
with laws;
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brokers;
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taxes;
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securities
trading markets;
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with
respect to CTHE, that it meets the registrant requirements to be
eligible
to file a registration statement on Form
S-3;
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absence
of stockholder claims;
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banking
relationships;
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guarantees
and powers of attorney;
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40
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books
and records; and
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contracts.
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The
representations and warranties in the merger agreement are complicated and
not
easily summarized. You should carefully read the sections of the merger
agreement entitled “Company’s Representations and Warranties” and “CTHE’s
Representations and Warranties.”
Directors
and Officers
The
officers and directors of CTHE will resign as of the effectiveness of the
merger
agreement. The officers and directors of Xcorporeal will become the officers
and
directors of CTHE.
Fees
and Expenses
All
expenses incurred in connection with the merger agreement will be paid by
the
party incurring such expenses, provided, that Xcorporeal shall pay for up
to
$25,000 of the reasonable, necessary and customary out-of-pocket costs and
expenses (including legal fees) of CTHE incurred in connection with the merger
agreement and the transactions.
Conditions
to the Consummation of the Merger
The
obligation of CTHE to effect the merger is subject to the satisfaction at
or
prior to the effective time of the following conditions, any or all of which
may
be waived, in whole or in part, to the extent permitted by applicable law:
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Xcorporeal’s
representations and warranties contained in the merger agreement
will be
true and correct as of the closing date, except to the extent such
representations and warranties are qualified by materiality or
absence of
adverse changes, and CTHE shall have received a duly executed certificate
from an officer of Xcorporeal to that
effect.
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Xcorporeal
shall have performed and complied in all material respects with
the
covenants, agreements and obligations contained in the merger
agreement.
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No
governmental entity or court shall have enacted any judgment, order,
decree or injunction that prohibits the consummation of the merger
or the
consummation of the transactions contemplated
thereby.
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Xcorporeal
shall not have taken any action or entered into any transaction
outside
the ordinary course of business which results in a material adverse
effect
on it or its business.
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The
merger shall have been approved by the requisite number of Xcorporeal
stockholders.
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The
obligation of Xcorporeal to effect the merger is subject to the satisfaction
at
or prior to the effective time of the following conditions, any or all of
which
may be waived, in whole or in part, to the extent permitted by applicable
law:
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CTHE’s
representations and warranties contained in the merger agreement
will be
true and correct as of the closing date, except to the extent such
representations and warranties are qualified by materiality or
absence of
adverse changes, and Xcorporeal shall have received a duly executed
certificate from an officer of CTHE to that
effect.
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CTHE
shall have performed, and complied in all material respects with,
the
covenants, agreements and obligations contained in the merger
agreement.
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No
governmental entity or court shall have enacted any judgment, order,
decree or injunction that prohibits the consummation of the merger
or the
consummation of the transactions contemplated
thereby.
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CTHE
shall not have taken any action or entered into any transaction
outside
the ordinary course of business which results in a material adverse
effect
on it or its business.
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The
merger shall have been approved by the requisite number of CTHE
stockholders.
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41
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CTHE
shall have delivered to Xcorporeal the resignations, effective
as of the
closing, of each officer and director of acquisition subsidiary
and
CTHE.
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Covenants
The
parties are subject to customary pre-closing covenants, including covenants
to:
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prepare,
execute and deliver all documents, and take all actions necessary
to
consummate the merger;
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give
all necessary third-party notices;
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make
all necessary state and federal
filings;
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cooperate
with the other party as necessary in the furtherance of completing
the
merger;
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provide
reasonable access to the business, personnel and properties of
the
respective companies; and
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provide
notice to the other parties of any material adverse
developments.
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In
addition, as part of the merger agreement, certain CTHE stockholders who
currently hold restricted stock were granted “piggyback” registration rights
substantially similar to those granted to approximately fifty institutional
and
accredited investors who purchased shares of Xcorporeal’s common stock in
November 2006. As a result, these stockholders will have the right to add
their
shares to any registration statement filed by Xcorporeal under the Securities
Act. Piggyback registration rights may be exercised for no more than 29%
of the
total number of shares of Xcorporeal outstanding as of the filing date of
any
registration statement for which such rights are exercised.
Termination
The
merger agreement may be terminated at any time prior to completion of the
merger
by:
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Xcorporeal
and CTHE by mutual written consent.
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Xcorporeal:
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in
the event of an uncured breach of the merger agreement by
CTHE;
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if
Xcorporeal is not reasonably satisfied with the results of its
due
diligence regarding CTHE;
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if
Xcorporeal’s shares become quoted on the OTC Bulletin
Board;
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if
the closing of the merger has not occurred by the close of business
on
Friday, August 31, 2007; or
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if
the board of directors or special committee of Xcorporeal determines
in
good faith that the failure to terminate the merger agreement would
constitute a breach of the fiduciary duties of Xcorporeal’s
directors.
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CTHE:
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in
the event of an uncured breach of the merger agreement by
Xcorporeal;
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if
CTHE is not reasonably satisfied with the results of its due
diligence;
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if
the closing of the merger shall not have occurred on or prior to
August
31, 2007; or
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if
the board of directors or special committee of CTHE determines
in good
faith that failure to terminate the merger agreement would constitute
a
breach of the fiduciary duties of CTHE’s directors or members of the
special committee.
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Either
Xcorporeal or CTHE may terminate the merger agreement in the event
that a
governmental entity has issued a final non-appealable order restraining,
enjoining or otherwise prohibiting the transactions contemplated
in the
merger agreement.
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42
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In
addition, Xcorporeal may terminate the merger agreement and rescind
the
merger upon written notice to CTHE and the merger subsidiary within
10
days after the closing of the merger if the shares of CTHE common
stock do
not continue to be quoted on the OTC Bulletin Board immediately
following
the merger.
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If
the
agreement is terminated in accordance with the above provisions, the parties
will have no further obligation of any kind; provided, that, if the merger
agreement is terminated because Xcorporeal’s common stock becomes listed on the
OTC Bulletin Board, Xcorporeal shall pay to CTHE an amount equal to its
reasonable out-of-pocket costs and expenses related to the merger.
Related
Agreements
• As
a
condition to the merger agreement, CTHE has entered into an Indemnity Agreement
with Steven B. Solomon, pursuant to which Mr. Solomon represents and warrants
that to the best of his knowledge CTHE and merger subsidiary’s representations
and warranties contained in the merger agreement are true, complete and correct
in all material respects. In addition, Mr. Solomon indemnifies and holds
Xcorporeal harmless from any and all claims arising out of or relating to
the
manner in which CTHE reported certain distributions, previously made to
shareholders of CTHE in its tax filings, including without limitation any
claims brought by CTHE shareholders in connection with the
foregoing.
2007
INCENTIVE COMPENSATION PLAN
Under
the
merger agreement, all options and warrants to purchase common stock granted
under Xcorporeal’s 2006 Incentive Compensation Plan will be assumed by CTHE
under a newly adopted, substantially identical 2007 Incentive Compensation
Plan
of CTHE. Any outstanding options and warrants of CTHE outstanding prior to
the
merger will be cancelled. The 2007 Plan was approved by CTHE’s shareholders at
the same time and in the same manner that the merger agreement was approved.
All
future grants of stock options by Xcorporeal after consummation of the merger
will be under the 2007 Plan.
A
description of the 2007 Incentive Compensation Plan is set forth
below.
There
will be 3,900,000 shares of common stock authorized for issuance under the
plan.
Options to purchase 3,460,000 shares of common stock have already been granted
under Xcorporeal’s 2006 Plan and will be assumed under the 2007
Plan.
The
purpose of the plan is to attract and retain the services of key management,
employees, outside directors and consultants, and to align long-term
pay-for-performance incentive compensation with shareholders’ interests. An
equity compensation plan aligns employees’ interests with those of our
shareholders, because an increase in stock price after the date of award
results
in increased value, thus rewarding employees for improved stock price
performance. Stock option grants under the plan may be intended to qualify
as
incentive stock options under Section 422 of the Tax Code, may be non-qualified
stock options governed by Section 83 of the Tax Code, restricted stock units,
or
other forms of equity compensation. Subject to earlier termination by our
board
of directors, the plan will remain in effect until all awards have been
satisfied or terminated under the terms of the plan.
We
believe that a broad-based incentive compensation plan is a valuable employee
incentive and retention tool that benefits all of our shareholders, and that
the
plan is necessary in order to provide appropriate incentives for achievement
of
company performance objectives and to continue to attract and retain the
most
qualified employees, directors and consultants in light of our ongoing growth
and expansion. Without sufficient equity incentives available for grant,
we may
be forced to consider cash replacement alternatives to provide a
market-competitive total compensation package necessary to attract, retain
and
motivate the employee talent important to the future success of the company.
These cash replacement alternatives would then reduce the cash available
for
operations.
While
we
believe that employee equity ownership is a significant contributing factor
in
achieving superior corporate performance, we recognize that increasing the
number of available shares under our option plans may lead to an increase
in our
stock overhang and potential dilution. We believe that our 2007 Incentive
Compensation Plan will be integral to our ability to achieve superior
performance by attracting, retaining and motivating the employee talent
important to attaining long-term improved company performance and shareholder
returns.
Overview
The
terms
of the plan provide for grants of stock options, stock appreciation rights,
restricted stock, deferred stock, bonus stock, dividend equivalents, other
stock-related awards and performance awards that may be settled in cash,
stock
or other property.
43
Shares
Available for Awards
The
total
number of shares of our common stock that will be subject to awards under
the
plan is equal to 440,000 shares, plus the number of shares with respect to
which
awards previously granted under the plan terminate without being exercised,
and
the number of shares that are surrendered in payment of any awards or any
tax
withholding requirements. Awards that are granted to replace awards assumed
pursuant to the acquisition of a business are not subject to this
limit.
Limitations
on Awards
No
more
than 2,000,000 shares of stock may be granted to an individual during any
fiscal
year under the plan. The maximum amount that may be earned by any one
participant for any fiscal year is $10,000,000 and the maximum amount that
may
be earned by any one participant for a performance period is
$10,000,000.
Eligibility
Our
employees, officers, directors and consultants are eligible for awards under
the
plan. However, incentive stock options may be granted only to our
employees.
Plan
Administrator
Our
board
of directors administers the plan, and has delegated authority to make grants
under the plan to the compensation committee, whose members are “non-employee
directors” as defined by Rule 16b-3 of the Exchange Act, “outside directors” for
purposes of Section 162(m), and “independent” as defined by the rules and
regulations promulgated by the NASD and SEC, The board and committee, referred
to collectively as the administrator, determine the type, number, terms and
conditions of awards granted under the plan.
Stock
Options and Stock Appreciation Rights
The
administrator may grant stock options, both incentive stock options, or ISOs,
and non-qualified stock options, or NS0s. In addition, the administrator
may
grant stock appreciation rights, or SARs, which entitle the participant to
receive the appreciation in our common stock between the grant date and the
exercise date. These may include “limited” SARs exercisable for a period of time
after a change in control or other event. The exercise price per share and
the
grant price are determined by the administrator, but must not be less than
the
fair market value of a share of our common stock on the grant date. The terms
and conditions of options and SARs generally are fixed by the administrator,
except that no stock option or SAR may have a term exceeding ten years. Stock
options may be exercised by payment of the exercise price in cash, shares
that
have been held for at least six months, outstanding awards or other property
having a fair market value equal to the exercise price.
Restricted
and Deferred Stock
The
administrator may grant restricted stock, which is a grant of shares of our
common stock that may not be sold or disposed of, and may be forfeited if
the
recipient’s service ends before the restricted period. Restricted stockholders
generally have all of the rights of a shareholder.
The
administrator may grant deferred stock, which confers the right to receive
shares of our common stock at the end of a specified deferral period, that
may
be forfeited if the recipient’s service ends before the restricted period. Prior
to settlement, an award of deferred stock generally carries no rights associated
with share ownership.
Dividend
Equivalents
The
administrator may grant dividend equivalents conferring the right to receive
awards equal in value to dividends paid on a specific number of shares of
our
common stock. These may be granted alone or in connection with another award,
subject to terms and conditions specified by the administrator.
Bonus
Stock and Awards
The
administrator may grant shares of our common stock free of restrictions as
a
bonus or in lieu of other obligations, subject to such terms as the
administrator may specify.
44
Other
Stock-Based Awards
The
administrator may grant awards under the plan that are based on or related
to
shares of our common stock. These might include convertible or exchangeable
debt
securities, rights convertible into common stock, purchase rights, payment
contingent upon our performance or other factors. The administrator determines
the terms and conditions of such awards.
Performance
Awards
The
right
to exercise or receive a grant or settlement of an award may be subject to
performance goals and subjective individual goals specified by the
administrator. In addition, performance awards may be granted upon achievement
of pre¬established performance goals and subjective individual goals during a
fiscal year. Performance awards to our chief executive officer and four highest
compensated officers, or covered employees, should qualify as deductible
performance based compensation under Internal Revenue Code section 162(m).
The
administrator will determine the grant amount, terms and conditions for
performance awards.
One
or
more of the following business criteria will be used by our Compensation
Committee in establishing performance goals for performance awards and annual
incentive awards to covered employees: (1) total shareholder return; (2)
such
total shareholder return as compared to total return (on a comparable basis)
of
a publicly available index such as, but not limited to, the Russell 2000
Small
Cap Index and Russell Healthcare Index; (3) net income; (4) pretax earnings;
(5)
pretax operating earnings after interest expense and before bonuses, service
fees, and extraordinary or special items; (6) earnings per share; (7) operating
earnings; and (8) ratio of debt to shareholders’ equity.
After
the
end of each performance period, the administrator (which will be the
Compensation Committee for awards intended to qualify as performance based
for
purposes of section I62(m)) will determine the amount of any pools, the maximum
amount of potential performance awards payable to each participant, and the
amount of any other potential performance awards payable to participants
in the
plan.
Acceleration
of Vesting; Change in Control
The
administrator may accelerate vesting or other restrictions of any award,
including if we undergo a change in control as defined in the plan. In addition,
performance goals relating to any performance-based award may be deemed met
upon
a change in control. Stock options and limited stock appreciation rights
may be
cashed out based on a defined “change in control price.”
In
the
event of a “corporate transaction” (as defined in the plan), the acquiror may
assume or substitute for each outstanding stock option.
Amendment
and Termination
Our
board
of directors may amend, alter, suspend, discontinue or terminate the plan
or the
administrator’s authority to grant awards without further shareholder approval,
except shareholder approval must be obtained for any amendment or alteration
required by law, regulation or applicable exchange rules. Unless earlier
terminated by our board of directors, the plan will terminate ten years after
its adoption, or when no shares of our common stock remain available for
issuance under the plan and we have no further rights or obligations with
respect to outstanding awards under the plan. Amendments to any award that
have
a material adverse effect on a participant require their consent.
Federal
Income Tax Consequences
The
information set forth above is a summary only and does not purport to be
complete. In addition, the information is based upon current Federal income
tax
rules and therefore is subject to change when those rules change. Moreover,
because the tax consequences to any recipient may depend on his or her
particular situation, each recipient should consult their tax adviser as
to the
Federal, state, local and other tax consequences of the grant or exercise
of an
award or the disposition of stock acquired as a result of an award. The plan
is
not qualified under the provisions of section 401(a) of the Internal Revenue
Code and is not subject to any of the provisions of the Employee Retirement
Income Security Act of 1974 (ERISA).
Non
qualified Stock Options
Generally,
there is no taxation upon the grant of a nonqualified stock option. On exercise,
an optionee will recognize ordinary income equal to the excess, if any, of
the
fair market value on the date of exercise of the stock over the exercise
price.
If the optionee is our employee or an employee of an affiliate, that income
will
be subject to withholding tax. The optionee’s tax basis in those shares will be
equal to their fair market value on the date of exercise of the option, and
his
capital gain holding period for those shares will begin on that
date.
45
Subject
to the requirement of reasonableness, the provisions of Section 162(m) and
the
satisfaction of a tax reporting obligation, we will generally be entitled
to a
tax deduction equal to the taxable ordinary income realized by the
optionee.
Incentive
Stock Options
The
plan
provides for the grant of options that qualify as incentive stock options, or
ISOs, as defined in Internal Revenue Code section 422. An optionee generally
is
not subject to ordinary income tax upon the grant or exercise of an ISO.
If the
optionee holds a share received on exercise of an ISO for a required holding
period of at least two years from the date the option was granted and at
least
one year from the date the option was exercised, the difference between the
amount realized on disposition and the holder’s tax basis will be long-term
capital gain.
If
an
optionee disposes of a share acquired on exercise of an ISO before the end
of
the required holding period, the optionee generally will recognize ordinary
income equal to the excess of the fair market value of the share on the date
the
ISO was exercised over the exercise price. If the sales proceeds are less
than
the fair market value, the amount of ordinary income recognized will not
exceed
the gain realized on the sale. If the amount realized on a disqualifying
disposition exceeds the fair market value of the share, the excess will be
short-term or long-term capital gain, depending on whether the holding period
for the share exceeds one year.
For
purposes of the alternative minimum tax, or AMT, the amount by which the
fair
market value of a share of stock acquired on exercise of an ISO exceeds the
exercise price generally will be an adjustment included in the optionee’s AMT
income. If there is a disqualifying disposition of the share in the year
in
which the option is exercised, there will be no adjustment for AMT purposes
with
respect to that share. If there is a disqualifying disposition in a later
year,
no income is included in the optionee’s AMT income for that year. The tax basis
of a share acquired on exercise of an ISO is increased by the amount of the
adjustment taken into account with respect to that share for AMT
purposes.
We
are
not allowed an income tax deduction with respect to the grant or exercise
of an
ISO or the disposition of a share acquired on exercise of an ISO after the
required. holding period. If there is a disqualifying disposition of a share,
we
are allowed a deduction in an amount equal to the ordinary income includible
in
income by the optionee, provided that amount constitutes an ordinary and
necessary business expense for us and is reasonable in amount, and either
the
employee includes that amount in income or we timely satisfy our reporting
requirements.
Stock
Awards
Generally,
the recipient of a stock award will recognize ordinary compensation income
at
the time the stock is received, equal to the excess of the fair market value
over any amount paid for the stock. If the stock is not vested when received
(for example, if the employee is required to work for a period of time in
order
to have the right to sell the stock), the recipient generally will not recognize
income until the stock becomes vested, at which time the recipient will
recognize ordinary compensation income equal to the excess of the fair market
value of the stock over any amount paid for the stock. A recipient may file
an
election with the Internal Revenue Service within 30 days of receipt of the
stock, to recognize ordinary compensation income as of the date the recipient
receives the award, equal to the excess of the fair market value over any
amount
paid for the stock.
The
recipient’s basis for the determination of gain or loss upon the subsequent
disposition of shares acquired as stock awards will be the amount paid for
the
shares plus any ordinary income recognized when the stock is received or
becomes
vested.
Subject
to the requirement of reasonableness, the provisions of Section 162(m) and
the
satisfaction of a tax reporting obligation, we will generally be entitled
to a
tax deduction equal to the taxable ordinary income realized by the recipient
of
the stock award.
Stock
Appreciation Rights
The
administrator may grant stock appreciation rights, or SARs, separate or
stand-alone of any other awards, or in tandem with options.
46
With
respect to stand-alone SARs, if the recipient receives the appreciation inherent
in the SARs in cash, it will be taxable as ordinary compensation income when
received. If the recipient receives the appreciation in shares of stock,
the
recipient will recognize ordinary compensation income equal to the excess
of the
fair market value of the stock on the day it is received over any amounts
paid
for the stock.
With
respect to tandem stock appreciation rights, if the recipient elects to
surrender the underlying option in exchange for cash or shares of stock equal
to
the appreciation inherent in the underlying option, the tax consequences
to the
recipient will be the same as discussed above. If the recipient elects to
exercise the underlying option, the holder will be taxed at the time of exercise
as if he or she had exercised a nonqualified stock option.
Subject
to the requirement of reasonableness, the provisions of Section 162(m) and
the
satisfaction of our tax reporting obligation, we will generally be entitled
to a
tax deduction equal to the taxable ordinary income realized by the recipient
of
the SAR.
Dividend
Equivalents
Generally,
the recipient of a dividend equivalent award will recognize ordinary
compensation income equal to the fair market value of the award when it is
received. Subject to the requirement of reasonableness, the provisions of
Section 162(m) and the satisfaction of our tax reporting obligation, we will
generally be entitled to a tax deduction equal to the taxable ordinal), income
realized by the recipient of the dividend equivalent.
Section
162 Limitations
Internal
Revenue Code Section 162(m) denies a deduction to any publicly held corporation
for compensation paid to our chief executive officer and four highest
compensated officers, to the extent that compensation exceeds $1 million.
It is
possible that compensation attributable to stock awards, when combined with
all
other types of compensation received by a covered employee may cause this
limitation to be exceeded in any particular year.
Certain
kinds of compensation, including qualified performance based compensation,
are
disregarded for purposes of the Section 162(m) deduction limitation.
Compensation attributable to some stock awards will qualify as performance-based
compensation if granted by a committee of the board of directors comprised
solely of “outside directors” only upon the achievement of an objective
performance goal established in writing by the committee while the outcome
is
substantially uncertain, and the material terms of the plan under which the
award is granted is approved by stockholders.
A
stock
option or stock appreciation right may be considered performance based
compensation if the plan contains a per-employee limitation on the number
of
shares for which stock options and stock appreciation rights may be granted
during a specified period, the material terms of the plan are approved by
the
stockholders, and the exercise price of the option or right is no less than
the
fair market value of the stock on the date of grant.
INFORMATION
ABOUT XCORPOREAL
For
purposes of this section entitled “Information About Xcorporeal” only, all
references to “we,” “us,” or “our” refers to Xcorporeal prior to the
effectiveness of the merger.
Business
of Xcorporeal
Overview
We
are a
medical device company actively researching and developing an extra-corporeal
platform to perform functions of various human organs. Our prototype systems
apply modern electronics and engineering principals to reduce the size, cost
and
power requirements of conventional extracorporeal therapies including
ultrafiltration therapy for fluid overloading resulting from congestive heart
failure and acute and chronic renal replacement therapies (kidney dialysis).
Our
platform may also improve the quality of therapy delivered ultimately leading
to
better patient outcomes and reduced healthcare costs. The products we plan
to
bring to market include:
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Portable
kidney dialysis for use in the clinic, hospital, or at
home
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Wearable
Artificial Kidney (WAK) for chronic treatment of End Stage Renal
Disease
(ESRD)
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Portable
ultrafiltration for management of fluid overload in hospital or
clinic
settings
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47
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Wearable
Ultrafiltration Device (WUD) for chronic treatment of fluid
overload.
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We
are a
development stage company, have been unprofitable since our inception, and
will
incur substantial additional operating losses for at least the next twelve
months as we continue to implement commercial operations and allocate
significant and increasing resources to research, development, clinical trials,
and other activities. Accordingly, our activities to date are not as broad
in
depth or scope as the activities we will undertake in the future, and our
historical operations and financial information are not indicative of our future
operating results, financial condition, or ability to operate profitably as
a
commercial enterprise.
Since
we
began implementing our current business model on August 31, 2006, we have
accomplished the following milestones:
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Raised
over $29 million in equity financing in the fourth quarter of 2006
selling
shares of Xcorporeal common stock at $7.00 per
share.
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Recruited
experienced independent board
members
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Recruited
top industry management team and scientific
staff
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|
Advanced
the clinical studies for our
technology
|
|
·
|
Paid
in excess of $1 million in licensed product development
expenses.
|
For
the
coming year we plan to test and develop the technology for our extra-corporeal
platform and other medical devices. In its simplest configuration, our product
platform can be used as an ultrafiltration
We
will
also plan our Validation and Verification strategy including bench testing,
clinical testing, and regulatory strategy in the U.S. and abroad.
Some
of
our products may qualify for the 510(k) regulatory process in the U.S. based
on
the existence of predicate devices. Other products, for example our Wearable
Artificial Kidney and Wearable Ultrafiltration Device are likely to require
a
full PMA treatment which will be longer and more expensive.
Product
Applications
Our
Wearable Artificial Kidney (WAK) is a breakthrough technology for the chronic
treatment of End Stage Renal Disease (ESRD). We have successfully demonstrated
a
prototype system that weighs less than 6 kg., is battery operated, and can
be
worn by an ambulatory patient. Our miniature, wearable device will enable
continuous (24 x 7) renal replacement therapy on a chronic basis at home.
Continuous therapy has previously been shown to reduce mortality, reduce
morbidity, and improve quality of life in ESRD patients. Our WAK is the first
practical device to provide continuous, chronic therapy, because:
|
·
|
Reduced
size, weight, and power consumption allows us to deploy a wearable
package
so that the treatment does not interfere with normal activities of
daily
life.
|
|
·
|
Novel
vascular access makes the WAK safe and effective for home
use.
|
Packaged
differently, the same attributes (portability, size, weight, fluid and power
reduction) make the WAK a very attractive alternative to conventional Continuous
Renal Replacement Therapy (CRRT) machines for hospitalized patients. Our
miniature system can also be configured to treat fluid overload in Congestive
Heart Failure (CHF) patients.
Research
and Development
R&D
Team
We
acquired the exclusive license to our platform technology on September 1, 2006,
and have commenced planning and implementing our research and development
efforts. We have recruited an experienced scientific team to execute our
research and development plan. The goals of our research and development efforts
will include:
|
·
|
Improving
the chemicals used in the dialysis process. The current chemicals
have
been used for decades. We believe new chemicals that last longer
and can
be used in smaller quantities would further reduce the cost and weight
of
our product.
|
48
|
·
|
Developing
software to allow physicians to customize the function of the device
to
meet the specific dialysis needs of each
patient.
|
|
·
|
Adapting
the extra-corporeal platform technology underlying our Wearable Artificial
Kidney to other medical uses. We believe our technology is a platform
for
a number of other devices that can be used to treat other diseases
and
will offer substantive value propositions for patients and healthcare
providers.
|
|
·
|
Expanding
our recruiting and retaining an experienced team of scientists and
engineers.
|
Clinical
Studies
The
feasibility of the WAK prototype was demonstrated in a porcine model during
2004
and 2005. The feasibility of the WAK prototype for treatment of fluid overload
in humans was demonstrated by the treatment of six volunteers in Vicenza, Italy
in July and August 2006. We demonstrated the feasibility of the WAK prototype
for dialysis treatment in humans by the treatment of eight volunteers in London
in March 2007. We are planning additional clinical trials over the next few
years, culminating in a pivotal study to support a regulatory
submission.
We
incurred approximately $1.5 million and $2.7 million in research and development
expenses for the three and six months ended June 30, 2007, respectively. This
compares to $1.3 million incurred during the year ended December 31, 2006.
We expect our research and development expenses to increase as a result of
additional headcount in the areas of product development and quality assurance
and regulatory affairs, a higher level of third-party consulting activity and
related expenses.
Third-party
Arrangements
In
July
2007, we entered into an agreement with Aubrey Group, Inc. an FDA-registered
third-party contract developer and manufacturer of medical devices for the
design and development of a Portable Artificial Kidney (PAK). The PAK will
be
designed for use as a Continuous Renal Replacement Therapy (CRRT) in either
a
hospital (with medical supervision) or home setting. The development is expected
to be completed by the end of 2008 and projected labor and material costs are
estimated at approximately $5.1 million over the term. The agreement can be
terminated at any time with 30 business days notice.
We
also
contract with other third parties to assist in our research and development
efforts and to supplement our internal resources while we continue to grow
our
organization.
Government
Regulation
US
Regulation
We
are
subject to extensive government regulation relating to the development and
marketing of our products. Due to the relatively early nature of our development
efforts, we have not yet confirmed with the FDA its view of the regulatory
status of any of our products or which center of the FDA might have primary
responsibility for review of the regulatory submissions we intend to make.
Depending on the claims made and the FDA’s ruling regarding the regulatory
status of each of our products, they may be designated as a device, a biologic
or as a combination product. However, we anticipate that regardless of
regulatory designation, we will need to conduct clinical studies involving
human
subjects before being able to market our products in the US.
To
support a regulatory submission, the FDA commonly requires clinical studies
to
show safety and effectiveness. While we cannot currently state the nature of
the
studies the FDA may require due to our early stage of product development,
it is
likely any product we attempt to develop will require time-consuming clinical
studies in order to secure approval.
Outside
the US, our ability to market potential products is contingent upon receiving
market application authorizations from the appropriate regulatory authorities.
These foreign regulatory approval processes may involve differing requirements
than those of the FDA, but also generally include many, if not all, of the
risks
associated with the FDA approval process described above, depending on the
country involved.
In
the
US, medical devices are classified into three different classes, Class I, II
and
III, on the basis of controls deemed reasonably necessary to ensure the safety
and effectiveness of the device. Class I devices are subject to general
controls, including labeling, pre-market notification and adherence to the
FDA’s
Good Manufacturing Practices (GMP), Class II devices are subject to general
and
special controls, including performance standards, post-market surveillance,
patient registries and FDA guidelines, and Class III devices are those which
must receive pre-market approval by the FDA to ensure their safety and
effectiveness, that is, life-sustaining, life-supporting and implantable
devices, or new devices, which have been found not to be substantially
equivalent to legally marketed devices. Because of their breakthrough nature,
some of our devices may be considered Class III.
49
Before
new medical devices such as our products can be marketed, marketing clearance
must be obtained through a pre-market notification under Section 510(k) of
the
Federal Food, Drug and Cosmetic (FDC) Act. Noncompliance with applicable
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal to
authorize the marketing of new products or to allow us to enter into supply
contracts and criminal prosecution. A 510(k) clearance will typically be granted
by the FDA, if it can be established that the device is substantially equivalent
to a “predicate device,” which is a legally marketed Class I or II device or a
pre-amendment Class III device (that is, one that has been marketed since a
date
prior to May 28, 1976), for which the FDA has not called for pre-market approval
(PMA). The FDA has been requiring an increasingly rigorous demonstration of
substantial equivalence, which may include a requirement to submit human
clinical trial data. It generally takes 4 to 12 months from the date of a 510(k)
submission to obtain clearance, but it may take longer.
If
clearance or approval is obtained, any device manufactured or distributed by
us
will be subject to pervasive and continuing regulation by the FDA. We will
be
subject to routine inspection by the FDA and will have to comply with the host
of regulatory requirements that usually apply to medical devices marketed in
the
U.S. including labeling regulations, GMP requirements, Medical Device Reporting
(MDR) regulation which requires a manufacturer to report to the FDA certain
types of adverse events involving its products, and the FDA’s prohibitions
against promoting products for unapproved or “off-label” uses.
European
Community
International
Organization for Standards (ISO) standards were developed by the European
Community (EC) as a tool for companies interested in increasing productivity,
decreasing cost and increasing quality. The EC uses ISO standards to provide
a
universal framework for quality assurance and to ensure the good quality of
products and services across borders. The ISO standards (it is now ISO13485)
have facilitated trade throughout the EC, and businesses and governments
throughout the world are recognizing the benefit of the globally accepted
uniform standards. Any manufacturer we utilize for purposes of producing our
products (including us, if we manufacture any of our own products) will be
required to obtain ISO certification to facilitate the highest quality products
and the easiest market entry in cross-border marketing. This will enable us
to
market our products in all of the member countries of the EC. We also will
be
required to comply with additional individual national requirements that are
outside the scope of those required by the European Economic Area.
Any
medical device that is legally marketed in the US may be exported anywhere
in
the world without prior FDA notification or approval. The export provisions
of
the FDC Act apply only to unapproved devices. While FDA does not place any
restrictions on the export of these devices, certain countries may require
written certification that a firm or its devices are in compliance with US
law.
In such instances FDA will accommodate US firms by providing a Certificate
for
Foreign Government. In cases where there are devices which the manufacturer
wishes to export during the interim period while their 510(k) submission is
under review, exporting may be allowed without prior FDA clearance under certain
limited conditions.
Competition
We
compete directly and indirectly with other biotechnology and healthcare
equipment businesses, including those in the dialysis industry. The major
competitors for the Xcorporeal platform technology are those companies
manufacturing and selling dialysis equipment and supplies. Xcorporeal will
compete with these companies in the critical care markets as well as the
wearable application markets. In many cases, these competitors are larger and
more firmly established than we are. In addition, our competitors have greater
marketing and development budgets and greater capital resources than our
company. The Wearable Artificial Kidney will also compete with dialysis clinics
in treating ESRD patients. We anticipate that some of our primary competitors
will be companies such as Baxter, Fresenius, Gambro, NxStage, and
Nephros.
License
Agreement
On
September 1, 2006, we entered into the License Agreement pursuant to which
we
obtained exclusive rights to our technology relating to the treatment of kidney
failure and congestive heart failure, with no geographic restrictions, that
will
last for a period of ninety-nine years or until the expiration of its
proprietary rights in each item of intellectual property, if earlier. As
consideration for granting the license, we agreed to reimburse designated costs
and expenses of our licensor, and pay a minimum royalty of 7% of net sales,
with
an annual minimum royalty of $250,000.
50
Patents
and Trademarks
We
have
exclusive license rights to two issued US patents, No. 20050101901 “Wearable
continuous renal replacement therapy device,” and No. 20040254514 “Wearable
ultrafiltration device” from the US Patent & Trademark Office. We also have
exclusive rights to a pending application specifically for the pump, the most
critical part of all four devices, “Dual-Ventricle Pump Cartridge,” and another
proposed patent for “Method For Installing and Servicing a Wearable Continuous
Renal Replacement Therapy Device” which is aimed to prevent entry into the
wearable device market. We are actively developing our intellectual property,
and plan to continually expand our patent portfolio.
In
addition, we are actively developing additional intellectual property that
in
part supersedes the rights licensed under the License Agreement. We are filing
patent applications to protect and improve the inventions that are commercially
important for the development of our business and we plan to continually expand
our patent portfolio.
We
have
pending applications to register our trademarks “Xcorporeal,” “Xcorporeal WUD”
and “Xcorporeal WAK.”
Employees
We
have
ten full-time employees, comprised of our Chief Operating Officer, Chief
Financial Officer, Chief Medical and Scientific Officer, Vice President of
Quality Assurance and Regulatory Affairs, and seven other personnel in research
and development and administration. During 2007, we plan to add additional
employees, particularly in the areas of product development, regulatory affairs,
and quality assurance. Our headcount is expected to exceed 15 employees by
the
end of the year. We also utilize, whenever appropriate, contract and part-time
professionals in order to conserve cash and resources. We believe that our
employee relations are good.
Business
Development
Formation
We
were
incorporated in the State of Nevada as Pacific Spirit Inc. on May 4, 2001 to
engage in the acquisition, exploration and development of natural resource
properties. On August 31, 2006, we changed our name to Xcorporeal,
Inc.
Contribution
and License Agreement
On
August
11, 2006, Consolidated National, LLC (CNL), whose sole managing member is our
current chairman, entered into an Irrevocable Option Agreement with National
Quality Care, Inc. (NQCI) following extensive negotiations that commenced in
late 2005. There was no pre-existing relationship between NQCI and CNL or their
principals.
On
August
31, 2006, we entered into a Contribution Agreement with CNL, giving us the
right
to enter into a Merger Agreement and a License Agreement with NQCI. We issued
9,600,000 shares of common stock, a 96% voting interest in our company, to
CNL
in exchange for all of our right, title, and interest to the name “Xcorporeal”
and related trademark applications and domain names, and the right to enter
into
a License Agreement with NQCI. Prior to the August 31, 2006 transaction, we
were
a shell corporation.
On
September 1, 2006, we entered into a License Agreement with NQCI, pursuant
to
which we obtained the exclusive rights to the technology relating to our
congestive heart failure treatment, kidney failure treatment, and other medical
devices. As a result, we have become a developmental stage company focused
on
researching, developing, and commercializing technology and products related
to
the treatment of kidney failure and congestive heart failure.
On
December 1, 2006, we initiated arbitration proceedings against NQCI for its
breach of the License Agreement, which remains pending. On December 29, 2006,
NQCI served us with a written notice purporting to terminate the License
Agreement for unspecified alleged breaches. On January 2, 2006, we advised
NQCI
that we did not consent to termination of the License Agreement, that we have
not breached the License Agreement, and that NQCI has no right to unilaterally
terminate the License Agreement in any event. Accordingly, the License Agreement
cannot be terminated.
51
Delaware
Reincorporation
We
were
incorporated in the State of Nevada as Pacific Spirit Inc. on May 4, 2001 to
engage in the acquisition, exploration and development of natural resource
properties. On August 31, 2006, we changed our name to Xcorporeal, Inc., and
thereafter acquired the rights to our congestive heart failure treatment
products, Wearable Artificial Kidney, and other medical devices. As a result,
we
have become a developmental stage company focused on researching, developing,
and commercializing technology and products related to the treatment of kidney
failure and congestive heart failure. On October 13, 2006, Xcorporeal, Inc.,
a
Nevada corporation (Xcorporeal Nevada), consummated a merger with and into
its
newly-formed, wholly-owned subsidiary, Xcorporeal Merger Corporation, a Delaware
corporation (Xcorporeal Delaware) for the purpose of
changing Xcorporeal’s domicile
from
Nevada to Delaware.
Terminated
Merger Agreement
On
September 1, 2006, we entered into a Merger Agreement with NQCI which
contemplated that we would acquire NQCI as a wholly owned subsidiary pursuant
to
a triangular merger, or we would issue to NQCI shares of our common stock in
consideration of the assignment of the technology relating to our Wearable
Artificial Kidney and other medical devices.
The
merger was not consummated, and the Merger Agreement expired by its own terms
on
December 31, 2006. In addition, on December 29, 2006, NQCI served written notice
that it was terminating the Merger Agreement, and on January 2, 2006, we
consented to the termination. Accordingly, the Merger Agreement is now
terminated. We will not be proceeding with any merger with NQCI. The termination
of the Merger Agreement had no effect on the License Agreement, the Contribution
Agreement, or the shares we issued to CNL.
Reports
to Security Holders
We
will
send an annual report including audited financial statements to all of our
stockholders of record. Anyone may obtain a copy of our annual report without
charge by writing us at: Investor Relations, Xcorporeal, Inc, 11150 Santa Monica
Blvd., Suite 340, Los Angeles, California 90025.
We
file
reports with the Securities and Exchange Commission (SEC) in accordance with
the
Securities Exchange Act of 1934, as amended, including annual reports on Form
10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, proxy
statements and other information.
The
public may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC
at
1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet
site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC, which
can
be found at http://www.sec.gov.
Management’s
Discussion and Analysis
Results
of Operations for the years ended December 31, 2006 and
2005
We
have not generated any revenues since inception. We incurred a net loss of
$4,380,212 for the year ended December 31, 2006, compared to net loss of
$35,753 for the year ended December 31, 2005. The increase in net loss was
primarily due to professional fees and salaries, and payment of reimbursed
expenses under our License Agreement during the fourth quarter of 2006. At
December 31, 2006, we had working capital of $25,397,733, compared to
negative working capital of $(52,557) at the beginning of the year. At
December 31, 2006, our total assets were $27,535,543, which consisted
primarily of cash from the sale of our common stock. We had no assets at the
beginning of the year.
Off-Balance
Sheet Arrangements
As
of December 31, 2006, we had no off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, results of operations or cash flows.
52
Legal
Proceedings
From
time to time, we may be involved in litigation relating to claims arising out
of
our operations in the normal course of business. Except as described in
Item 3. Legal Proceedings, as of the date of this report we are not
currently involved in any legal proceeding that we believe would have a material
adverse effect on our business, financial condition or operating
results.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations
is
based upon our financial statements, which have been prepared in accordance
with
accounting principles generally accepted in the United States. Generally
accepted accounting principles require management to make estimates, judgments
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates on experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form
the
basis for making judgments about the carrying values of assets and liabilities
that may not be readily apparent from other sources. Our actual results may
differ from those estimates.
We
consider our critical accounting policies to be those that involve significant
uncertainties, require judgments or estimates that are more difficult for
management to determine or that may produce materially different results when
using different assumptions. We consider the following accounting policies
to be
critical:
Identifiable
Intangibles
Certain
costs associated with obtaining and licensing patents and trademarks are
capitalized as incurred and are amortized on a straight-line basis over the
shorter of their estimated useful lives or their legal lives of 17 to
20 years. Amortization of such costs begins once the patent or trademark
has been issued. We evaluate the recoverability of our patent costs and
trademarks quarterly based on estimated undiscounted future cash
flows.
Stock-Based
Compensation
Effective
January 1, 2006, we adopted Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards No.
(SFAS) No. 123-R , Share-Based
Payment.
SFAS
123-R requires employee stock options and rights to purchase shares under stock
participation plans to be accounted for under the fair value method and requires
the use of an option pricing model for estimating fair value. Accordingly,
share-based compensation is measured at grant date, based on the fair value
of
the award. At December 31, 2006, warrants to purchase our common stock were
issued to consultants, and options to purchase our common stock were granted
to
employees and directors.
The
fair value of all share purchase options and warrants granted to employees
are
expensed over their vesting period with a corresponding increase to Additional
Paid in Capital. Upon exercise of share purchase options and warrants, the
consideration paid by the option holder is recorded as an increase to share
capital.
We
use the Black-Scholes Option Valuation Model to calculate the fair value of
share purchase options and warrants at the date of grant. Pricing models require
the input of highly subjective assumptions, including the expected price
volatility. Changes in these assumptions can materially affect the fair value
estimate and, therefore, the existing models do not necessarily provide a
reliable measure of the fair value of our share purchase options and
warrants.
Recent
Accounting Pronouncements
In
July 2006, the FASB released FASB Interpretation No. (FIN) 48,
Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109.
FIN 48
clarifies the accounting and reporting for uncertainties in income tax law.
This
Interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. This statement is effective
for fiscal years beginning after December 15, 2006. We are currently in the
process of evaluating the expected effect of FIN 48 on our results of operations
and financial position.
53
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements.
SFAS
157 establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. We are required to adopt the provision of SFAS
157, as applicable, beginning in fiscal year 2008. We are currently in the
process of evaluating the expected effect of SFAS 157 on our results of
operations and financial position.
In
February 2007, the FASB issued SFAS 159, “The
Fair Value Option for Financial Assets and Financial Liabilities — Including an
Amendment of FASB Statement No. 115, Accounting for Certain Investments in
Debt and Equity Securities”.
SFAS
159 permits an entity to choose to measure many financial instruments and
certain items at fair value. The objective of this standard is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reporting earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 permits all entities to choose to measure eligible items
at
fair value at specified election dates. Entities will report unrealized gains
and losses on items for which the fair value option has been elected in earnings
at each subsequent reporting date. The fair value option: (a) may be
applied instrument by instrument, with a few exceptions, such as investments
accounted for by the equity method; (b) is irrevocable (unless a new
election date occurs); and (c) is applied only to entire instruments and
not to portions of instruments. SFAS No. 159 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2007, which for us would be our fiscal year beginning August 1, 2008. Early
adoption is permitted as of the beginning of the previous fiscal year provided
that the entity makes that choice in the first 120 days of that
fiscal
year and also elects to apply to provision of FASB Statement No. 157,
“Fair
Value Measurements.” We
are
currently evaluating the impact that the adoption of SFAS 159 will have on
our
financial statements.
In
December 2006, the FASB issued FSP 00-19-2, Accounting
for Registration Payment Arrangements,
which
addresses accounting for registration payment arrangements. FSP 00-19-2
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument
or
other agreement, should be separately recognized and measured in accordance
with
FASB Statement No. 5, “Accounting
for Contingencies.”
FSP
00-19-2 further clarifies that a financial instrument subject to a registration
payment arrangement should be accounted for in accordance with other applicable
generally accepted accounting principles without regard to the contingent
obligation to transfer consideration pursuant to the registration payment.
FSP
00-19-2 is effective immediately for registration payment arrangements and
the
financial instruments subject to those arrangements that are entered into or
modified subsequent to December 21, 2006. For registration payment
arrangement and related financial instruments entered into prior to
December 21, 2006, FSP 00-19-2 is effective for financial statements issued
for fiscal years beginning after December 15, 2006 and interim periods
within those financial years. Companies are required to report transition
through a cumulative- effect adjustment to the opening balance of retained
earnings as of the first interim period for the fiscal year in which FSP 00-19-2
is adopted. The adoption of FSP 00-19-2 during the fourth quarter of 2006 did
not have any affect on our financial position and results of operations.
In
September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. (SAB) 108 (Topic 1N), “Considering
the Effects of Prior Year Misstatement when Quantifying Misstatements in Current
Year Financial Statements.” SAB
No. 108 requires SEC registrants (i) to quantify misstatements using a
combined approach that considers both the balance-sheet and income-statement
approaches, (ii) to evaluate whether either approach results in quantifying
an error that is material in light of relevant quantitative and qualitative
factors, and (iii) to adjust their financial statements if the new combined
approach results in a conclusion that an error is material. SAB No. 108 is
effective for fiscal years ending after November 15, 2006. The adoption of
SAB No. 108 did not have any effect on our financial position and results
of operations.
Results
of Operations for the three and six months ended June 30,
2007
We
have
not generated any revenues since inception. We incurred net loss of $2.8 million
and $7.7 million for the three and six months ended June 30, 2007, compared
to a
net loss of $5,587 and $11,790 for the three and six months ended June 30,
2006,
respectively. The net loss for the three and six months ended June 30, 2007
was
primarily due to (i) research, development and other expenses related to
advancing our kidney and congestive heart failure treatment technologies, (ii)
stock compensation expense related to options and warrants granted to directors,
officer, employees and consultants, and (iii) legal and audit fees. The net
loss
for the three and six months ended June 30, 2006 was a result of general and
administrative expenses incurred for the non-operating public shell entity.
At
June 30, 2007, we had positive working capital of $22.0 million compared to
positive working capital of $25.4 million for beginning of the
year.
54
Liquidity
and Capital Resources
We
expect
to incur operating losses and negative cash flows for the foreseeable future.
During the fourth quarter of 2006 we raised approximately $27.3 million (net
of
placement fees of $2.1 million) through a private placement. Our ability to
execute on our current business plan is dependent upon our ability to develop
and market our products, and, ultimately, to generate revenue.
At
June
30, 2007 we had cash, cash equivalents and marketable securities of
approximately $23,106,516, We are currently expending cash at a rate of
approximately $0.9 million per month. At present rates, we will not have to
raise additional funds in the next twelve months,
Off-Balance
Sheet Arrangements
As
of
June 30, 2007, we had no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
results of operations or cash flows.
Legal
Proceedings
We
are
involved in arbitration against National Quality Care, Inc. concerning our
License Agreement, as described in our most recent annual report. From time
to
time, we may be involved in litigation relating to claims arising out of our
operations in the normal course of business. As of the date of this report
we
are not currently involved in any legal proceeding that we believe would have
a
material adverse effect on our business, financial condition or operating
results.
Controls
and Procedures.
We
conducted an evaluation, under the supervision and with the participation of
our
President and Chief Operating Officer (principal executive officer) and Chief
Financial Officer (principal financial officer), of our disclosure controls
and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June
30,
2007. Based upon this evaluation, our President and Chief Operating Officer
and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective to ensure that required material information is included in
this
quarterly report for the period ended June 30, 2007.
There
were no changes in our internal control over financial reporting during the
quarter ended June 30, 2007 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Directors,
Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the Exchange Act
Directors
and Executive Officers
Our
current officers and directors are listed below. Each of our directors will
serve for one year or until their respective successors are elected and
qualified. Our officers serve at the pleasure of the board of directors.
|
Name
|
Age
|
Position
|
Director
Since
|
|||
|
Terren
S. Peizer
|
47
|
Executive
Chairman of the Board
|
2006
|
|||
|
Winson
W. Tang
|
50
|
Chief
Operating Officer
|
||||
|
Victor
Gura, M.D.
|
65
|
Chief
Medical and Scientific Officer, and Director
|
2006
|
|||
|
Robert
Weinstein
|
47
|
Chief
Financial Officer
|
||||
|
Robert
S. Stefanovich
|
42
|
Interim
Chief Financial Officer
|
||||
|
Marc
G. Cummins
|
46
|
Director
|
2006
|
|||
|
Daniel
S. Goldberger
|
48
|
Director
|
2006
|
|||
|
Hervé
de Kergrohen, M.D.
|
48
|
Director
|
2006
|
|||
|
Nicholas
S. Lewin
|
29
|
Director
|
2007
|
|||
|
Kelly
J. McCrann
|
51
|
Director
|
2007
|
|||
|
Jay
A. Wolf
|
33
|
Director
|
2006
|
55
Terren
S. Peizer
has
served as Chairman of our Board of Directors since August 2006 and as Executive
Chairman since August 2007. From April 1999 to October 2003, Mr. Peizer served
as Chief Executive Officer of Clearant, Inc., which he founded to develop and
commercialize a universal pathogen inactivation technology. He served as
Chairman of its board of directors from April 1999 to October 2004 and a
Director until February 2005. From February 1997 to February 1999, Mr. Peizer
served as President and Vice Chairman of Hollis-Eden Pharmaceuticals, Inc.
In
addition, from June 1999 through May 2003 he was a Director, and from June
1999
through December 2000 he was Chairman of the Board, of supercomputer designer
and builder Cray Inc., and remains its largest beneficial stockholder. Mr.
Peizer has been the largest beneficial stockholder and held various senior
executive positions with several technology and biotech companies. In these
capacities he has assisted the companies with assembling management teams,
boards of directors and scientific advisory boards, formulating business and
financial strategies, investor and public relations, and capital formation.
Mr.
Peizer has been a Director, Chairman of the Board and Chief Executive Officer
of
Hythiam, Inc., a healthcare services management company focused on delivering
solutions for those suffering from alcoholism and other substance dependencies,
since September 2003. Mr. Peizer has a background in venture capital, investing,
mergers and acquisitions, corporate finance, and previously held senior
executive positions with the investment banking firms Goldman Sachs, First
Boston and Drexel Burnham Lambert. He received his B.S.E. in Finance from The
Wharton School of Finance and Commerce.
Winson
W. Tang
was
appointed our Chief Operating Officer on August 10, 2007. Dr. Tang is an
executive with over 20 years of experience in academic medicine, biomedical
research and the biopharmaceutical industry. Dr. Tang has held drug development
positions of increasing responsibility at Amgen, Vertex, Tularik, and Isis
Pharmaceuticals. During his biopharmaceutical career, he has successfully filed
for Investigation New Drug Applications and Clinical Trial Applications, two
Biologic License Applications, in-licenses a preclinical drug candidate that
is
now marketed (Sensipar®) and commercialized two drugs (Infergen® and Aranesp®).
Both Infergen® and Aranesp® are important therapies for patients with end stage
renal disease. He was most recently the Director of Research for the Pacific
Capital Group, a private equity group where he managed the biotech investment
portfolio. Dr. Tang is a Diplomate of American Board of Internal Medicine and
a
fellow of the American College of Physicians. He has published more than 30
original research articles and book chapters. Dr. Tang is a graduate of The
Albert Einstein College of Medicine and completed a Residency in Internal
Medicine at the University of Southern California, a Clinical Fellowship in
Nephrology at the University of California San Diego and a Research Fellowship
in Immunology at The Scripps Research Institute.
Victor
Gura, M.D.
has
served as our Chief Medical and Scientific Officer in December 2006. Dr. Gura
has been a member of our board of directors since October 13, 2006. He served
as
Chief Scientific Officer of National Quality Care, Inc. from 2005 to November
2006. He was formerly its Chairman of the Board, President and Chief Executive
Officer. Dr. Gura is board certified in internal medicine/nephrology. He has
been a director and principal shareholder of Medipace Medical Group, Inc. in
Los
Angeles, California, since 1980. Dr. Gura has been an attending physician at
Cedars-Sinai Medical Center since 1984 and the medical director of Los Angeles
Community Dialysis since 1985. He also serves as a Clinical Assistant Professor
at UCLA School of Medicine. He was a fellow at the nephrology departments at
Tel
Aviv University Medical School and USC Medical Center. Dr. Gura received his
M.D. from School of Medicine, Buenos Aires University.
Robert
Weinstein
has
served as our Chief Financial Officer since August 2007. Prior to joining us,
Mr. Weinstein served as Vice President, Director of Quality Control &
Compliance of Citi Private Equity Services (formerly BISYS Private Equity
Services) New York, NY, a worldwide private equity fund administrator and
accounting service provider. In 2005, Mr. Weinstein was the Founder, Finance
& Accounting Consultant for EB Associates, LLC, Irvington, NY, an
entrepreneurial service organization. From 2003 to 2004, Mr. Weinstein served
as
the Chief Financial Officer for Able Laboratories, Inc., Cranbury, NJ. In 2002,
he served as Acting Chief Financial Officer of Eutotech, Ltd., Fairfax, VA,
a
distressed, publicly traded early-stage technology transfer and development
company. Mr. Weinstein received his M.B.A., Finance & International Business
from the University of Chicago, Graduate School of Business, and a B.S. in
Accounting from the State University of New York at Albany. Mr. Weinstein is
a
Certified Public Accountant (inactive) in the State of New York.
56
Robert
S. Stefanovich
has
served as our interim Chief Financial Officer since January 2007. From September
2002 through July 2006, Mr. Stefanovich served as Executive Vice President
and
Chief Financial Officer of Artemis International Solutions Corporation, a
publicly traded software company. Prior to that, he held several senior
positions, including Chief Financial Officer and Secretary of Aethlon Medical
Inc., a publicly traded medical device company and Vice President of
Administration at SAIC, a Fortune 500 company. Mr. Stefanovich also was a member
of the Software Advisory Group and an Audit Manager with Price Waterhouse LLP’s
(now PricewaterhouseCoopers) hi-tech practice in San Jose, CA and Frankfurt,
Germany. He received his Masters of Finance/Accounting and Engineering from
University of Darmstadt, Germany.
Marc
G. Cummins
has
served as a Director since November 2006. He is a Managing Partner of Prime
Capital, LLC, a private investment firm focused on consumer companies. Prior
to
founding Prime Capital, Mr. Cummins was managing partner of Catterton Partners,
a private equity investor in consumer products and service companies with over
$1 billion of assets under management. He has served as a director of Hythiam,
Inc. since 2004. Prior to joining Catterton in 1998, Mr. Cummins spent fourteen
years at Donaldson, Lufkin & Jenrette Securities Corporation where he was
Managing Director of the Consumer Products and Specialty Distribution Group,
and
was also involved in leveraged buyouts, private equity and high yield
financings. Mr. Cummins received a B.A. in Economics, magna cum laude, from
Middlebury College, where he was honored as a Middlebury College Scholar and
is
a member of Phi Beta Kappa. He also received an M.B.A. in Finance with honors
from The Wharton School at University of Pennsylvania.
Daniel
S. Goldberger
served
as our President and Chief Operating Officer from October 2006 to August 2007.
Mr.
Goldberger has recently been named as the new Chief Executive Officer of Sound
Surgical Technologies, a privately held manufacturer of equipment for ultrasound
assisted liposuction.
Mr.
Goldberger served as Chief Executive Officer of Glucon Inc., a privately
held glucose monitoring business from 2004 to 2007. From 2001 to 2004, Mr.
Goldberger served as President and as a Director of the Medical Group of OSI
Systems, Inc. (NASDAQ: OSIS), which included the Spacelabs, Dolphin, Osteometer
product lines with combined revenue approaching $250 million. Mr. Goldberger
was
also the co-founder of Optiscan Biomedical Corporation, where he served as
Director from 1994 to 2001 and also served as its Vice President from 1994
to
1998 and then as its President from 1998 to 2001. Mr. Goldberger has over 25
years of management experience with large and small medical device companies,
including Nellcor and Square One Technology. He received his B.S.M.E. from
Massachusetts Institute of Technology and his M.S.M.E. from Stanford University.
Hervé
de Kergrohen, M.D.
has
served as a Director since November 2006. Since August 2002, he has been a
Partner with CDC Enterprises Innovation in Paris, a European venture capital
firm, and since January 2001 has been Chairman of BioData, an international
healthcare conference in Geneva. He sits on several boards with U.S. and
European private health care companies, including Kuros BioSurgery and Bioring
SA in Switzerland since January 2003, Praxim SA, Biomethode, and Hythiam, Inc.
since September 2003, and Clearant, Inc. since December 2001. From February
1999
to December 2001 he was Head Analyst for Darier Hentsch & Co., then the
third largest Geneva private bank and manager of its CHF 700 million health
care
fund. From February 1997 to February 1998 he was the Head Strategist for the
international health care sector with UBS AGin Zurich. Dr. de Kergrohen started
his involvement with financial institutions in 1995 with Bellevue Asset
Management in Zug, Switzerland, the fund manager of BB Biotech and BB Medtech,
where he covered the healthcare services sector. He was previously Marketing
Director with large U.S. pharmaceutical companies such as Sandoz USA and G.D.
Searle, specialized in managed care. Dr. de Kergrohen received his M.D. from
Université Louis Pasteur, Strasbourg, and holds an M.B.A. from Insead,
Fontainebleau.
Nicholas
S. Lewin
has
served as a Director since February 2007. He has been a private investor since
2000 operating in both the public and private markets. Mr. Lewin has invested
across many industries, and throughout the capital structure. He invests in
special situations and in companies with innovative technologies and strong
intellectual property. Generally, these are activist situations working with
management. Representative industries include biotechnology, healthcare, telecom
and media. Mr. Lewin sits on the boards of directors of VirnetX and Duramedic.
He holds a BA from Johns Hopkins University.
Kelly
J. McCrann
was
appointed as a Director on August 10, 2007. Mr. McCrann is a senior healthcare
executive with extensive experience in board governance, strategic leadership,
profit and loss management and strategic transactions. He was most recently
Senior Vice President of DaVita, Inc., where he was responsible for all home
based renal replacement therapies for the United States’ second largest kidney
dialysis provider. Prior to that, Mr. McCrann was the Chief Executive Officer
and President of PacificCare Dental and Vision, Inc. Mr. McCrann has held
positions of increasing responsibility at Professional Dental Associates, Inc.,
Coram Healthcare Corporation, HMSS, Inc. and American Medical International.
He
is a graduate of the Harvard Business School and began his career as a
consultant for KPMG and McKinsey & Company.
57
Jay
A. Wolf
has
served as a Director since November 2006. He has over a decade of investment
and
operations experience in a broad range of industries. His investment experience
includes: senior and subordinated debt, private equity (including leveraged
transactions), mergers & acquisitions and public equity investments. Since
2003, Mr. Wolf has served as a Managing Director of Trinad Capital. From 1999
to
2003, he served as the Executive Vice President of Corporate Development for
Wolf Group Integrated Communications Ltd. where he was responsible for the
company’s acquisition program. From 1996 to 1999, Mr. Wolf worked at Canadian
Corporate Funding, Ltd., a Toronto-based merchant bank in the senior debt
department and subsequently for Trillium Growth, the firm’s venture capital
Fund. He sits on the boards of Shells Seafood Restaurants, Prolink Holdings
Corporation, Optio Software, Inc. and Starvox Communications, Inc. Mr. Wolf
received a Bachelor of Arts from Dalhousie University.
Family
Relationships
There
are
no family relationships among any of our directors or executive
officers.
Legal
Proceedings
There
have been no events under any bankruptcy act, no criminal proceedings and no
judgments, injunctions, orders or decrees material to the evaluation of the
ability and integrity of any director, executive officer, promoter or control
person of our company during the past five years.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
and directors and persons who beneficially own more than 10% of our common
stock
to file with the SEC initial reports of ownership and reports of changes in
ownership of our common stock. These insiders are required by SEC regulations
to
furnish us with copies of all Section 16(a) forms they file, including Forms
3,
4 and 5. Based solely upon our review of copies of such forms we have received,
and other information available to us, to the best of our knowledge all required
forms have been filed on a timely basis, except for the filing of a Form 4
by
Mr. Peizer on November 22, 2006, a Form 3 by Dr. Gura and Mr. Goldberger on
November 27, 2006, and a Form 3 by Mr. Cummins on December 18, 2006.
Code
of Ethics
We
have a
Code of Ethics that applies to all of our officers, directors and employees,
including our principal executive officer, principal financial officer,
principal accounting officer and controller, and others performing similar
functions.
Corporate
Governance
Nominating
Committee
Effective
February 27, 2007, our board of directors authorized the formation of a
Nominating Committee to consist entirely of independent directors. The
committee’s primary function is to review and recommend potential director
candidates.
The
Nominating Committee will consider director candidates that are suggested by
members of the board, as well as by management and stockholders. The committee
may also retain a third-party executive search firm to identify candidates.
The
process for identifying and evaluating nominees for director involves reviewing
potentially eligible candidates, conducting background and reference checks,
interviewing the candidate and others (as schedules permit), meeting to consider
and approve the candidate and, as appropriate, preparing and presenting to
the
full board an analysis with regard to particular recommended candidates. The
Nominating Committee considers a potential candidate’s experience, areas of
expertise, and other factors relative to the overall composition of the board.
The committee endeavors to identify director nominees who have the highest
personal and professional integrity, have demonstrated exceptional ability
and
judgment, and, together with other director nominees and members, are expected
to serve the long term interest of our stockholders and contribute to our
overall corporate goals.
58
Audit
Committee
Effective
February 27, 2007, our board of directors established a separately-designated
standing Audit Committee in accordance with section 3(a)(58)(A) of the Exchange
Act. Messrs. Wolf (Chairman), Cummins and Lewin are members of the Audit
Committee. All members of the Audit Committee are independent directors as
defined by NASD Marketplace Rule 4200(a)(15) and Rule 10A-3(b)(i) under the
Exchange Act.
Audit
Committee Financial Expert
The
board
of directors has determined that Mr. Wolf meets the applicable requirements
for
audit committee financial experts as defined by Item 401(e)(2) of Regulation
S-B.
Executive
Compensation
The
following table sets forth the total compensation received by the named
executive officer during the fiscal years ended December 31, 2006 and 2005:
SUMMARY
COMPENSATION TABLE
|
Non-Equity
|
Nonqualified
|
|||||||||||||||||||||||||||
|
Name
and
|
Stock
|
Option
|
Incentive
Plan
|
Deferred
|
All
Other
|
|||||||||||||||||||||||
|
principal
|
Salary
|
Bonus
|
Awards
|
Awards
|
Compensation
|
Compensation
|
Compensation
|
Total
|
||||||||||||||||||||
|
position
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
Earnings
($)
|
($)
|
($)
|
|||||||||||||||||||
|
Daniel
S. Goldberger
|
2006
|
$
|
35,170
|
—
|
—
|
$
|
70,497
|
—
|
—
|
$
|
105,667
|
|||||||||||||||||
|
President
& COO(1)
|
||||||||||||||||||||||||||||
|
Victor
Gura
Chief
Scientific
|
2006
|
$
|
35,000
|
—
|
—
|
$
|
88,121
|
—
|
—
|
$
|
123,121
|
|||||||||||||||||
|
Officer
|
||||||||||||||||||||||||||||
|
Peter
Sotola
|
2006
|
$
|
3,000
|
—
|
—
|
—
|
—
|
—
|
—
|
$
|
3,000
|
|||||||||||||||||
|
Former
President(2)
|
||||||||||||||||||||||||||||
| (1) |
Mr.
Goldberger resigned as President and Chief Operating Officer on August
10,
2007. He remains a Director of Xcorporeal.
|
|
|
(2)
|
Mr. Sotola
resigned as president on October 13,
2006
|
Compensation
Agreements
Executive
Chairman
On
August
10, 2007, Terren S. Peizer entered into an Executive Chairman Agreement with
Xcorporeal for an initial term of three years with automatic one-year renewals.
His base compensation will be $450,000 per annum as of July 1, 2007, with
a
signing bonus of $225,000. Mr. Peizer will be entitled to receive an annual
bonus at the discretion of the Board based on performance goals and targeted
at
100% of his base compensation. He is also eligible to particate in any equity
incentive plans adopted by us. In the event Mr. Peizer’s position is terminated
without good cause or he resigns for good reason, we will obligated to pay
Mr.
Peizer in a lump sum an amount equal to three years’ base compensation bonus plus 100% of the
targeted bonus.
59
Chief
Financial Officer
On
August
10, 2007, Robert Weinstein entered into an Employment Agreement with us with
an
initial term of three years, with automatic one year renewals. His base salary
will be $275,000 per annum. Mr. Weinstein will be entitled to receive an
annual
bonus at the discretion of the Board based on performance goals and targeted
at
50% of his annual salary. In addition to any perquisites and other fringe
benefits provided to other executives, Mr. Weinstein will receive options
to
purchase 300,000 shares of common stock under our 2006 Incentive Compensation
Plan at an exercise price of $7.00 per share and vesting at a rate of 20%
per
year. In the event Mr. Weinstein is terminated by us without good cause,
as such
terms are defined in the Employment Agreement, we will be obligated to pay
Mr.
Weinstein in a lump sum an amount equal to 12 months salary and
benefits.
Chief
Medical and Scientific Officer
On
November 30, 2006, we entered into an employment agreement with Victor Gura,
M.D. On December 1, 2006, Victor Gura, M.D. became our Chief Medical and
Scientific Officer. Dr. Gura has been a member of our board of directors since
October 13, 2006. Dr. Gura entered into a four-year Employment Agreement with
us. His initial annual base salary is $420,000. Dr. Gura is eligible to receive
discretionary bonuses on an annual basis targeted at 50% of his annual salary.
Additionally, Dr. Gura was granted 500,000 stock options at an exercise price
of
$5 per share under our 2006 Incentive Compensation Plan. These options will
vest
20% on each of the first, second, third, fourth and fifth anniversaries and
expire November 14, 2011. He will also be granted options to purchase an
additional 500,000 shares of our common stock upon FDA approval of our first
product. Dr. Gura is eligible to receive reimbursement of reasonable and
customary relocation expenses as well as health, medical, dental insurance
coverage and insurance for accidental death and disability. In the event he
is
terminated by us without good cause or if he resigns for good reason, as such
terms as are defined in the agreement, we will be obligated to pay Dr. Gura
in a
lump sum an amount equal to two year’s salary plus 200% of the targeted bonus.
In addition all stock options granted to Dr. Gura will vest
immediately.
Dr.
Gura’s agreement provides for medical insurance and disability benefits,
severance pay if his employment is terminated by us without cause or due to
change in our control before the expiration of the agreement, and allows for
bonus compensation and stock option grants as determined by our Board of
Directors. The agreement also contains a restrictive covenant preventing
competition with us and the use of confidential business information, except
in
connection with the performance of his duties for CTHE, for a period of two
years following the termination of his employment with us.
Incentive
Compensation Plan
On
October 13, 2006, after the effectiveness of the Delaware reincorporation,
we
adopted the Xcorporeal, Inc. 2006 Incentive Compensation Plan and the related
form of option agreement. The plan authorizes the grant of stock options,
restricted stock, restricted stock units and stock appreciation rights. At
December 31, 2006, there were 2,000,000 shares of common stock reserved for
issuance pursuant to the plan, subject to adjustment in accordance with the
provisions of the plan. Effective February 27, the total number of shares of
common stock reserved for issuance pursuant to the plan was increased to
3,900,000. The 2006 Plan will be replaced and superseded
by the 2007 Incentive Compensation Plan upon the effectiveness of the
merger.
Outstanding
Equity Awards At Fiscal Year-End
The
following table sets forth information concerning unexercised options; stock
that has not vested; and equity incentive plan awards for each named executive
officer outstanding as of December 31, 2006:
|
OUTSTANDING
EQUITY AWARDS AT FISCAL
YEAR-END
|
|
OPTION
AWARDS
|
|
|
|
STOCK
AWARDS
|
|
|||||||||||||||||||||||
|
Name
|
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
|
Number
of Securities Underlying Unexercised Options (#)
Unexercisable
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
|
Option
Exercise Price ($)
|
|
Option
Expiration
Date
|
|
Number
of Shares or Units of Stock That Have Not Vested (#)
|
|
Market
Value of Shares or Units of Stock That Have Not Vested ($)
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or
Other Rights
That Have Not Vested (#)
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units of
Other Rights That Have Not Vested (#)
|
|
|||||||||
|
Lino
Braganza
|
||||||||||||||||||||||||||||
|
VP
of Marketing & Sales
|
|
|
—
|
|
|
—
|
|
|
250,000
|
|
$
|
7.00
|
|
|
August
10, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Braig
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VP
of Product Development
|
|
|
—
|
|
|
—
|
|
|
300,000
|
|
$
|
7.00
|
|
|
August
15, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel
Goldberger
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
—
|
|
|
—
|
|
|
200,000
|
|
$
|
5.00
|
|
|
November
14, 2016
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Victor
Gura
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Scientific Officer
|
|
|
—
|
|
|
—
|
|
|
500,000
|
|
$
|
5.00
|
|
|
November
14, 2016
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Herve
de Kergrohen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
—
|
|
|
—
|
|
|
100,000
|
|
$
|
7.00
|
|
|
February
27, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicolas
Lewin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
—
|
|
|
—
|
|
|
100,000
|
|
$
|
7.00
|
|
|
February
27, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kelly
McCrann
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
—
|
|
|
—
|
|
|
100,000
|
|
$
|
7.00
|
|
|
August
10, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terren
Peizer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Chairman
|
|
|
—
|
|
|
—
|
|
|
700,000
|
|
$
|
5.00
|
|
|
November
14, 2011
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nina
Peled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
VP
|
|
|
—
|
|
|
—
|
|
|
150,000
|
|
$
|
7.00
|
|
|
February
27, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nina
Peled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Senior
VP
|
|
|
—
|
|
|
—
|
|
|
50,000
|
|
$
|
7.00
|
|
|
August
10, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Winson
Tang
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Operating Officer
|
|
|
—
|
|
|
—
|
|
|
300,000
|
|
$
|
7.00
|
|
|
May
11, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Robert
Weinstein
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Chief
Financial Officer
|
|
|
—
|
|
|
—
|
|
|
300,000
|
|
$
|
7.00
|
|
|
August
10, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Jay
Wolf
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Director
|
|
|
—
|
|
|
—
|
|
|
100,000
|
|
$
|
7.00
|
|
|
February
27, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
60
|
*
Dan Goldberger: 200,000 options canceled upon resignation as an
officer
|
|
*
Nina Peled: 150,000 shares granted upon hire as VP of Quality and
Regulatory Affairs
|
||||||||||||||||||||||
|
*
Nina Peled: additional 50,000 shares granted upon promotion to Senior
VP
|
||||||||||||||||||||||
|
*
Stock warrants issued to OGT, LLC, company owned by Marc Cummins,
a
Director of Xcorporeal . 150,000 shares with an exercise price of
$7.00
and an expiration date of February 27,
2012
|
Compensation
Of Directors
The
following table reflects the compensation of directors for our fiscal year
ended
December 31, 2006:
DIRECTOR
COMPENSATION
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|||||||
|
|
|
Fees
|
|
|
|
|
|
Incentive
|
|
Non-Qualified
|
|
All
|
|
|
|
|||||||
|
|
|
Earned
or
|
|
Stock
|
|
Option
|
|
Plan
|
|
Deferred
|
|
Other
|
|
|
|
|||||||
|
|
|
Paid
in
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Compensation
|
|
Compensation
|
|
|
|
|||||||
|
Name
|
|
Cash
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Earnings
($)
|
|
($)
|
|
Total
($)
|
||||||||
|
Terren
S. Peizer
|
—
|
—
|
$
|
105,632
|
—
|
—
|
—
|
$
|
105,632
|
|||||||||||||
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Equity
Compensation Plans
The
following table sets forth information with respect to compensation plans as
of
December 31, 2006:
Equity
Compensation Plan Information
|
Number
of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
Weighted-average exercise
price of outstanding
options, warrants
and rights
|
Number
of securities remaining
available for
future issuance under
equity compensation
plans (excluding
securities reflected
in column (a))
|
||||||||
|
Plan
category
|
(a)
|
(b)
|
(c)
|
|||||||
|
Equity
compensation plans approved by security holders
|
1,600,000
|
$
|
5.00
|
400,000
|
||||||
|
Equity
compensation plans not approved by security holders
|
—
|
—
|
—
|
|||||||
|
Total
|
1,600,000
|
$
|
5.00
|
400,000
|
||||||
Security
Ownership of Certain Beneficial Owners
The
following table sets forth the securities ownership of our directors, named
executive officers, and any person or group who is known to us to be the
beneficial owner of more than five percent of our common stock as of
December 31, 2006:
|
Name
and address of beneficial owner
(1)
|
Amount
and nature
of beneficial ownership
|
Percent
of class
|
|||||
|
Terren
S. Peizer
(2)
|
9,600,000
|
68
|
%
|
||||
|
Marc
G. Cummins
(3)
|
428,572
|
3
|
%
|
||||
|
Jay
A. Wolf
(4)
|
357,143
|
3
|
%
|
||||
|
Nicholas
S. Lewin
(5)
|
35,714
|
*
|
|||||
|
Winson
W. Tang
|
|||||||
|
Robert
Weinstein
|
|||||||
|
Daniel
S. Goldberger
|
—
|
—
|
|||||
|
Victor
Gura
|
—
|
—
|
|||||
|
Hervé
de Kergrohen
|
—
|
—
|
|||||
|
Kelly
J. McCrann
|
—
|
—
|
|||||
|
Robert
S. Stefanovich
|
—
|
—
|
|||||
|
All
directors and executive officers as a group (11 persons)
|
10,421,429
|
73
|
%
|
||||
|
*
|
Less
than one percent.
|
61
|
(1)
|
Unless
otherwise indicated, the address of all of the above named persons
is c/o
Xcorporeal, Inc., 11150 Santa Monica Blvd., Suite 340, Los Angeles,
California 90025.
|
|
(2)
|
Includes
9,600,000 shares held of record by Consolidated National, LLC, of
which
Mr. Peizer is the sole managing member and beneficial
owner.
|
|
(3)
|
Includes
428,572 shares held of record by Prime Logic Capital, LLC, CPS
Opportunities, and GPC LXI, LLC. Mr. Cummins is a Managing Partner
of
Prime Capital, LLC. He disclaims beneficial ownership of the reported
securities except to the extent of his pecuniary interest
therein.
|
|
(4)
|
Includes
357,143 shares held of record by Trinad Capital Master Fund Ltd.
(the
“Master Fund”), that may be deemed to be beneficially owned by Trinad
Management, LLC, the investment manager of the Master Fund and Trinad
Capital LP; a controlling stockholder of the Master Fund; Trinad
Advisors
GP, LLC, the general partner of Trinad Capital LP; and Jay Wolf a
director
of the issuer and a managing director of Trinad Management, LLC and
a
managing director of Trinad Advisors GP, LLC. Mr. Wolf disclaims
beneficial ownership of the reported securities except to the extent
of
his pecuniary interest therein.
|
|
(5)
|
Includes
27,514 shares held of record by Paizon Capital, which is beneficially
owned and controlled by Mr. Lewin’s immediate family members. Mr. Lewin
disclaims beneficial ownership of these
shares.
|
Unless
otherwise indicated, we believe that all persons named in the table have sole
voting and investment power with respect to all shares of our common stock
beneficially owned by them. A person is deemed to be the beneficial owner of
securities which may be acquired by such person within 60 days from the date
on
which beneficial ownership is to be determined, upon the exercise of options,
warrants or convertible securities. Each beneficial owner’s percentage ownership
is determined by assuming that options, warrants and convertible securities
that
are held by such person (but not those held by any other person) and which
are
exercisable, convertible or exchangeable within such 60 day period, have been
so
exercised, converted or exchanged.
Certain
Relationships and Related Transactions
Transactions
with Related Persons
In
connection with the contribution of the assets to our company, we issued to
Consolidated National, LLC (CNL), of which our Chairman is the sole managing
member and beneficial owner, an aggregate of 9,600,000 shares of common
stock.
We
owed
$64,620 to Peter Sotola at August 31, 2006, a director of Xcorporeal as of
that date, consisting of unpaid advances and management fees. This amount was
forgiven by the former director, who was no longer a shareholder as of the
sale
of his common stock on August 31, 2006. The debt forgiveness was accounted
for
as an Addition to Paid in Capital.
Our
Chief
Medical and Scientific Officer and director of our Company, Dr. Victor Gura,
owns 13,453,250 shares of common stock of NQCI (or approximately 27.6% of NQCI’s
common stock outstanding as of September 30, 2006) with whom we entered
into a license agreement. In addition, Medipace Medical Group, Inc., an
affiliate of Dr. Gura owns 800,000 shares of common stock of NQCI (or
approximately 1.6% of NQCI’s common stock outstanding as of September 30, 2006).
62
Director
Independence
Messrs.
Cummins, de Kergrohen, Lewin, McCrann and Wolf are independent directors under
NASD Marketplace Rule 4200(a)(14).
Description
of Xcorporeal common stock
DESCRIPTION
OF XCORPOREAL CAPITAL STOCK
The
following description of our capital stock is intended to be a summary and
does
not describe all provisions of our certificate of incorporation or bylaws or
Delaware law applicable to us. For a more thorough understanding of the terms
of
our capital stock, you should refer to our certificate of incorporation and
bylaws, which are included as exhibits to this information
statement.
Common
Stock
We
are
authorized to issue up to 40,000,000 share of our common stock, $0.0001 par
value. The holders of common stock are entitled to one vote per share on
all
matters to be voted upon by stockholders. Subject to preferences that may
be
applicable to any outstanding preferred stock, holders of common stock are
entitled to receive ratably dividends as may be declared by the board of
directors out of funds legally available for that purpose. In the even of
our
liquidation, dissolution, or winding up, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preferences of any outstanding preferred stock. The common
stock has no preemptive or conversion rights, other subscription rights,
or
redemption or sinking fund provisions. All issued and outstanding shares
of
common stock are fully paid and non-assessable. As of December 31, 2006,
there
are 14,200,050 shares of our common stock issued outstanding.
Preferred
Stock
Our
board
of directors has the authority, without further action by our stockholders,
to
issue up to 10,000,000 shares of preferred stock, $0.0001 par value, in one
or
more series and to designate the rights, preferences, privileges and
restrictions of each series. The issuance of preferred stock could have the
effect of restricting dividends on the common stock, diluting the voting
power
of the common stock, impairing the liquidation rights of the common stock,
or
delaying or preventing a change in control without further action by our
stockholders. As of the date of this information statement, there are no
shares
of preferred stock outstanding, and we have no present plans to issue any
shares
of preferred stock. There
is
no preferred stock outstanding at this times.
INFORMATION
ABOUT CTHE
For
purposes of this section entitled “Information About CTHE” only, all references
to “we,” “us,” or “our” refers to CTHE prior to the effectiveness of the
merger.
Description
of Business
CTHE
provides management expertise including consulting on operations, marketing
and
strategic planning and a single source of capital to early stage technology
companies. The Company was incorporated in Delaware in 1992. The business model
is designed to enable the companies with whom CTHE acquires or invests to become
market leaders in their industries. The strategy over the years has led to
the
development, acquisition and operation of technology based businesses with
compelling valuations and strong business models. The goal is to realize the
value of these investments for CTHE’s shareholders through a subsequent
liquidity event such as a sale, merger or initial public offering of the
investee companies. However, our business model is constrained by our lack
of
capital.
At
June
30, 2007, CTHE does not hold any investments and does not have any products
or
services, customers or revenue, and CTHE has no other lines of business.
Results
of Operations for the three and six months ended June 30, 2007 as compared
with
the three and six months ended June 30, 2006
Our
operations consist of costs and expenses for the activities to identify
additional technologies and companies in which we might invest, as well as
legal
defense costs and costs associated with SEC reporting. We do not generate any
revenue.
General
and Administrative Expenses
During
the three and six months ended June 30, 2007 general and administrative expenses
were $7,117 and $69,034, respectively. This compares to $48,895 and $122,560,
respectively, for the three and six month periods ending June 30, 2006. General
and administrative expenses declined $41,778, or 85%, and $53,526, or 44%,
for
the three and six month periods, respectively, primarily due to lower legal
and
other professional fees. The Company had $34,800 of stock compensation expense
for the six month period ending June 30, 2007 versus none in the comparable
period in 2006. The Company also realized a $237,281 gain on settlement of
accounts payable in the first six months of 2007.
Interest
Expense
We
had no
interest expense during the three month period ended June 30, 2007 and $413
during the six month period ended June 30, 2007 compared to $168,266 and
$411,342, respectively, in 2006. Interest expense during the first two quarters
of 2007 was not significant because the litigation accrual, advances and notes
payable to officers and shareholders, the demand note payable to Citadel and
the
convertible note payable to CITN Investment Inc. (“CII”) which, collectively,
generated interest expense in the first two quarters of 2006 were no longer
outstanding during the three and six month periods ending June 30,
2007.
Liquidity
and Capital Resources
We
received a report from our independent registered public accounting firm for
our
year ended December 31, 2006 containing an explanatory paragraph that
describes the uncertainty regarding our ability to continue as a going concern
due to our recurring operating losses and our significant working capital
deficiency. Historically, we have incurred recurring operating losses and have
a
stockholders’ deficit at June 30, 2007 of approximately $63,239. We had a cash
balance of $271 at June 30, 2007 and current liabilities total approximately
$63,510. We have limited access to capital, no plans to raise capital and we
have not identified sources of capital at June 30, 2007. Our past funding needs
of the business have been provided by financings through short-term notes
payable and additional investments from related parties, including our CEO
and
CH, however there can be no assurance that such funds will be available from
these related parties in the future. The Company has been and continues to
be
dependent upon outside financing to perform its business development activities,
make investments in new technology companies and to fund
operations.
63
Our
plans
to continue to support and expand our business development activities are
limited due to a lack of identification and availability of near term capital.
As a result, it is unlikely that the implementation of the Company’s business
strategy will generate positive cash flow in the foreseeable future. We have
no
plans at June 30, 2007 to raise additional capital to invest in new business
opportunities.
There
can
be no assurance that management’s plans will be successful or what other actions
may become necessary. There can be no assurance that the Company will ever
achieve liquidity for its investments. Until we are able to create liquidity
from an additional inflow of new capital, we will continue to require external
sources of working capital to fund our operating expenses. Our inability to
raise capital could have a material adverse effect on our business and
operations that could be material to our results of operations.
Cash
Used in Operating Activities
The
net
cash used in operating activities was approximately $43,000 for the six months
ended June 30, 2007 resulting from a net profit of approximately $133,000 offset
by non-cash charges of approximately $202,000, plus a net change in operating
liabilities of approximately $27,000.
Cash
Provided by Financing Activities
Net
cash
provided by financing activities was approximately $43,000 consisting primarily
of shares issued to the CEO for an advance made to the Company.
Contractual
Obligations
There
are
no notes payable, other long-term debt obligations, capital lease obligations,
operating lease obligations or long-term capital purchase commitments at June
30, 2007.
Controls
and Procedures
The
Company’s management, including the Company’s principal executive and financial
officer, has evaluated the effectiveness of the Company’s disclosure controls
and procedures (as defined in Rules 13(a) - 15(e) and 15(d) - 15(e) under the
Securities Exchange Act of 1.934) as of the six months ended June 30, 2007,
the
period covered by the Form 10-QSB. Based upon that evaluation, the Company’s
principal executive and financial officer have concluded that the disclosure
controls and procedures were effective as of June 30, 2007 to provide reasonable
assurance that information required to be disclosed on the reports the Company
files or submits under the Exchange Act is recorded, processed, summarized
and
reported, within the time period specified in the Commission’s rules and forms
and that information required to be disclosed in the reports the Company files
or submits is accumulated and communicated to management including the CEO
/
CFO, as appropriate to allow timely decisions regarding required disclosures.
There were no changes in the Company’s internal control over financial reporting
that occurred during the Company’s last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Inherent
limitations on Effectiveness of Internal Controls
The
effectiveness of any system of internal control over financial reporting,
including CT Holdings’, is subject to inherent limitations, including the
exercise of judgment in designing, implementing, operating, and evaluating
the
controls and procedures, and the inability to eliminate misconduct completely.
Accordingly, any system of internal control over financial reporting, including
CT Holdings’, can only provide reasonable, not absolute assurances. In addition,
projections of any evaluation of effectiveness to future periods are subject
to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate. We intend to continue to monitor and upgrade our internal controls
as necessary or appropriate for our business, but cannot assure you that such
improvements will be sufficient to provide us with effective internal control
over financial reporting.
The
Year ended December 31, 2006, compared with the Year ended December 31,
2005
Our
operations consisted of costs and expenses for providing services to our
investee
companies and the activities to identify additional technologies and
companies
in which we might invest, as well as legal defense costs and costs associated
with SEC reporting. We do not generate any direct revenue and because
our investee companies were not consolidated, we did not report revenue
from
investee businesses.
64
General
and Administrative Expenses
During
the year ended December 31, 2006 general and administrative expenses were
$99,185
versus $177,631 for the year ended December 31, 2005. The decrease of
$78,446
or 44% from the year earlier period is primarily due to lower legal defense
costs and lower management fees charged by CDSS in the respective year
periods.
Legal defense costs are expected to decline in future periods as a result
of
the settlement of the lawsuits during 2006. Management fees for services
provided by CDSS will no longer be incurred as a result of the termination
of the transition services agreement in December 2006. We may incur similar
costs, principally accounting, legal and SEC compliance related fees,
from
other providers of similar services, principally accounting and information
technology
support, however no assurances are provided that the costs of similar
services
may be available at the same cost as previously incurred and may possibly
be more expensive than the cost of services previously provided by CDSS.
Settlement
of Litigation
Since
August 1998 we have been engaged in litigation with Meyers Associates,
L.P.
f/k/a Roan/Meyers Associates, L.P. and f/k/a Janssen-Meyers Associates,
L.P.
(collectively "Meyers"). The original lawsuit arose out of an alleged 1995
contract
with a predecessor entity of the Company. Since the original lawsuit
was
filed, a number of court actions, motions and judgments have been prosecuted.
Two lawsuits with Meyers, further described below, were being vigorously
defended during the years ended December 31, 2006 and 2005. A settlement
of all litigation with Meyers was reached during 2006 and is discussed
below.
In
December 2001, the plaintiffs refiled a lawsuit, previously dismissed by a
federal
court, in state court, seeking to enforce a proposed settlement term
sheet
executed on July 7, 2000. The case was filed in the Supreme Court of New
York,
that state's trial court, in a case styled Roan Meyers v. CT Holdings. CT
Holdings
filed counterclaims for breach of the term sheet as well as breach of
the
placement agency agreement. Cross motions for partial summary judgments were
argued
but on June 9, 2004 the court entered judgment in favor of Roan-Meyers in
the
amount of $3,000,000 and granted interest at the rate of 9% from October 31,
2000
through the date of final judgment, and thereafter at the statutory rate
allowed
by law. The Company appealed the final judgment, and the appellate court
affirmed the trial court's decision. The $3,000,000 judgment as well as
the
interest from October 2000 through December 31, 2005 of $1,404,590 was
accrued
at December 31, 2005. We continued to accrue interest on the judgment
of
approximately $179,000 during the year ended December 31, 2006 until ultimate
settlement
of the lawsuit discussed below.
On
April
8, 2005, Meyers filed a lawsuit in the Court of Chancery of the State
of
Delaware, in New Castle County, against the Company, Citadel Security
Software,
Inc. (CDSS) including Steven B. Solomon, the Chief Executive and a Director
of the Company, Chris A. Economou, a Director of the Company, Lawrence
Lacerte,
a former Director of the Company, and Phillip J. Romano, a former Director
of the Company (the "Individual Defendants"). The suit alleged that in
connection
with an action filed in the Supreme Court of New York, New York
County,
to enforce a Settlement Term Sheet executed on July 7, 2000 by Meyers
and
CT
Holdings, Meyers was awarded a judgment against CT Holdings in the amount
of
$3
million plus interest on the judgment at the rate of 9% from October 31,
2000
until the date of entry of that judgment and thereafter at the statutory
rate
(the
"Judgment"). CT Holdings appealed the Judgment. The suit also alleged
that
CT
Holdings' May 2002 spin-off of its interests in CDSS to CT Holdings'
shareholders
rendered CT Holdings insolvent and constituted a fraudulent conveyance
to defraud CT Holdings' creditors, including Meyers. The suit asserted
fraudulent conveyance claims against CDSS and CT Holdings pursuant to
Delaware
statutory and common law. The suit also asserted a claim against CDSS
for
successor liability as the alleged successor in interest or alter ego of CT
Holdings.
The suit alleged that the Individual Defendants who were officers and/or
directors of CT Holdings at the time of the spin-off breached fiduciary
duties
allegedly owed to creditors of CT Holdings, including Meyers, by approving
and allowing the spin-off transaction. The suit sought to void the spin-off
transaction or alternatively to hold CDSS liable for the Judgment including
interest, to recover damages against the Individual Defendants in an
amount
not less than the Judgment including interest, plus an unspecified amount
of
punitive, consequential and incidental damages, as well as attorneys' fees
and
costs.
65
On
August
23, 2006, CT Holdings and certain other parties entered into a Release
and
Settlement Agreement ("Agreement") by and among Meyers and their related
parties
(collectively, the "Meyers Released Parties") on the one hand and defendants
CT Holdings Enterprises, Citadel Security Software Inc., Steven B. Solomon,
Chris A. Economou, Lawrence Lacerte, Mark Rogers, Phillip J. Romano,
Axel
Sawallich, George Sharp and Gilbert Gertner (collectively "Defendants") on
the
other
hand. The Agreement provides for the settlement of litigation filed by
Meyers
against defendants CDSS, CT Holdings Enterprises, certain of our and
CDSS's
current and former directors and officers, Steven B. Solomon, Chris E.
Economou,
Lawrence Lacerte, Mark Rodgers, Phillip J. Romano and Axel Sawallich
in
the
Court of Chancery of the State of Delaware in and for New Castle County
(the
"Delaware Action") asserting various claims, and other litigation against
CT
Holdings and its former officers and directors (the "Actions"). Pursuant to
the
Agreement, CDSS paid the sum of $1,250,000 to Meyers Associates in two
payments,
the first payment of $250,000 was made upon signing of the Agreement
in
August
2006 and the second payment of $1,000,000 was made on November 1, 2006
in
accordance with the terms of the Agreement. The Defendants were released by
the
Plaintiffs from all claims in the actions 91 days after receipt of the
payments,
subject to the terms and conditions of the agreement. Accordingly, the
Company reversed the accrued liability for Meyers legal claims during 2006
in
the
amount of $4,583,852.
Gain
on Extinguishment of Debt
On
May
22, 2006 the Company and CII, an affiliate of the Company's CEO, entered
into
a
settlement, pursuant to which CII agreed to release the Company from
indebtedness
and accrued interest under the Amended Note of $271,148 plus accrued
interest of $9,211 through May 22, 2006, in exchange for the delivery to
CII
of
the shares of Parago and River Logic owned by the Company. The carrying
value
of
these shares was zero at the settlement date.
As a
result of this
settlement, the Company recorded a gain of $280,359 on the settlement with
CII,
a
related party, and recognized as interest expense the unamortized amount
of
beneficial conversion feature related to the debt at the time of settlement
of
approximately $250,290.
66
In
December 2006, we entered into an agreement with CDSS to cancel and terminate
the
Tax
Disaffiliation Agreement and the Transition Services Agreement and released
each other from all outstanding liabilities to the other. As a result
of
this
agreement, the gain on the extinguishment of debt includes approximately
$327,305 representing the release of principal and interest owed to
CDSS
for an unsecured demand note payable and $686,666 for the gain on the
release
of a non-interest bearing payable to CDSS.
Interest
Expense
Interest
expense for the years ended December 31, 2006 and 2005 was $465,184 and
$494,341,
respectively, representing interest expense on litigation accrual, advances
and notes payable to officers and shareholders, the demand note payable
to
CDSS
and the convertible note payable to CII. Interest expense related to
these
items is expected to decline in future periods as a result of the settlement
of the litigation and the settlement of the convertible note payable
to
CII.
The
year
2006 includes interest expense of approximately $179,000 related to the
Meyers
lawsuits versus approximately $279,000 accrued in 2005. Interest expense
associated
with the advances and the notes payable was approximately $35,000 in
2006
versus approximately $55,000 for 2005. Interest expense also includes
amortization
of the beneficial conversion feature associated with the CII convertible
note which totaled approximately $250,000 and $161,000 for the years
ended
December 31, 2006 and 2005, respectively.
Other
Income
Other
income for the year ended December 31, 2006 was $11,203, representing the
reversal
of excess accruals for a prior legal settlement.
Liquidity
and Capital Resources
We
have
received a report from our independent registered public accounting firm
for
our
year ended December 31, 2006 containing an explanatory paragraph that
describes
the uncertainty regarding our ability to continue as a going concern.
Although
we have a significant gain for the year ended December 31, 2006, we have
a
history of recurring operating losses and have a significant working
capital
deficiency at December 31, 2006 of approximately $456,000. We had a cash
balance
of $197 at December 31, 2006 and current liabilities total approximately
$456,000.
We have limited access to capital, no plans to raise capital, and we
have
not
identified sources of capital at December 31, 2006. Our past funding
needs
of
the business have been provided by financings through short-term notes
payable
and additional investments from related parties, including our CEO and
CII,
an
entity of which our CEO is an officer, director and 50% shareholder and
a
commitment to advance up to an additional $100,000 in exchange for 250,000
shares
of
our common stock, however there can be no assurance that such funds will
be
available from these related parties in the future. The Company has been
and
continues to be dependent upon outside financing to perform its business
development activities, make investments in new technology companies
and to fund operations.
67
Until
we
are able to create liquidity through a financing, investment or some
other
liquidity transaction, we will continue to require working capital to fund
operating
expenses. At December 31, 2006 we have not identified sources of capital
nor do we have any plans to raise sufficient amounts of capital to settle
liabilities or to fund business development activities.
On
February 14, 2007 our shareholders approved a proposal to amend the Company's
Certificate
of Incorporation to combine shares of the Company's common stock to effect
a
one for 70 reverse stock split. A 1 for 70 reverse stock split would
make
available sufficient authorized shares of common stock to settle commitments
to issue shares and to potentially facilitate a corporate transaction
such as a merger or financing. Corporate transactions of this nature
could improve liquidity, however there can be no assurance that the Company
will enter into any corporate transaction to improve liquidity.
There
can
be no assurance that management's plans will be successful or what other
actions may become necessary. There can be no assurance that the Company
will
ever
achieve liquidity. Until we are able to create liquidity from an additional
inflow of new capital, we will continue to require external sources of
working capital to fund our operating expenses. Our inability to raise
capital
could have a material adverse effect on our business and operations that
could
be
material to our results of operations.
Cash
Flows from Operating Activities
During
the year ended December 31, 2006 the net cash used in operating activities
was approximately $46,000 resulting from net income approximately $5,325,000
offset by non-cash amortization of deferred debt discount of approximately
$250,000 recorded as interest expense, a gain of the extinguishment
of debt of approximately $1,294,000 and the reversal of
litigation
accruals of approximately $4,405,000 resulting from the settlement of
litigation
plus a reduction in operating liabilities of approximately $77,000.
The
net
cash used in operating activities was approximately $43,000 for the year
ended
December 31, 2005 resulting from a net loss of approximately $672,000
offset
by
non-cash amortization of deferred debt discount of approximately $161,000
recorded as interest expense, a non-cash interest accrual on the litigation
judgment of approximately $279,000 plus a change in operating liabilities
of approximately $189,000.
Cash
Flows from Investing Activities
There
were no cash flows used or from investing activities in either year ended
December
31, 2006 or 2005.
Cash
Flows from Financing Activities
We
rely
on related parties, including our CEO, for funds to pay accounts payable
and
to
settle other liabilities. In some cases, our CEO elected to pay vendors
directly
rather than advance funds to the Company. We have presented these direct
vendor payments in the statement of cash flows as if the funds had been
first
advanced to the Company. During the years ended December 31, 2006 and
2005,
our
CEO paid vendors directly or advanced funds to the Company in the amount
of
approximately $46,000 and $38,800, respectively representing the total
amount
of
cash flows provided by financing activities in 2006 and 2005.
68
Contractual
Obligations
At
December 31, 2006 a $46,288 unsecured advance payable to an officer and a
$9,000
unsecured note payable plus accrued interest of approximately $7,800 to a
shareholder
which is in default at December 31, 2006. There are no other long-term
debt obligations, capital lease obligations, operating lease obligations
or long-term capital purchase commitments.
Off-Balance
Sheet Arrangements
We
entered into an Agreement dated as of December 4, 2006 with CDSS, where CDSS
assigned
to us causes of action and rights of CDSS related to claims against CDSS's
insurance carrier related to prior litigation. Subsequently,
we assigned these causes of action to Lawrence Lacerte, a former director and
greater than 10% shareholder. The
Company has no other off-balance
sheet arrangements that have had, or are reasonably likely to have, a
current
or future effect on the Company's financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors.
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
As
of
August 22, 2007, there were issued and outstanding approximately 2,894,675
shares of common stock. There is no other class of voting security of CT
Holdings issued or outstanding. The following table sets forth the number of
shares of common stock beneficially owned as of August 10, 2007, by (i) each
person known to CTHE to own more than 5% of the common stock, (ii) each
director, (iii) each named executive officer and (iv) all directors, named
executive officers and other executive officers as a group. We calculated
beneficial ownership according to Rule 13d-3 of the Securities Exchange Act
as
of that date. Shares issuable upon exercise of options that are exercisable
within 60 days after August 10, 2007 are included as beneficially owned by
the
option holder. Beneficial ownership generally includes voting and investment
power with respect to securities. Unless otherwise indicated below, the persons
and entities named in the table have sole voting and sole investment power
with
respect to all shares beneficially owned and has an address of c/o CT Holdings,
2100 McKinney Avenue, Suite 1500, Dallas, Texas 75201. The number of shares
owned have been adjusted for the effect of a 1 for 70 reverse stock split
approved by shareholders on February 14, 2007, but do not reflect the proposed
1
for 8.27 reverse stock split.
|
|
APPROXIMATE
|
||||||
|
|
NUMBER
OF
|
PERCENT
|
|||||
|
NAME
AND ADDRESS
|
SHARES
OWNED
|
OF
CLASS
|
|||||
|
Steven
B. Solomon
|
1,604,547
|
55.4
|
%
|
||||
|
|
|||||||
|
Lawrence
Lacerte
5950
Sherry Lane
Dallas,
Texas 75225
|
482,143
|
16.7
|
%
|
||||
|
|
|||||||
|
Chris
A. Economou
150
North Federal Highway, # 210
Fort
Lauderdale, Florida 33301
|
50,349
|
1.7
|
%
|
||||
|
|
|||||||
|
Mark
Rogers
751
Laurel St. #19
San
Carlos, California
|
49,308
|
1.7
|
%
|
||||
|
|
|||||||
|
Dr.
Axel Sawallich
Beatrixgasse
3
1030
Vienna, Austria.
|
25,532
|
*
|
|||||
|
|
|||||||
|
All
officers and directors as
a group (4 persons)
|
1,729,736
|
59.7
|
%
|
||||
|
*
|
Less
than 1%
|
69
Certain
Relationships and Related Transactions, and Director Independence
The
following is a description of the material terms of the agreements and
arrangements involving CTHE and its subsidiaries.
Agreements
Relating to the Sale of Substantially All of the Assets of CDSS
In
connection with the sale of substantially all of the assets of CDSS, we entered
into an Agreement dated as of December 4, 2006 (the “Agreement”) with CDSS.
Pursuant to the Agreement with CDSS:
|
1.
|
we
and CDSS canceled and terminated the Tax Disaffiliation Agreement
dated as
of May 17, 2002, and Transition Services Agreement dated as of May
17,
2002 between us and CDSS;
|
|
2.
|
each
party released the other from all outstanding liabilities to each
other;
|
|
3.
|
CDSS
assigned to us causes of action and rights of CDSS related to claims
against CDSS’s insurance carrier related to prior
litigation;
|
|
4.
|
we
waived any and all rights in and to any of the assets transferred
by CDSS
pursuant to the asset purchase agreement;
and
|
|
5.
|
we
waived any prohibition or restriction to the transactions contemplated
by
the asset purchase agreement set forth in the Agreement and Plan
of
Distribution dated as of May 17, 2002 between us and CDSS or otherwise.
|
CT
Holdings’ Related Party Transactions
During
2006 our CEO paid approximately $46,000 of operating expenses on behalf of
CTHE
for which we recorded a non-interest bearing advance payable of
$46,000.
During
2005, our CEO advanced CTHE $38,800 and in December 2005, this amount plus
a
$5,000 note due to our CEO were converted to a note payable to CITN Investment,
Inc., further discussed below. At December 31, 2005, CTHE had a convertible
note
payable due to a related party, CITN Investment, Inc., a Texas corporation
(“CII”) and an affiliate of the company’s CEO. The convertible note was first
issued on May 24, 2004, when CTHE entered into a Loan and Security Agreement
(the “Loan Agreement”) with CII. The Loan Agreement provided for advances by CII
to CTHE of up to $600,000, such advances to be made in the sole discretion
of
CII. In the event the entire $600,000 was advanced to CTHE, the loans would
be
convertible, at the option of CII, into 1,014,286 shares of CTHE’s common stock
and a pro rata amount of such number of shares in the event less than the
$600,000 was advanced to CTHE. All advances under the Loan Agreement were
secured by a pledge of all CTHE’s assets. On May 24, 2004, CTHE was advanced
$200,000 by CII pursuant to the Loan Agreement and evidenced by a Secured
Convertible Promissory Note (the “Note”). The Note was amended in December 2005
and settled in May 2006 as discussed below.
In
December 2005, CTHE and CII entered into an Amended and Restated Secured
Convertible Promissory Note (the “Amended Note”). Pursuant to the Amended Note,
the principal was increased to $271,148 resulting from the combination of the
principal and accrued interest from the original note with CII and additional
advances of $43,800 plus accrued interest of $1,222 through the issue date
of
the Amended Note. The Amended Note was convertible into 240 million pre 1 for
70
reverse split shares, and if the Amended Note was repaid by CTHE, CII had an
option to purchase up to 71 million pre 1 for 70 reverse split shares of CTHE’s
common stock at an exercise price equal to the par value per shares ($0.01
per
share). The note accrued interest at 8% per annum and was due the earlier of
May
24, 2006 or on demand by CII. This Amended Note was secured by a pledge of
all
of CTHE’s assets. The accrued interest on the Amended Note at December 31, 2005
was $772.
70
On
May
22, 2006 CTHE and CII entered into a settlement of the Amended Note, pursuant
to
which CII agreed to release CTHE from indebtedness and accrued interest under
the Amended Note of $271,148 plus accrued interest of $9,211 through May 22,
2006, in exchange for the delivery to CII of the shares of Parago and River
Logic owned by CTHE.
The
Company recorded a debt forgiveness gain related to this transaction in the
amount of $280,359 in the second quarter of 2006. CII retained its option
to purchase 51% of CTHE’s common stock, 1,014,286 shares of common stock of
CTHE’s, at an exercise price equal to the par value per shares ($0.01 per
share). The CII option to acquire 1,014,286 shares of common stock was exercised
on March 2, 2007 and otherwise would have expired on April 28, 2007, sixty
(60)
days following the effectiveness of the 1 for 70 reverse stock
split.
Pursuant
to the terms of the transition services agreement with CDSS until its
termination in December 2006, CTHE agreed to pay CDSS $10,000 per quarter
(reduced in July 2005 from $7,500 per month) for the services of its CEO, CFO
and accounting and information management staff, as well as office rent and
indirect overhead expenses. The Company had a liability recorded for $650,000
for amounts payable to CDSS under this agreement at December 31, 2005. No amount
was owed at December 31, 2006 because all amounts owed under the transition
services agreement were released on December 4, 2006 pursuant to the Agreement
discussed above.
The
Company has an accrued liability to a law firm in which an attorney who is
a
partner and who was a former CT Holdings’ employee and is a relative of our CEO
of approximately $97,000 and $100,000 at December 31, 2006 and 2005,
respectively.
CII
is
owned 50% by Steven B. Solomon, CTHE’s Chief Executive Officer and Chairman of
the Board, and 50% by Lawrence Lacerte, a shareholder and former director of
CTHE. At December 31, 2006, Mr. Solomon beneficially owned 783,114 shares of
CTHE’s common stock including, an unexercised stock option for 28,572 shares of
common stock, which was cancelled subsequent to December 31, 2006. 85,714
unissued shares of common stock from a prior exercise of an option, and as
a
result of his stock ownership in CII, Mr. Solomon was deemed the beneficial
owner of 507,143 shares of common stock underlying an option owned by CII,
more
than 50% of our common stock outstanding on that date, giving him potential
control of CTHE through the voting power over a majority of the shares of our
outstanding common stock. Due to an insufficient number of authorized shares
at
December 31, 2006 (discussed below), approximately 621,430 shares were not
issuable to Mr. Solomon. Following the 1 for 70 reverse stock split in February
2007, Mr. Solomon was issued 85,714 the unissued shares of common stock from
his
prior exercise of an option, and CII exercised its option to acquire 1,014,286
shares. Subsequent to December 31, 2006, CII distributed 607,143 shares to Mr. Solomon and 407,143 shares to Mr.
Lacerte.
On
March
2, 2007, Mr. Solomon acquired 250,000 shares of common stock for providing
up to
$100,000 of cash for working capital purposes. On March 9, 2007, in recognition
of their service to CTHE, Mr. Economou, a director, was awarded 40,000 shares
of
common stock, Mr. Rogers, a director, was awarded 40,000 shares of common stock,
Mr. Sawallich, a director, was awarded 20,000 shares of common stock, and Mr.
Connelly, former Chief Financial Officer, was awarded 10,000 shares of common
stock. In August 2007, CTHE issued 500,000 shares of common stock to Mr. Solomon
in connection with his services to CTHE and further advances of
funds.
COMPARISON
OF RIGHTS OF HOLDERS OF XCORPOREAL COMMON STOCK
AND
CTHE COMMON STOCK
Upon
completion of the merger, there will be no change in the rights of holders
of
Xcorporeal common stock because CTHE will amend and restate its certificate
of
incorporation and bylaws to be substantially similar to the certificate of
incorporation and bylaws of Xcorporeal immediately prior to the merger. CTHE
shareholders rights will change because of the changes to its certificate of
incorporation and bylaws. In addition, the par value of CTHE common stock will
change from $0.01 per share to $0.0001 per share as a result of the reverse
split. Also, as a result of the reverse stock split and merger, CTHE
stockholders will own approximately 350,000 shares in the combined company,
while Xcorporeal stockholders will own approximately 14.2 million shares in
the
combined company. Accordingly, CTHE shareholders’ percentage ownership in CTHE
will substantially decrease as a result of the merger.
Upon
completion of the merger, CTHE will change its name to Xcorporeal, Inc, and
adopt the Certificate of Incorporation and Bylaws of Xcorporeal in effect
immediately prior to the merger. Those documents are substantially similar
to the current Certificate of Incorporation and Bylaws of CTHE except that
the
Bylaws of CTHE provide that stockholders representing 25% of the outstanding
common stock may call a special meeting of stockholders while the Bylaws
of
Xcorporeal provide that special meetings of stockholders may only be called
by
the Chairman of the Board, the Chief Executive Officer, the President or
Secretary of the corporation, in each case pursuant to a resolution of the
Board
of Directors.
71
LEGAL
MATTERS
Wood
& Sartain LLP, counsel to CTHE, will render an opinion as to certain legal
matters concerning the
shares of CTHE common stock to be issued to Xcorporeal stockholders pursuant
to
the merger.
INTERESTS
OF NAMED EXPERTS AND LEGAL COUNSEL
Dreier
Stein & Kahan LLP, legal counsel to Xcorporeal, and its attorneys hold no
shares of its common stock, but an attorney with the firm holds a warrant to
purchase up to 200,000 shares of Xcorporeal’s common stock. Wood
& Sartain, LLP, legal counsel to CTHE owns no shares of its common
stock, but an attorney with the firm who is the brother-in-law of CTHE’s Chieft
Executive Officer, owns 53,572 shares of CTHE common stock.
72
INDEX
TO FINANCIAL STATEMENT OF
XCORPOREAL,
INC.
(a
Development Stage Company)
|
PAGE
|
||||
|
BALANCE
SHEETS AS OF JUNE 30, 2007 (UNAUDITED) AND DECEMBER 21,
2006
|
F-2
|
|||
|
STATEMENTS
OF OPERATIONS, THREE MONTHS ENDED JUNE 30, 2007, SIX
MONTHS ENDED, DATE OF INCEPTION TO JUNE 30, 2007
(UNAUDITED)
|
F-3
|
|||
|
STATEMENTS
OF CASH FLOWS, SIX MONTHS ENDED JUNE 30, 2007, SIX
MONTHS ENDED JUNE 30, 2006, DATE OF INCEPTION TO JUNE 30, 2007
(UNAUDITED)
|
F-4
|
|||
|
STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIENCY) DATE OF INCEPTION TO JUNE 30, 2007
(UNAUDITED)
|
F-5
|
|||
|
NOTES
TO INTERIM FINANCIAL STATEMENTS, JUNE 30, 2007 (UNAUDITED)
|
F-6
|
|||
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-10
|
|||
|
|
||||
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-11
|
|||
|
|
||||
|
FINANCIAL
STATEMENTS
|
||||
|
|
||||
|
BALANCE
SHEETS AS OF DECEMBER 31, 2006 AND 2005
|
F-12
|
|||
|
|
||||
|
STATEMENTS
OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005,
AND THE
PERIOD FROM INCEPTION (MAY 4, 2001) TO DECEMBER 31, 2006
|
F-13
|
|||
|
|
||||
|
STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIENCY) FOR THE YEARS ENDED DECEMBER 31,
2006 AND 2005, AND THE PERIOD FROM INCEPTION (MAY 4, 2001)
TO DECEMBER 31,
2006
|
F-14
|
|||
|
|
||||
|
STATEMENTS
OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005,
AND THE
PERIOD FROM INCEPTION (MAY 4, 2001) TO DECEMBER 31, 2006
|
F-15
|
|||
|
|
||||
|
NOTES
TO FINANCIAL STATEMENTS
|
F-16
|
|||
F-1
XCORPOREAL,
INC.
(a
Development Stage Company)
|
|
|
June
30,
|
|
|
December
31,
|
|
||
|
|
|
2007
|
|
|
2006
|
|
||
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
346,887
|
|
|
$
|
27,440,987
|
|
|
Marketable
securities, at fair value
|
|
|
22,676,578
|
|
|
|
—
|
|
|
Restricted
cash
|
|
|
83,050
|
|
|
|
—
|
|
|
Prepaids
|
|
|
158,802
|
|
|
|
70,850
|
|
|
Other
current assets
|
|
|
12,066
|
|
|
|
19,378
|
|
|
|
|
|
|
|
|
|
||
|
Total
current assets
|
|
|
23,277,383
|
|
|
|
27,531,215
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
56,094
|
|
|
|
3,328
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
951
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Total
Assets
|
|
|
23,334,428
|
|
|
|
27,535,543
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
455,036
|
|
|
|
143,606
|
|
|
Accrued
placement agent fees
|
|
|
—
|
|
|
|
1,348,470
|
|
|
Accrued
professional fees
|
|
|
427,259
|
|
|
|
312,208
|
|
|
Accrued
royalties
|
|
|
208,333
|
|
|
|
83,333
|
|
|
Accrued
other liabilities
|
|
|
111,630
|
|
|
|
121,189
|
|
|
Other
current liabilities
|
|
|
115,400
|
|
|
|
124,676
|
|
|
|
|
|
|
|
|
|
||
|
Total
Current Liabilities
|
|
|
1,317,658
|
|
|
|
2,133,482
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.001 par value, 10,000,000 shares authorized, none
outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Common
Stock, $0.0001 par value, 40,000,000 shares authorized, 14,200,050
outstanding on June 30, 2007 and December 31, 2006
|
|
|
1,420
|
|
|
|
1,420
|
|
|
Additional
paid-in capital
|
|
|
34,202,998
|
|
|
|
29,924,410
|
|
|
Deficit
accumulated during the development stage
|
|
|
(12,187,648
|
)
|
|
|
(4,523,769
|
)
|
|
|
|
|
|
|
|
|
||
|
Total
Stockholders’ Equity
|
|
|
22,016,770
|
|
|
|
25,402,061
|
|
|
|
|
|
|
|
|
|
||
|
Total
Liabilities & Stockholders’ Equity
|
|
$
|
23,334,428
|
|
|
$
|
27,535,543
|
|
|
|
|
|
|
|
|
|
||
See
accompanying notes to the interim financial statements
F-2
(a
Development Stage Company)
(Unaudited)
|
|
|
|
|
|
|
|
May
4, 2001 (Date
|
|
||||||||
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
of
Inception) to
|
|
|||||||||
|
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
|||||||||
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
||||||
|
Operating
Expenses:
|
||||||||||||||||
|
Selling,
general and administrative
|
$
|
1,611,188
|
$
|
5,587
|
$
|
5,590,288
|
$
|
11,790
|
$
|
8,908,940
|
||||||
|
Research
and development
|
1,482,037
|
—
|
2,688,134
|
—
|
3,975,456
|
|||||||||||
|
Depreciation
and amortization
|
3,862
|
—
|
5,383
|
—
|
5,478
|
|||||||||||
|
Loss
before Other Income and Income Tax
|
(3,097,087
|
)
|
(5,587
|
)
|
(8,283,805
|
)
|
(11,790
|
)
|
(12,889,874
|
)
|
||||||
|
Interest
Income
|
308,060
|
—
|
619,926
|
—
|
702,226
|
|||||||||||
|
Loss
before income taxes
|
(2,789,027
|
)
|
(5,587
|
)
|
(7,663,879
|
)
|
(11,790
|
)
|
(12,187,648
|
)
|
||||||
|
Income
taxes
|
—
|
—
|
—
|
—
|
—
|
|||||||||||
|
Net
Loss
|
$
|
(2,789,027
|
)
|
$
|
(5,587
|
)
|
$ |
(7,663,879
|
) | $ |
(11,790
|
) | $ |
(12,187,648
|
) | |
|
Basic
and diluted loss per share
|
$
|
(0.20
|
)
|
$
|
(0.00
|
)
|
$
|
(0.54
|
)
|
$
|
(0.00
|
)
|
||||
|
Weighted
average number of shares outstanding
|
14,200,050
|
3,820,000
|
14,200,050
|
3,820,000
|
||||||||||||
See
accompanying notes to the interim financial statements
F-3
(a
Development Stage Company)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
May
4, 2001 (Date
|
|
|
|
|
|
Six
Months Ended
|
|
|
of
Inception) to
|
|
||||||
|
|
|
June
30,
|
|
|
June
30,
|
|
||||||
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|||
|
Cash
flows used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss for the Period
|
|
$
|
(7,663,879
|
)
|
|
$
|
(11,790
|
)
|
|
$
|
(12,187,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee
Stock Based Compensation
|
|
|
2,795,124
|
|
|
|
—
|
|
|
|
4,957,735
|
|
|
Stock
Based Compensation
|
|
|
1,483,464
|
|
|
|
—
|
|
|
|
1,747,715
|
|
|
Depreciation
and amortization
|
|
|
5,383
|
|
|
|
—
|
|
|
|
5,478
|
|
|
Net
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
Expenses
|
|
|
(87,952
|
)
|
|
|
—
|
|
|
|
(158,802
|
)
|
|
Other
Current Assets
|
|
|
7,312
|
|
|
|
—
|
|
|
|
(12,066
|
)
|
|
Other
Assets
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,000
|
)
|
|
Accounts
Payable and Accrued Liabilities
|
|
|
(806,548
|
)
|
|
|
5,459
|
|
|
|
1,202,257
|
|
|
Other
Current Liabilities
|
|
|
(9,276
|
)
|
|
|
—
|
|
|
|
115,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net
Cash Used in Operating Activities
|
|
|
(4,276,372
|
)
|
|
|
(6,331
|
)
|
|
|
(4,330,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
(58,100
|
)
|
|
|
—
|
|
|
|
(61,523
|
)
|
|
Restricted
Cash
|
|
|
(83,050
|
)
|
|
|
—
|
|
|
|
(83,050
|
)
|
|
Purchase
of marketable securities
|
|
|
(25,000,000
|
)
|
|
|
—
|
|
|
|
(25,000,000
|
)
|
|
Sale
of marketable securities
|
|
|
2,323,422
|
|
|
|
—
|
|
|
|
2,323,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net
Cash Used in Investing Activities
|
|
|
(22,817,728
|
)
|
|
|
—
|
|
|
|
(22,821,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Stock issued
|
|
|
—
|
|
|
|
—
|
|
|
|
27,434,349
|
|
|
Advances
from related party
|
|
|
—
|
|
|
|
6,590
|
|
|
|
64,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net
Cash Provided by Financing Activities
|
|
|
—
|
|
|
|
6,590
|
|
|
|
27,498,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease)
in cash during the period
|
|
|
(27,094,100
|
)
|
|
|
259
|
|
|
|
346,887
|
|
|
Cash,
beginning of the period
|
|
|
27,440,987
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Cash,
end of the period
|
|
$
|
346,887
|
|
|
$
|
259
|
|
|
$
|
346,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information; cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Income
taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
See
accompanying notes to the interim financial statements
F-4
(a
Development Stage Company)
For
the Period May 4, 2001 (Inception) to June 30,
2007
(Unaudited)
|
|
|
|
|
Deficit
|
|
|||||||||||
|
|
|
|
|
Accumulated
|
|
|||||||||||
|
|
|
|
Additional
|
During
|
|
|||||||||||
|
|
Common
Stock
|
Paid-in
|
Development
|
|
||||||||||||
|
|
Shares
|
Amount
|
Capital
|
Stage
|
Total
|
|||||||||||
|
Common
stock issued for cash at $0.01 per share
|
2,500,000
|
$
|
250
|
$
|
24,750
|
$
|
25,000
|
|||||||||
|
Net
Loss for the year ended December 31, 2001
|
$
|
(40,255
|
)
|
(40,255
|
)
|
|||||||||||
|
Balance
as of December 31, 2001
|
2,500,000
|
250
|
24,750
|
(40,255
|
)
|
(15,255
|
)
|
|||||||||
|
Common
stock issued for cash at $0.05 per share
|
1,320,000
|
132
|
65,868
|
66,000
|
||||||||||||
|
Net
Loss for the year ended December 31, 2002
|
(31,249
|
)
|
(31,249
|
)
|
||||||||||||
|
Balance
as of December 31, 2002
|
3,820,000
|
382
|
90,618
|
(71,504
|
)
|
19,496
|
||||||||||
|
Net
Loss for the year ended December 31, 2003
|
(12,962
|
)
|
(12,962
|
)
|
||||||||||||
|
Balance
as of December 31, 2003
|
3,820,000
|
382
|
90,618
|
(84,466
|
)
|
6,534
|
||||||||||
|
Net
Loss for the year ended December 31, 2004
|
(23,338
|
)
|
(23,338
|
)
|
||||||||||||
|
Balance
as of December 31, 2004
|
3,820,000
|
382
|
90,618
|
(107,804
|
)
|
(16,804
|
)
|
|||||||||
|
Net
Loss for the year ended December 31, 2005
|
(35,753
|
)
|
(35,753
|
)
|
||||||||||||
|
Balance
as of December 31, 2005
|
3,820,000
|
382
|
90,618
|
(143,557
|
)
|
(52,557
|
)
|
|||||||||
|
Common
stock issued for a licence rights
|
9,600,000
|
960
|
40
|
1,000
|
||||||||||||
|
Capital
stock cancelled
|
(3,420,000
|
)
|
(342
|
)
|
342
|
—
|
||||||||||
|
Warrants
granted for consulting fees
|
2,162,611
|
2,162,611
|
||||||||||||||
|
Forgiveness
of related party debt
|
64,620
|
64,620
|
||||||||||||||
|
Common
stock issued for cash at $7.00, net of placement fees of
$2,058,024
|
4,200,050
|
420
|
27,341,928
|
27,342,348
|
||||||||||||
|
Stock-based
compensation expense
|
264,251
|
264,251
|
||||||||||||||
|
Net
loss for the period
|
(4,380,212
|
)
|
(4,380,212
|
)
|
||||||||||||
|
Balance
as of December 31, 2006
|
14,200,050
|
1,420
|
29,924,410
|
(4,523,769
|
)
|
25,402,061
|
||||||||||
|
Warrants
granted for consulting services
|
2,795,124
|
2,795,124
|
||||||||||||||
|
Stock-based
compensation expense
|
1,483,464
|
1,483,464
|
||||||||||||||
|
Net
loss for the period
|
(7,663,879
|
)
|
(7,663,879
|
)
|
||||||||||||
|
Balance
as of June 30, 2007
|
14,200,050
|
$
|
1,420
|
$
|
34,202,998
|
$
|
(12,187,648
|
)
|
$
|
22,016,770
|
||||||
See
accompanying notes to the interim financial statements
F-5
XCORPOREAL,
INC.
(a
Development Stage Company)
June 30,
2007
(Unaudited)
Note
1 — Interim Reporting
While
information presented in the accompanying interim financial statements is
unaudited, it includes all adjustments, which are, in the opinion of management,
necessary to present fairly the financial position, results of operations and
cash flows for the interim period presented. All adjustments are of a normal
recurring nature. It is suggested that these interim financial statements be
read in conjunction with our December 31, 2006 financial
statements.
The
results of operations for the period ended June 30, 2007, are not
necessarily indicative of the results that can be expected for the year ended
December 31, 2007.
Note
2 — Nature and Continuance of Operations
We
were incorporated in the State of Nevada as Pacific Spirit Inc. on May 4,
2001 to engage in the acquisition, exploration and development of natural
resource properties. On August 31, 2006, we changed our name to Xcorporeal,
Inc. and thereafter acquired the rights to our Wearable Artificial Kidney,
congestive heart failure treatment products, and other medical devices. As
a
result, we transitioned to a development stage company focused on researching,
developing and commercializing technology and products related to the treatment
of kidney failure and congestive heart failure.
On
October 13, 2006, Xcorporeal, Inc., a Nevada corporation (Xcorporeal
Nevada), consummated a merger with and into its newly-formed, wholly-owned
subsidiary, Xcorporeal Merger Corporation, a Delaware corporation (Xcorporeal
Delaware) for the purpose of changing our domicile from Nevada to Delaware.
Each
outstanding share of Xcorporeal Nevada common stock, par value $0.001 per share,
was automatically converted into one share of Xcorporeal Delaware common stock,
par value $0.0001 per share. The change in par value has been applied
retroactively. As a result of the reincorporation, the total number of common
stock authorized changed from 100,000,000 shares to 40,000,000 common shares;
the total number of preferred stock authorized remained at 10,000,000 shares,
resulting in a total number of capital stock authorized of 50,000,000
shares.
Note
3 — Development Stage Company
We
were previously a pre-exploration stage company as defined in the Statement
of
Financial Accounting Standards (“SFAS”) No. 7 and the Securities and
Exchange Act Guide No. 7. Effective with the execution of the license
agreement on August 31, 2006, we are a development stage company, devoting
substantially all of our efforts to the research, development and
commercialization of kidney and congestive heart failure treatment
technologies.
Risks
and Uncertainties—
We
operate in an industry that is subject to intense competition, government
regulation and rapid technological change. Our operations are subject to
significant risk and uncertainties including financial, operational,
technological, regulatory and other risks associated with a development stage
company, including the potential risk of business failure.
Note
4 — Cash Equivalents and Marketable Securities
We
invest available cash in short-term commercial paper, certificates of deposit
and high grade variable rate securities. Liquid investments with an original
maturity of three months or less when purchased are considered to be cash
equivalents.
Investments,
including auction rate securities and certificates of deposit, with maturity
dates greater than three months when purchased, which have readily determined
fair values, are classified as available-for-sale investments and reflected
in
current assets as marketable securities at fair market value. Auction rate
securities are recorded at par value, which equals fair market value, as the
rate on such securities resets generally every 7, 28 or
35 days.
Restricted
cash represents deposits secured as collateral for a bank credit card
program.
F-6
Property
and equipment consist of the following at June 30, 2007:
|
|
|
|
|
|
|
Property
and equipment
|
|
$
|
61,523
|
|
|
Accumulated
depreciation
|
|
|
(5,429
|
)
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
56,094
|
|
Depreciation
expense for the three and six months ended June 30, 2007 was $3,847 and
$5,334, respectively. There was no depreciation expense during
2006.
Note
6 — Interest Income
Interest
income of $308,060 and $619,926 reported for the three and six months ended
June 30, 2007, respectively, are a result of the interest earned on our
cash raised from our private placement during the fourth quarter of
2006.
Note
7 — Mineral Property
By
a lease agreement effective June 1, 2001 and amended June 25, 2002,
November 25, 2002, January 9, 2004 and April 11, 2005, we were
granted the exclusive right to explore and mine the Del Oro and NP Claims
located in Pershing County of the State of Nevada. The term of this lease was
for 30 years, renewable for an additional 30 years so long as the
conditions of the lease are met. We were required to pay minimum advanced
royalties payments on each January 9 of $50,000. We did not make the payment
which triggered an event of default under the lease. On March 10, 2006, we
received a termination notice and the lease was subsequently
terminated.
Note
8 — Related Party Transaction
We
were charged the following by a former director:
|
|
|
|
|
|
|
May
2, 2001
|
||||||||||
|
(Date
of
|
||||||||||||||||
|
|
Three
months ended
|
Six
months ended
|
Inception)
to
|
|||||||||||||
|
|
June
30,
|
June
30,
|
June
30,
|
|||||||||||||
|
|
2006
|
2007
|
2006
|
2007
|
2007
|
|||||||||||
|
Administrative
services
|
$
|
1,500
|
$
|
—
|
$
|
3,000
|
$
|
—
|
$
|
12,000
|
||||||
Note
9 — License Agreement
On
August 31, 2006, we entered into a Contribution Agreement with a company
whose sole managing member is our current Chairman. We issued 9,600,000 shares
of common stock in exchange for (a) the right, title, and interest to the
name “Xcorporeal” and related trademarks and domain names, and (b) the
right to enter into the Merger Agreement and License Agreement with National
Quality Care, Inc. (NQCI) dated September 1, 2006 pursuant to which we
obtained the exclusive rights to the technology relating to our congestive
heart
failure treatment, kidney failure treatment, and other medical devices. We
were
a shell corporation prior to the transaction. We valued the License Agreement
at
the carry-over basis of $1,000. As consideration for being granted the License,
we agreed to pay a minimum annual royalty of $250,000, or 7% of net sales.
We
recorded $208,333 in royalty expenses covering the minimum royalties from
commencement of the License Agreement through June 30, 2007. The first
minimum royalty payment is due by December 1, 2007. The License Agreement
expires in 2105.
Note
10 — Terminated Merger Agreement
On
September 1, 2006, we entered into a Merger Agreement with our licensor,
NQCI, which contemplated that we would either (i) acquire it as a wholly
owned subsidiary pursuant to a triangular merger, or (ii) issue shares of
our common stock in consideration of the assignment of the licensed technology.
The Merger Agreement expired by its own terms on December 31, 2006. In
addition, on December 29, 2006, NQCI served written notice that it was
terminating the Merger Agreement, and on January 2, 2007, we consented to
the termination. Accordingly, the Merger Agreement is now terminated. We will
not be proceeding with any merger with NQCI. The termination of the Merger
Agreement had no effect on the License Agreement, the Contribution Agreement,
or
the shares we issued to CNL.
F-7
Note
11 — Stock Options and Warrants
Incentive
Compensation Plan
On
October 13, 2006, after the effectiveness of the Nevada reincorporation, we
adopted the Xcorporeal, Inc. 2006 Incentive Compensation Plan and the related
form of option agreement. The plan authorizes the grant of stock options,
restricted stock, restricted stock units and stock appreciation rights.
Effective February 28, 2007, there are 3,900,000 shares of common stock
reserved for issuance pursuant to the plan (subject to adjustment in accordance
with the provisions of the plan). The plan will continue in effect for a term
of
up to ten years
Stock
Options to Employees, Officer and Directors
The
Compensation Committee of our Board of Directors determines the terms of the
options granted, including the exercise price, the number of shares subject
to
option, and the vesting period. Options generally vest over five years and
have
a maximum life of ten years. On May 11, 2007, we granted options to
purchase an aggregate of 625,000 shares of our common stock under the 2006
Incentive Compensation Plan to employees. The options vest ratably over 4 or
5 years, are exercisable at $7.00 per share, the fair market value of our
common stock on the grant date, and expire in 2017. The fair value of such
stock
options was $3.8 million.
We
reported $0.8 million and $1.5 million in stock-based compensation
expense for employees, officers and directors for the three and six month period
ended June 30, 2007, respectively. No such stock-based compensation expense
was reported for the three and six month period ended June 30,
2006.
All
compensation expense for stock options granted has been determined under the
fair value method using the Black-Scholes option-pricing model with the
following assumptions:
|
|
|
For
the quarter
|
||
|
|
|
ended
|
||
|
|
|
June
30, 2007
|
||
|
Expected
dividend yields
|
|
zero
|
|
|
|
Expected
volatility
|
|
|
110
|
%
|
|
Risk-free
interest rate
|
|
|
4.60
|
%
|
|
Expected
terms in years
|
|
|
6.25-6.50
|
|
Warrants
and Stock Options to Non-Employees
On
May 11, 2007, we also issued stock options to a consultant to purchase
50,000 shares of common stock in exchange for consulting services. These stock
options vest ratably over 5 years so long as the consultant continues to
provide services, are exercisable at $7.00 per share, the fair market value
of
our common stock on the grant date and expire 2017. The resulting fair value
of
such stock options was $0.3 million.
We
reported $0.1 million and $2.8 million in stock-based compensation
expense for consultants for the three and six month period ended June 30,
2007, respectively. No such stock-based compensation expense was reported for
the three and six month period ended June 30, 2006.
Compensation
for options granted to non-employees has been determined in accordance with
SFAS
No. 123 and EITF 96-18, “Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or
Services.” Accordingly, compensation is determined using the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured.
For
options and warrants issued as compensation to non-employees for services that
are fully vested and non-forfeitable at the time of issuance, the estimated
value is recorded in equity and expensed when the services are performed and
benefit is received as provided by Financial Accounting and Standards Board
(“FASB”) Emerging Issues Task Force No. 96-18 “Accounting For Equity
Instruments That Are Issued To Other Than Employees For Acquiring or In
Conjunction With Selling Goods Or Services.”
F-8
All
charges for warrants granted have been determined under the fair value method
using the Black-Scholes option-pricing model with the following
assumptions:
|
|
|
For
the quarter
|
||
|
|
|
ended
|
||
|
|
|
June
30, 2007
|
||
|
Expected
dividend yields
|
|
zero
|
||
|
Expected
volatility
|
|
|
135
|
%
|
|
Risk-free
interest rate
|
|
|
4.67
|
%
|
|
Expected
terms in years
|
|
|
9.87
|
|
The
following table shows the change in unamortized compensation expense for stock
options and warrants issued to employees, officers, directors and non-employees
during the six months ended June 30, 2007:
|
|
|
Stock
Options and
|
|
|
Unamortized
|
|
||
|
|
|
Warrants
|
|
|
Compensation
|
|
||
|
|
|
Outstanding
|
|
|
Expense
|
|
||
|
January 1,
2007
|
|
|
2,054,221
|
|
|
$
|
10,002,154
|
|
|
Granted
in the period
|
|
|
2,160,000
|
|
|
|
13,343,156
|
|
|
Cancelled
in the period
|
|
|
(50,000
|
)
|
|
|
(282,403
|
)
|
|
Expensed
in the period
|
|
|
|
|
|
|
(4,297,569
|
)
|
|
|
|
|
|
|
|
|
||
|
June 30,
2007
|
|
|
4,164,221
|
|
|
$
|
18,765,338
|
|
In
July 2007, we entered into an agreement with Aubrey Group, Inc., an
FDA-registered third-party contract developer and manufacturer of medical
devices for the design and development of a Portable Artificial Kidney (PAK).
The PAK will be designed for use as a Continuous Renal Replacement Therapy
(CRRT) in either a hospital (with medical supervision) or home setting. The
development is expected to be completed by the end of 2008 and projected labor
and material costs are estimated at approximately $5.1 million over the
term. The agreement can be terminated at any time with 30 business days
notice.
F-9
Board
of
Directors and Stockholders
Xcorporeal
Inc.
(a
development stage company)
(formerly
Pacific Spirit, Inc.)
Santa
Monica, California
We
have
audited the accompanying balance sheet of Xcorporeal Inc., a development
stage
company as of December 31, 2006 and the related statements of operations,
stockholders’ equity, and cash flows for the year ended December 31, 2006 and
the period from inception (May 4, 2001) to December 31, 2006, except
that we did not audit these financial statements for the period from inception
(May 4, 2001) through December 31, 2005; those statements were audited by
other
auditors whose report dated February 2, 2006, except as to Note 4 in the
2005
financial statements which was as of March 10, 2006, expressed a going concern
opinion on those statements. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audit in accordance with the 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 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 includes examining,
on a test basis, 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 audit provide a reasonable basis
for
our opinion.
In
our
opinion, based on our audit and the report of other auditors, the financial
statements referred to above present fairly, in all material respects, the
financial position of Xcorporeal Inc. at December 31, 2006 and the period
from inception (May 4, 2001) through December 31, 2006, and the results of
its
operations and its cash flows for the year ended December 31, 2006
,
in
conformity with accounting principles generally accepted in the United States
of
America.
As
more
fully described in Note 1 to the financial statements, effective January 1,
2006 the company adopted Statement of Financial Accounting Standards
No. 123R, “Share-Based Payment”
|
/s/
BDO Seidman, LLP
|
|||
|
Los
Angeles, California
|
|||
|
April 16,
2007
|
F-10
To
the
Stockholders,
Xcorporeal,
Inc. (formerly Pacific Spirit Inc.)
We
have
audited the accompanying balance sheet of Xcorporeal, Inc. (formerly Pacific
Spirit Inc.) (A Pre-exploration Stage Company) as of December 31, 2005 and
the related statements of operations, cash flows and stockholders’ equity
(deficiency) for the year ended December 31, 2005 and the period
May 4, 2001 (Date of Inception) to December 31, 2005. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform an audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In
our
opinion, these financial statements referred to above present fairly, in all
material respects, the financial position of Xcorporeal, Inc. (formerly Pacific
Spirit Inc.) as of December 31, 2005 and the results of its operations and
its cash flows for the years ended December 31, 2005 and the period
May 4, 2001 (Date of Inception) to December 31, 2005, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying financial statements referred to above have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the
financial statements, the Company is in the pre-exploration stage, and has
no
established source of revenue and is dependent on its ability to raise capital
from shareholders or other sources to sustain operations. These factors, along
with other matters as set forth in Note 1, raise substantial doubt that the
Company will be able to continue as a going concern. The financial statements
do
not include any adjustments that might result from the outcome of this
uncertainty.
|
|
|
|
|
Vancouver,
Canada
|
|
|
|
February 2,
2006, except as to Note 4
|
|
“AMISANO
HANSON”
|
|
which
is as of March 10, 2006
|
|
Chartered
Accountants
|
F-11
(formerly
Pacific Spirit Inc.)
(a
Development Stage Company)
|
Years
ended December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
ASSETS
|
|
|
|||||
|
Current
|
|
|
|||||
|
Cash
|
$
|
27,440,987
|
$
|
—
|
|||
|
Prepaids
|
70,850
|
—
|
|||||
|
Other
current assets
|
19,378
|
—
|
|||||
|
Total
current assets
|
27,531,215
|
—
|
|||||
|
Property
and equipment, net
|
3,328
|
—
|
|||||
|
|
|||||||
|
Other
assets
|
1,000
|
—
|
|||||
|
Total
Assets
|
27,535,543
|
—
|
|||||
|
|
|||||||
|
Current
|
|||||||
|
Accounts
payable
|
143,606
|
—
|
|||||
|
Accrued
placement agent fees
|
1,348,470
|
—
|
|||||
|
Accrued
professional fees
|
312,208
|
—
|
|||||
|
Accrued
other liabilities
|
204,522
|
18,330
|
|||||
|
Due
to related party
|
—
|
34,227
|
|||||
|
Other
current liabilities
|
124,676
|
—
|
|||||
|
Total
Current Liabilities
|
2,133,482
|
52,557
|
|||||
|
Commitments
and contingencies
|
|||||||
|
|
|||||||
|
STOCKHOLDERS’
EQUITY (DEFICIENCY)
|
|||||||
|
|
|||||||
|
Preferred
Stock, $0.001 par value, 10,000,000 shares authorized, none
outstanding
|
—
|
—
|
|||||
|
Common
Stock, $0.0001 par value, 40,000,000 shares authorized, 14,200,050
and
3,820,000 outstanding on December 31, 2006 and 2005,
respectively
|
1,420
|
382
|
|||||
|
Additional
paid-in capital
|
29,924,410
|
90,618
|
|||||
|
Deficit
accumulated during the development stage
|
(4,523,769
|
)
|
(143,557
|
)
|
|||
|
Total
Stockholders’ Equity/(Deficiency)
|
25,402,061
|
(52,557
|
)
|
||||
|
Total
Liabilities & Stockholders’ Equity
|
$
|
27,535,543
|
$
|
—
|
|||
F-12
(formerly
Pacific Spirit Inc.)
(a
Development Stage Company)
|
|
|
Years
ended December
31,
|
|
May
4, 2001 (Date of
Inception) to December 31,
|
|
|||||
|
|
|
2006
|
|
2005
|
|
2006
|
||||
|
Operating
Expenses:
|
|
|
|
|||||||
|
Selling,
general and administrative
|
$
|
3,174,995
|
$
|
35,753
|
$
|
3,318,652
|
||||
|
Research
and development
|
1,287,322
|
—
|
1,287,322
|
|||||||
|
Depreciation
|
95
|
—
|
95
|
|||||||
|
|
||||||||||
|
Loss
before Other Income and Income Tax
|
(4,462,412
|
)
|
(35,753
|
)
|
(4,606,069
|
)
|
||||
|
|
||||||||||
|
Interest
Income
|
82,200
|
—
|
82,300
|
|||||||
|
|
|
|
||||||||
|
Loss
before income taxes
|
(4,380,212
|
)
|
(35,753
|
)
|
(4,523,769
|
)
|
||||
|
|
||||||||||
|
Income
taxes
|
—
|
—
|
—
|
|||||||
|
|
|
|
||||||||
|
Net
Loss
|
$
|
(4,380,212
|
)
|
$
|
(35,753
|
)
|
$
|
(4,523,769
|
)
|
|
|
|
||||||||||
|
Basic
and diluted loss per share
|
$
|
(0.67
|
)
|
$
|
(0.01
|
)
|
||||
|
|
||||||||||
|
Weighted
average number of shares outstanding
|
6,542,312
|
3,820,000
|
||||||||
See
accompanying notes to the financial statements
F-13
(formerly
Pacific Spirit Inc.)
(a
Development Stage Company)
For
the Period May 4, 2001 (Inception) to December 31,
2006
|
|
|
|
|
Deficit
|
|
|
||||||||||
|
|
|
|
|
Accumulated
|
|
|
||||||||||
|
|
|
|
Additional
|
|
During
|
|
|
|||||||||
|
|
|
Common
Stock
|
|
Paid-in
|
|
Development
|
|
|
||||||||
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Stage
|
|
Total
|
||||||
|
Common
stock issued for cash at $0.01 per share
|
2,500,000
|
$
|
250
|
$
|
24,750
|
$
|
25,000
|
|||||||||
|
Net
Loss for the year ended December 31, 2001
|
|
|
|
$
|
(40,255
|
)
|
(40,255
|
)
|
||||||||
|
|
|
|
|
|
|
|||||||||||
|
Balance
as of December 31, 2001
|
2,500,000
|
250
|
24,750
|
(40,255
|
)
|
(15,255
|
)
|
|||||||||
|
|
||||||||||||||||
|
Common
stock issued for cash at $0.05 per share
|
1,320,000
|
132
|
65,868
|
66,000
|
||||||||||||
|
Net
Loss for the year ended December 31, 2002
|
|
|
|
(31,249
|
)
|
(31,249
|
)
|
|||||||||
|
|
||||||||||||||||
|
Balance
as of December 31, 2002
|
3,820,000
|
382
|
90,618
|
(71,504
|
)
|
19,496
|
||||||||||
|
|
||||||||||||||||
|
Net
Loss for the year ended December 31, 2003
|
|
|
|
(12,962
|
)
|
(12,962
|
)
|
|||||||||
|
|
|
|
|
|
|
|||||||||||
|
Balance
as of December 31, 2003
|
3,820,000
|
382
|
90,618
|
(84,466
|
)
|
6,534
|
||||||||||
|
|
||||||||||||||||
|
Net
Loss for the year ended December 31, 2004
|
|
|
|
(23,338
|
)
|
(23,338
|
)
|
|||||||||
|
|
||||||||||||||||
|
Balance
as of December 31, 2004
|
3,820,000
|
382
|
90,618
|
(107,804
|
)
|
(16,804
|
)
|
|||||||||
|
|
||||||||||||||||
|
Net
Loss for the year ended December 31, 2005
|
|
|
|
(35,753
|
)
|
(35,753
|
)
|
|||||||||
|
|
||||||||||||||||
|
Balance
as of December 31, 2005
|
3,820,000
|
382
|
90,618
|
(143,557
|
)
|
(52,557
|
)
|
|||||||||
|
|
||||||||||||||||
|
Common
stock issued for licence rights
|
9,600,000
|
960
|
40
|
1,000
|
||||||||||||
|
Capital
stock cancelled
|
(3,420,000
|
)
|
(342
|
)
|
342
|
—
|
||||||||||
|
Warrants
granted for consulting fees
|
2,162,611
|
2,162,611
|
||||||||||||||
|
Forgiveness
of debt
|
64,620
|
64,620
|
||||||||||||||
|
|
||||||||||||||||
|
Common
stock issued for cash at $7.00, net of placement fees of
$2,058,024
|
4,200,050
|
420
|
27,341,928
|
27,342,348
|
||||||||||||
|
Stock-based
compensation expense
|
264,251
|
264,251
|
||||||||||||||
|
Net
loss for the period
|
|
|
|
(4,380,212
|
)
|
(4,380,212
|
)
|
|||||||||
|
|
||||||||||||||||
|
Balance
as of December 31, 2006
|
14,200,050
|
$
|
1,420
|
$
|
29,924,410
|
$
|
(4,523,769
|
)
|
$
|
25,402,061
|
||||||
See
accompanying notes to the financial statements
F-14
(formerly
Pacific Spirit Inc.)
(a
Development Stage Company)
|
May
4, 2001 (Date
|
||||||||||
|
Years
ended
|
of
Inception) to
|
|||||||||
|
December
31,
|
December
31,
|
|||||||||
|
2006
|
2005
|
2006
|
||||||||
|
Cash
flows used in operating activities
|
|
|
|
|||||||
|
Net
Loss for the Period
|
$
|
(4,380,212
|
)
|
$
|
(35,753
|
)
|
$
|
(4,523,769
|
)
|
|
|
|
||||||||||
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||||
|
Non-employee
Stock Based Compensation
|
2,162,611
|
2,162,611
|
||||||||
|
Stock
Based Compensation
|
264,251
|
264,251
|
||||||||
|
Depreciation
|
95
|
95
|
||||||||
|
Net
Change in assets and liabilities:
|
||||||||||
|
Prepaid
Expenses
|
(70,850
|
)
|
800
|
(70,850
|
)
|
|||||
|
Other
Current Assets
|
(19,378
|
)
|
(19,378
|
)
|
||||||
|
Other
Assets
|
(1,000
|
)
|
(1,000
|
)
|
||||||
|
Accounts
Payable and Accrued Liabilities
|
1,990,475
|
5,826
|
2,008,805
|
|||||||
|
Other
Current Liabilities
|
124,676
|
|
124,676
|
|||||||
|
|
||||||||||
|
Net
Cash Provided by (Used in) Operating Activities
|
70,668
|
(29,127
|
)
|
(54,559
|
)
|
|||||
|
|
||||||||||
|
Cash
Flows from Investing Activities
|
||||||||||
|
Capital
Expenditures
|
(3,423
|
)
|
—
|
(3,423
|
)
|
|||||
|
|
||||||||||
|
Net
Cash Used in Investing Activities
|
(3,423
|
)
|
—
|
(3,423
|
)
|
|||||
|
|
||||||||||
|
Cash
Flows from Financing Activities
|
||||||||||
|
Capital
Stock issued in Private Placement for $29,400,351 in cash; fees
of
$2,057,002
|
27,343,349
|
—
|
27,434,349
|
|||||||
|
Advances
from related party
|
30,393
|
28,551
|
64,620
|
|||||||
|
|
||||||||||
|
Net
Cash Provided by Financing Activities
|
27,373,742
|
28,551
|
27,498,969
|
|||||||
|
|
||||||||||
|
Increase/(decrease)
in cash during the period
|
27,440,987
|
(576
|
)
|
27,440,987
|
||||||
|
Cash,
beginning of the period
|
—
|
576
|
|
|||||||
|
|
||||||||||
|
Cash,
end of the period
|
$
|
27,440,987
|
$
|
—
|
$
|
27,440,987
|
||||
|
|
||||||||||
|
Supplemental
disclosure of cash flow information; cash paid for:
|
||||||||||
|
Interest
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
|
||||||||||
|
Income
taxes
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
See
accompanying notes to the financial statements
F-15
1.
NATURE OF OPERATIONS
We
were
incorporated in the State of Nevada as Pacific Spirit Inc. on May 4, 2001
to engage in the acquisition, exploration and development of natural resource
properties. On August 31, 2006, we changed our name to Xcorporeal, Inc. and
thereafter acquired the rights to our Wearable Artificial Kidney, congestive
heart failure treatment products, and other medical devices. As a result, we
transitioned to a development stage company focused on researching, developing
and commercializing technology and products related to the treatment of kidney
failure and congestive heart failure.
On
October 13, 2006, Xcorporeal, Inc., a Nevada corporation (Xcorporeal
Nevada), consummated a merger with and into its newly-formed, wholly-owned
subsidiary, Xcorporeal Merger Corporation, a Delaware corporation (Xcorporeal
Delaware) for the purpose of changing the Company’s domicile from Nevada to
Delaware. Each outstanding share of Xcorporeal Nevada common stock, par value
$0.001 per share, was automatically converted into one share of Xcorporeal
Delaware common stock, par value $0.0001 per share. The change in par value
has
been applied retroactively. As a result of the reincorporation, the total number
of common stock authorized changed from 100,000,000 shares to 40,000,000 common
shares; the total number of preferred stock authorized remained at 10,000,000
shares, resulting in a total number of capital stock authorized of 50,000,000
shares.
The
financial statements as of December 31, 2005, have been prepared using
generally accepted accounting principles in the United States of America
applicable for a going concern which assumes that the Company will realize
its
assets and discharge its liabilities in the ordinary course of business.
Realization values may be substantially different from carrying values as shown
and these financial statements do not give affect to adjustments that would
be
necessary to the carrying values and classifications of assets and liabilities
should the Company be unable to continue as a going concern. The Company has
a
working capital deficiency of $52,557 and as at December 31, 2005, has not
yet attained profitable operations and has accumulated a deficit of $143,557
since inception. Its ability to continue as a going concern is dependent upon
the ability of the Company to generate profitable operations in the future
and/or to obtain the necessary financing to meet its obligations and repay
its
liabilities arising from normal business operations when they come due. These
financial statements do not include any adjustments to the amounts and
classification of assets and liabilities that may be necessary should the
Company be unable to continue as a going concern. The Company anticipates that
additional funding will be in the form of equity financing from the sale of
common shares. The Company may also seek to obtain short-term loans from the
directors of the Company. There are no current arrangements in place for equity
funding or short-term loans.
2.
DEVELOPMENT STAGE COMPANY
We
were
previously a pre-exploration stage company as defined in the Statement of
Financial Accounting Standards (“SFAS”) No. 7 and the Securities and
Exchange Act Guide No. 7. Effective with the execution of the license
agreement on August 31, 2006, we are a development stage company, devoting
substantially all of our efforts to the research, development and
commercialization of kidney and congestive heart failure treatment
technologies.
Risks
and Uncertainties—
We
operate in an industry that is subject to intense competition, government
regulation and rapid technological change. Our operations are subject to
significant risk and uncertainties including financial, operational,
technological, regulatory and other risks associated with a development stage
company, including the potential risk of business failure.
3.
SUMMARY OF ACCOUNTING POLICIES
Cash
and Cash Equivalents —
Cash
equivalents are comprised of certain highly liquid investments with original
maturities of less than three months.
Property
and Equipment —
Property
and equipment are stated at cost less accumulated depreciation and amortization,
which are calculated using the straight-line method over the shorter of the
estimated useful lives of the related assets (generally ranging from three
to
five years), or the remaining lease term when applicable. Gains and losses
on
disposals are included in results of operations at amounts equal to the
difference between the book value of the disposed assets and the proceeds
received upon disposal. There were no gains or losses on disposals from
inception through the end of 2006. Expenditures for replacements and leasehold
improvements are capitalized, while expenditures for maintenance and repairs
are
expensed as incurred.
Identifiable
Intangibles and Amortization —
Costs
associated with obtaining and licensing patents and trademarks are capitalized
as incurred and are amortized on a straight-line basis over the shorter of
their
estimated useful lives or their legal lives of 17 to 20 years. Amortization
of such costs begins once the patent or trademark has been issued. We evaluate
the recoverability of our patent costs and trademarks quarterly based on
estimated undiscounted future cash flows.
F-16
Research
and Development —
Research
and development is expensed as incurred. Upfront and milestone payments made
to
third parties in connection with research and development collaborations prior
to regulatory approval are expensed as incurred. Payments made to third parties
subsequent to regulatory approval are capitalized and amortized over the shorter
of the remaining license or product patent life. At December 31, 2006, the
Company had no such capitalized research and development costs.
Income
Taxes —
Under
SFAS 109, “Accounting for Income Taxes,” deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the consolidated financial statements and their respective tax basis. Deferred
income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes, and (b) tax
credit carry-forwards. We record a valuation allowance for deferred tax assets
when, based on management’s best estimate of taxable income in the foreseeable
future, it is more likely than not that some portion of the deferred income
tax
assets may not be realized.
Earnings
per Share —
Under
SFAS 128, “Earnings per Share,” basic earnings per share is computed by dividing
net income available to common stockholders by the weighted average number
of
common shares assumed to be outstanding during the period of computation.
Diluted earnings per share reflect the potential dilution that could occur
if
securities or other contracts to issue common stock were exercised or converted
into common stock. As the Company had net losses for all periods presented,
basic and diluted loss per share are the same, as any additional common stock
equivalents would be anti-dilutive.
Share-Based
Compensation —
Effective January 1, 2006, we adopted FASB Statement No. 123R,
Share-Based
Payment
(“FAS
123R”) (see Note 14). FAS 123R requires all share-based payments to employees to
be expensed over the requisite service period based on the grant-date fair
value
of the awards and requires that the unvested portion of all outstanding awards
upon adoption be recognized using the same fair value and attribution
methodologies previously determined under FASB Statement No. 123,
Accounting
for Stock-Based Compensation
. We
continue to use the Black-Scholes valuation method and applied the requirements
of FAS 123R using the modified prospective method. Prior to January 1,
2006, there was no share-based compensation expense.
Use
of Estimates —
The
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States (“GAAP”) and, accordingly,
include certain amounts that are based on management’s best estimates and
judgments. Estimates are used in determining such items as provisions for sales
discounts and returns, depreciable and amortizable lives, recoverability of
inventories produced in preparation for product launches, amounts recorded
for
contingencies, environmental liabilities and other reserves, pension and other
postretirement benefit plan assumptions, share-based compensation, acquisitions
and taxes on income. Because of the uncertainty inherent in such estimates,
actual results may differ from these estimates.
Reclassifications
—
Certain
reclassifications have been made to prior year amounts to conform with the
current year presentation.
Recently
Issued Accounting Standards
In
February 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. (SFAS) 159, “ The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
Amendment of FASB Statement No. 115, Accounting for Certain Investments in
Debt and Equity Securities.”
SFAS
No. 159 permits an entity to choose to measure many financial instruments
and certain items at fair value. The objective of this standard is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reporting earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS No. 159 permits all entities to choose to measure eligible
items at fair value at specified election dates. Entities will report unrealized
gains and losses on items for which the fair value option has been elected
in
earnings at each subsequent reporting date. The fair value option: (a) may
be applied instrument by instrument, with a few exceptions, such as investments
accounted for by the equity method; (b) is irrevocable (unless a new
election date occurs); and (c) is applied only to entire instruments and
not to portions of instruments. SFAS No. 159 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2007, which for us would be our fiscal year beginning January 1, 2008.
Early adoption is permitted as of the beginning of the previous fiscal year
provided that the entity makes that choice in the first 120 days of that
fiscal year and also elects to apply to provision of FASB Statement
No. 157, “ Fair
Value Measurements.”
We
are
currently evaluating the impact that the adoption of
SFAS
No. 159 will have on our consolidated financial statements.
F-17
In
December 2006, the FASB issued FSP 00-19-2, Accounting
for Registration Payment Arrangements
(“
FSP
00-19-2”)
which
addresses accounting for registration payment arrangements. FSP 00-19-2
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether
issued
as a separate agreement or included as a provision of a financial instrument
or
other agreement, should be separately recognized and measured in accordance
with
FASB Statement No. 5, “ Accounting
for Contingencies
.” FSP
00-19-2 further clarifies that a financial instrument subject to a registration
payment arrangement should be accounted for in accordance with other applicable
generally accepted accounting principles without regard to the contingent
obligation to transfer consideration pursuant to the registration payment.
FSP
00-19-2 is effective immediately for registration payment arrangements and
the
financial instruments subject to those arrangements that are entered into
or
modified subsequent to December 21, 2006. For registration payment
arrangement and related financial instruments entered into prior to
December 21, 2006, FSP 00-19-2 is effective for financial statements issued
for fiscal years beginning after December 15, 2006 and interim periods
within those financial years. Companies are required to report transition
through a cumulative-effect adjustment to the opening balance of retained
earnings as of the first interim period for the fiscal year in which FSP
00-19-2
is adopted. We have early adopted FSP 00-19-2 in 2006. There was no impact
on
our financial statements upon adoption.
In
September 2006, the FASB issued FASB Statement No. 157, “ Fair
Value Measurements”
(“
SFAS
No. 157”).
SFAS
No. 157 establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, clarifies the definition of fair
value
within that framework, and expands disclosures about fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, which for us would be our fiscal year
beginning January 1, 2008. We are currently evaluating the impact that the
adoption of SFAS No. 157 will have on our consolidated financial
statements.
In
September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. (SAB) 108 (Topic 1N), “ Considering
the Effects of Prior Year Misstatement when Quantifying Misstatements in
Current
Year Financial Statements
,”. SAB
No. 108 requires SEC registrants (i) to quantify misstatements using a
combined approach that considers both the balance-sheet and income-statement
approaches, (ii) to evaluate whether either approach results in quantifying
an error that is material in light of relevant quantitative and qualitative
factors, and (iii) to adjust their financial statements if the new combined
approach results in a conclusion that an error is material. SAB No. 108 is
effective for fiscal years ending after November 15, 2006, which for us
would be our current fiscal year ending December 31, 2006. The adoption of
SAB No. 108 did not have any effect on our financial position and results
of operations.
In
July 2006, the FASB issued FASB Interpretation No. (FIN) 48, “
Accounting
for Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109”
(“
FIN
48”).
FIN
48 prescribes detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in an
enterprise’s financial statements in accordance with Statement No. 109, “
Accounting
for Income Taxes
.” Tax
positions must meet a more-likely-than-not recognition threshold at the
effective date to be recognized upon the adoption of FIN 48 and in subsequent
periods. FIN 48 will be effective for fiscal years beginning after
December 15, 2006 which for us would be our fiscal year beginning on
August 1, 2007. The provisions of FIN 48 will be applied to all tax
positions upon initial adoption of the Interpretation. The cumulative effect
of
applying the provisions of this Interpretation will be reported as an adjustment
to the opening balance of retained earnings for that fiscal year. We are
currently evaluating the impact of FIN 48 on our financial statements but
do not
believe that its adoption will have a material effect on our financial position
or results of operations.
F-18
4.
MINERAL PROPERTY
By
a
lease agreement effective June 1, 2001 and amended June 25, 2002,
November 25, 2002, January 9, 2004 and April 11, 2005, the
Company was granted the exclusive right to explore and mine the Del Oro and
NP
Claims located in Pershing County of the State of Nevada. The term of this
lease
was for 30 years, renewable for an additional 30 years so long as the
conditions of the lease are met. The Company was required to pay minimum
advanced royalties payments on each January 9 of $50,000. The Company did not
make the payment which triggered an event of default under the lease. On
March 10, 2006, the Company received a termination notice and the lease was
subsequently terminated.
5.
PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at December 31, 2006:
|
Furniture
and office equipment
|
$
|
3,423
|
||
|
Accumulated
depreciation
|
(95
|
)
|
||
|
|
||||
|
Property
and equipment, net
|
$
|
3,328
|
Depreciation
expense for the years ended December 31, 2006 and 2005 was $95 and $0,
respectively.
6.
INTEREST INCOME
Interest
income of $82,200 reported for the year ended December 31, 2006 is a result
of the interest earned on our cash raised from our private placement as further
described in Note 14 below.
7.
LEASES
During
2006 we assumed a month-to-month lease for our research lab at Cedars-Sinai
Medical Center at a rate of $4,191 per month. In addition, as part of our
License Agreement (see Note 12. License Agreement) we reimbursed our licensor
for rent for medical office space for a three month period through
November 30, 2006 at $1,400 per month. NQCI subleased this space from a
related party of ours. We paid the $1,400 per month rent for December 2006
and January 2007 directly to the related party.
8.
LICENSE EXPENSES
As
part
of our License Agreement with National Quality Care, Inc. (NQCI) dated
September 1, 2006, we agreed to pay reasonable and necessary expenses
incurred in the ordinary course of business consistent with past practices,
during the period September 1, 2006 until the date of closing or
termination of the Merger Agreement, which occurred on December 31,
2006.
During
2006, we paid $1,182,359 on three invoices totaling $1,478,516 and the disputed
balance is included under the caption ‘ Other
current liabilities’
in
the
accompanying balance sheet as of December 31, 2006.
9.
NON-CASH TRANSACTIONS
Investing
and financing activities during the year ended December 31, 2006 that do
not have a direct impact on current cash flows have been excluded from the
statements of cash flows as follows:
a)
We
cancelled 3,420,000 shares of common stock.
b)
We
issued 9,600,000 shares of common stock to acquire the right, title and interest
to the name “Xcorporeal,” related trademarks and domain names, and the right to
enter into the License Agreement to obtain the rights to technology relating
to
congestive heart and kidney failure treatment and other devices. The value
of
the stock was recorded at $1,000, the carryover basis of our 96% stockholder
immediately following the transaction.
c)
A
former director of the Company forgave $64,620 of unpaid advances and management
fees.
There
were no non-cash transactions during the year ended December 31,
2005.
F-19
10.
LOSS PER COMMON SHARE
The
following table sets forth the computation of basic and diluted loss per common
share:
|
|
Years
ended
|
||||||
|
|
December
31,
|
||||||
|
|
2006
|
2005
|
|||||
|
Numerator:
|
|
|
|||||
|
|
|
|
|||||
|
Net
Loss
|
$
|
(4,380,212
|
)
|
$
|
(35,753
|
)
|
|
|
|
|||||||
|
Denominator:
|
|||||||
|
Weighted
average outsanting shares of common stock
|
6,542,312
|
3,820,000
|
|||||
|
|
|||||||
|
Loss
per common share:
|
|||||||
|
|
|
|
|||||
|
Basic
|
$
|
(0.67
|
)
|
$
|
(0.01
|
)
|
|
|
|
|||||||
|
Diluted
|
$
|
(0.67
|
)
|
$
|
(0.01
|
)
|
|
Diluted
loss per common share for the years ended December 31, 2006 and 2005 does
not include the effect of stock options and warrants (see Note 15. Stock Options
and Warrants to Non-Employees) since their effect would be anti-dilutive.
Options and warrants outstanding at December 31, 2006 and 2005 were
approximately 1.9 million and nil, respectively.
11.
INCOME TAXES
The
(benefit) provision for taxes on income from continuing operations is
comprised of the following for the years ended December 31:
The
reported (benefit) provision for taxes on income from continuing operations
differs from the amount computed by applying the statutory federal income
tax
rate of 34% to loss before income taxes as follows for the years ended
December 31:
|
|
2006
(%)
|
2005
(%)
|
|||||
|
Income
tax benefit at statutory rate
|
(34.00
|
)
|
(34.00
|
)
|
|||
|
State
taxes, net of federal benefits
|
(5.83
|
)
|
(5.83
|
)
|
|||
|
Research
and development credits
|
(3.92
|
)
|
—
|
||||
|
Change
in valuation allowance
|
43.75
|
39.83
|
|||||
|
|
|||||||
|
Total
|
—
|
—
|
|||||
F-20
The
Company provides deferred income taxes for temporary differences between assets
and liabilities recognized for financial reporting and income tax purposes.
The
tax effects of temporary differences at December 31 are as
follows:
|
|
2006
|
|
2005
|
||||
|
Net
operating loss carryforwards
|
$
|
778,063
|
$
|
39,238
|
|||
|
Tax
credits
|
171,690
|
—
|
|||||
|
Deferred
Stock Based compensation
|
966,726
|
—
|
|||||
|
|
|||||||
|
Deferred
tax assets
|
1,916,479
|
39,238
|
|||||
|
Valuation
allowance
|
(1,916,479
|
)
|
(39,238
|
)
|
|||
|
|
|||||||
|
Net
deferred tax liability
|
$
|
(0
|
)
|
$
|
(0
|
)
|
|
|
|
|
Based
upon the Company’s development stage status and history of operating
losses, realization of its deferred tax assets does not meet the
“more
likely than not” criteria under SFAS No. 109 and, accordingly, a
valuation allowance for the entire deferred tax asset amount has
been
recorded.
|
|
|
||
|
|
|
The
valuation allowance had an increase of $1.8 million and $0.04 million
in
2006 and 2005, respectively.
|
|
|
||
|
|
|
At
December 31, 2006, the Company has net operating loss carry forwards
for federal and state income tax purposes of approximately
$1.9 million which begin to expire in 2026 and 2021, respectively. In
addition, the Company has research and development and other tax
credits
for federal and state income tax purposes of approximately $83,676
and
$88,014, respectively. The federal credits begin to expire in 2026
and
state credits do not expire for California purposes.
|
|
|
||
|
|
|
Pursuant
to Sections 382 and 383 of the Internal Revenue Code, the utilization
of net operating losses (“NOL”) and other tax attributes may be subject to
substantial limitations if certain ownership changes occur during
a
three-year testing period (as defined). The Company is currently
evaluating the effect of the recent stock issuances on its ability
to
utilize its NOL or credit
carryovers.
|
12.
LICENSE AGREEMENT
On
August 31, 2006, we entered into a Contribution Agreement with a company
whose sole managing member is our current Chairman. We issued 9,600,000 shares
of common stock in exchange for (a) the right, title, and interest to the
name “Xcorporeal” and related trademarks and domain names, and (b) the
right to enter into the Merger Agreement and License Agreement dated September
1, 2006 pursuant to which we obtained the exclusive rights to the technology
relating to our congestive heart failure treatment, kidney failure treatment,
and other medical devices. We were a shell corporation prior to the transaction.
We valued the License Agreement at the carry-over basis of $1,000. As
consideration for being granted the License, we agreed to pay a minimum annual
royalty of $250,000, or 7% of net sales. We recorded $83,300 in royalty expenses
covering the minimum royalties from commencement of the License Agreement
through December 31, 2006. The first minimum royalty payment is due by
December 1, 2007. The License Agreement expires in 2105.
13.
TERMINATED MERGER AGREEMENT
On
September 1, 2006, we entered into a Merger Agreement with our licensor,
NQCI, which contemplated that we would either (i) acquire it as a wholly
owned subsidiary pursuant to a triangular merger, or (ii) issue shares of
our common stock in consideration of the assignment of the licensed technology.
The Merger Agreement expired by its own terms on December 31, 2006. In
addition, on December 29, 2006, NQCI served written notice that it was
terminating the Merger Agreement, and on January 2, 2006, we consented to
the termination. Accordingly, the Merger Agreement is now terminated. We will
not be proceeding with any merger with NQCI. The termination of the Merger
Agreement had no effect on the License Agreement, the Contribution Agreement,
or
the shares we issued to CNL.
F-21
14.
STOCKHOLDERS’ EQUITY
During
the fourth quarter of 2006, we completed a private placement of an aggregate
of
4,200,050 unregistered shares of our common stock. Our shares were issued to
approximately 100 institutional and accredited investors, priced at $7.00 per
share, for proceeds of approximately $27.3 million, net of placement agent
fees of $2.1 million. Purchasers included affiliates of our board members
Marc Cummins, Nicholas Lewin and Jay Wolf. We accounted for the placement agent
fees as a reduction in the gross proceeds of the private placement and a credit
to additional paid-in capital. In addition, we issued 3-year warrants to
purchase 100,000 and 29,221 shares of our common stock to two placement agents
at $7.00 and $7.25 per share (“Placement Agent Warrants”), respectively. The
fair value of the Placement Agent Warrants issued is $615,810 and was determined
using the Black-Scholes option-pricing model with the following assumptions:
Annual dividends - zero, expected volatility - 110%, risk free interest rate
-
4.6%, expected life - 3 years.
On
August 31, 2006, we issued immediately-exercisable, five-year warrants to
purchase an aggregate of 325,000 shares of common stock (see Note 15. Stock
Options and Warrants). The fair value for the consulting services provided
of
approximately $2,162,611 was recorded as a credit to additional paid-in capital
and a debit to selling, general and administrative expenses.
The
private placement was exempt from registration pursuant to Rule 506
promulgated under Regulation D of the Securities Act of 1933, as amended,
as a transaction not involving a public offering. We entered into registration
rights agreements with each of the purchasers, obligating us to use best efforts
to file a registration statement covering the purchased shares. We filed a
registration statement on Form S-3 with the SEC on December 22, 2006 to
register the common stock issued under this transaction. In response to
correspondence from the staff of the SEC dated January 18, 2007, we filed a
registration withdrawal request with the SEC on January 31, 2007 to
withdraw the registration statement on Form S-3 previously filed until such
time
as our common stock is quoted on the “OTC Bulletin Board” administered by Nasdaq
or other exchange.
15.
STOCK OPTIONS AND WARRANTS
Incentive
Compensation Plan
On
October 13, 2006, our Board of Directors and stockholders unanimously
approved the Xcorporeal, Inc. 2006 Incentive Compensation Plan and the related
form of option agreement. The plan authorizes the grant of stock options,
restricted stock, restricted stock units and stock appreciation rights. As
of
December 31, 2006, there were 2,000,000 shares of common stock reserved for
issuance pursuant to the plan, subject to adjustment in accordance with the
provisions of the plan. The purpose of the plan is to assist us in attracting,
motivating, retaining and rewarding high-quality employees, officers, directors
and consultants.
Stock
Options
The
Compensation Committee of our Board of Directors determines the terms of the
options granted, including the exercise price, the number of shares subject
to
option, and the vesting period. Options generally vest over five years and
have
a maximum life of ten years. On November 14, 2006, we granted options to
purchase an aggregate of 1.6 million shares of our common stock under the
2006 Incentive Compensation Plan to two officers and the chairman of the
Company. The options vest ratably over 5 years, are exercisable at $5.00
per share and expire between 2011 and 2016. No options were granted during
the
year ended December 31, 2005. We reported $264,251 in stock-based
compensation expense during the year ended December 31, 2006. No
stock-based compensation expense was reported for the year ended
December 31, 2005.
F-22
All
compensation expense for stock options granted have been determined under
the
fair value method using the Black-Scholes option-pricing model with the
following assumptions:
|
|
For
the years ended December 31,
|
||||||
|
|
2006
|
2005
|
|||||
|
Annual
dividends
|
zero
|
—
|
|||||
|
Expected
volatility
|
110-135
|
%
|
—
|
||||
|
Risk
free interest rate
|
4.57-4.60
|
%
|
—
|
||||
|
Expected
life
|
5-10
years
|
—
|
|||||
In
addition, our Chief Medical and Scientific Officer will also be granted options
to purchase an additional 500,000 shares of our common stock upon FDA approval
of our first product.
Warrants
On
August 31, 2006, we issued immediately-exercisable, five-year warrants to
purchase an aggregate of 325,000 shares of common stock at $1.00 per share
to
consultants in exchange for services performed during the third quarter of
2006.
The fair value of the services provided was calculated using the Black-Scholes
pricing model and approximated $2,162,611. In addition, we issued 3-year
warrants to purchase 100,000 and 29,221 shares of our common stock to two
placement agents at $7.00 and $7.25 per share (“Placement Agent Warrants”),
respectively. The fair value of the Placement Agent Warrants issued is $615,810
and was also determined using the Black-Scholes option-pricing model. No
warrants were granted during the year ended December 31, 2005.
Compensation
for options granted to non-employees has been determined in accordance with
SFAS
No. 123 and EITF 96-18, “Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or
Services.” Accordingly, compensation expense is determined using the fair value
of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measured.
For
options and warrants issued as compensation to non-employees for services that
are fully vested and non-forfeitable at the time of issuance, the estimated
value is recorded in equity and expensed when the services are performed and
benefit is received as provided by Financial Accounting and Standards Board
(“FASB”) Emerging Issues Task Force No. 96-18 “Accounting For Equity
Instruments That Are Issued To Other Than Employees For Acquiring Or In
Conjunction With Selling Goods Or Services.” Non-vested options and warrants
issued for services performed are marked to market monthly.
All
charges for warrants granted have been determined under the fair value method
using the Black-Scholes option-pricing model with the following
assumptions:
|
|
For
the years ended December 31,
|
||||||
|
|
2006
|
2005
|
|||||
|
Annual
dividends
|
zero
|
—
|
|||||
|
Expected
volatility
|
110-120
|
%
|
—
|
||||
|
Risk
free interest rate
|
4.60-4.70
|
%
|
—
|
||||
|
Expected
life
|
3-5
years
|
—
|
|||||
F-23
The
following tables summarize information concerning outstanding options at
December 31, 2006 and 2005:
|
|
|
Weighted
|
|||||
|
|
|
Average
|
|||||
|
|
Stock
|
Exercise
|
|||||
|
|
Options
|
Price
|
|||||
|
Outstanding
at December 31, 2004
|
—
|
—
|
|||||
|
Granted
|
—
|
—
|
|||||
|
Exercised
|
—
|
—
|
|||||
|
Cancelled
or forfeited
|
—
|
—
|
|||||
|
|
|||||||
|
Outstanding
at December 31, 2005
|
—
|
—
|
|||||
|
|
|||||||
|
Granted
|
1,600,000
|
$
|
5.00
|
||||
|
Exercised
|
—
|
—
|
|||||
|
Cancelled
or forfeited
|
—
|
—
|
|||||
|
|
|||||||
|
Outstanding
at December 31, 2006
|
1,600,000
|
$
|
5.00
|
||||
|
|
|||||||
|
Exercisable
at December 31, 2005
|
—
|
—
|
|||||
|
|
|||||||
|
Exercisable
at December 31, 2006
|
—
|
—
|
|||||
The
following tables summarize information concerning outstanding warrants at
December 31, 2006 and 2005:
|
|
|
Weighted
|
|||||
|
|
|
Average
|
|||||
|
|
|
Exercise
|
|||||
|
|
Warrants
|
Price
|
|||||
|
Outstanding
at December 31, 2004
|
—
|
—
|
|||||
|
Granted
|
—
|
—
|
|||||
|
Exercised
|
—
|
—
|
|||||
|
Cancelled
or forfeited
|
—
|
—
|
|||||
|
|
|||||||
|
Outstanding
at December 31, 2005
|
—
|
—
|
|||||
|
|
|||||||
|
Granted
|
454,221
|
$
|
2.72
|
||||
|
Exercised
|
—
|
—
|
|||||
|
Cancelled
or forfeited
|
—
|
—
|
|||||
|
|
|||||||
|
Outstanding
at December 31, 2006
|
454,221
|
$
|
2.72
|
||||
|
|
|||||||
|
Exercisable
at December 31, 2005
|
—
|
—
|
|||||
|
|
|||||||
|
Exercisable
at December 31, 2006
|
454,221
|
$
|
2.72
|
||||
The
weighted average grant-date estimated fair value of stock options granted in
2005 and 2006 approximated nil and $10.3 million or $6.42 per share,
respectively. The weighted average grant-date estimated fair value of
warrants
granted in 2005 and 2006 approximated nil and $2.8 million or $6.11 per share,
respectively. At December 31, 2006, the unamortized compensation charges
related to outstanding stock options were $10.0 million. There were no
unamortized compensation charges related to warrants at December 31, 2006.
No stock options or warrants were exercised during the two years ended
December 31, 2006.
F-24
|
|
Stock
|
|||
|
|
Options
|
|||
|
Outstanding
at December 31, 2005
|
—
|
|||
|
|
||||
|
Granted
|
1,600,000
|
|||
|
Exercised
|
—
|
|||
|
Cancelled
or forfeited
|
—
|
|||
|
|
||||
|
Outstanding
at December 31, 2006
|
1,600,000
|
|||
The
weighted average remaining contractual life of the warrants that are exercisable
as of December 31, 2006 approximates 4.18 years. No stock options were
exercisable as of December 31, 2006.
16.
RELATED PARTY TRANSACTIONS
We
were
charged the following by a former director:
|
|
|
|
May
2, 2001
|
|||||||
|
|
|
|
(Date
of
|
|||||||
|
|
Year
ended
|
|
Inception)
to
|
|||||||
|
|
December
31,
|
|
December
31,
|
|||||||
|
|
2006
|
2005
|
2006
|
|||||||
|
Administrative
services
|
$
|
3,000
|
$
|
9,000
|
$
|
12,000
|
||||
We
owed
$64,620 to related party at August 31, 2006, a director as of that date,
consisting of unpaid advances and management fees. This amount was forgiven
by
the former director, who was no longer a shareholder as of the sale of his
common stock on August 31, 2006. The debt forgiveness was accounted for as
an Addition to Paid in Capital.
17.
SUBSEQUENT EVENTS (unaudited)
Amendment
of the 2006 Incentive Compensation Plan
On
February 27, 2007, our board of directors approved an amendment to the 2006
Incentive Compensation Plan to increase the number of shares of common stock
reserved for issuance under the plan from 2,000,000 to 3,900,000. The amendment
was previously approved by our stockholders.
Issuance
of Stock Options and Warrants
Also
on
February 27, 2007, the board of directors approved the issuance of options
and warrants to directors, officers, other employees and consultants to purchase
a total of 1,035,000 and 225,000, respectively, of our common stock.
The options will vest 20% on each of the first, second, third, fourth and fifth
anniversaries and expire five years from the grant date. The warrants have
a
5-year term and vest immediately.
Lease
for Corporate Headquarters
Effective
February 2, 2007, we entered into a one-year lease for our executive
offices of approximately 3,000 square feet for monthly rent of approximately
$11,000 per month.
F-25
INDEX
TO FINANCIAL STATEMENTS
|
Unaudited
Balance Sheets, June 30, 2007; December 31, 2006
|
F-26 | ||
|
Unaudited
Statements of Operations, three months ended June 30, 2007 and
2006; six
months ended June 30, 2007 and 2006
|
F-27 | ||
|
Unaudited
Statements of Cash Flows, six months ended June 30, 2006 and
2007
|
F-28 | ||
|
Notes
to Financial Statements, June 30, 2007
|
F-29 | ||
|
Report
of Independent Registered Public Accounting Firm
|
F-31
|
||
|
Balance
Sheets as of December 31, 2006 and 2005
|
F-32
|
||
|
Statements
of Operations for the years ended December 31, 2006 and
2005
|
F-33
|
||
|
Statements
of Changes in Stockholders' Deficit for the years ended December
31, 2006
and 2005
|
F-34
|
||
|
Statements
of Cash Flows for the years ended December 31, 2006 and 2005
|
F-35
|
||
|
Notes
to Financial Statements
|
F-36
|
UNAUDITED
BALANCE SHEETS
|
|
JUNE
30,
|
DECEMBER
31,
|
|||||
|
|
2007
|
2006
|
|||||
|
ASSETS
|
|
|
|||||
|
|
|
|
|||||
|
CURRENT
ASSETS
|
|
|
|||||
|
Cash
|
$
|
271
|
$
|
197
|
|||
|
|
|||||||
|
TOTAL
ASSETS
|
$
|
271
|
$
|
197
|
|||
|
|
|||||||
|
|
|||||||
|
CURRENT
LIABILITIES
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
57,418
|
$
|
392,681
|
|||
|
Advance
payable to officer
|
6,092
|
46,288
|
|||||
|
Note
payable to shareholder including accrued interest of
|
|||||||
|
$0
and $7,801
|
-
|
16,801
|
|||||
|
|
|||||||
|
Total
current liabilities
|
63,510
|
455,770
|
|||||
|
|
|||||||
|
COMMITMENTS
AND CONTINGENCIES
|
|||||||
|
|
|||||||
|
PREFERRED
STOCK, $0.01 stated value per share; 1,000,000 shares
authorized;
|
|||||||
|
No
shares issued or outstanding
|
-
|
-
|
|||||
|
COMMON
STOCK, $.01 par value per share; 60,000,000 shares
authorized;
|
|||||||
|
2,397,264
and 836,370 shares issued and outstanding at June 30, 2007
and
|
|||||||
|
December
31, 2006.
|
23,973
|
8,364
|
|||||
|
COMMON
STOCK, pending issuance (38,572 shares at December 31,
2006)
|
-
|
600,000
|
|||||
|
ADDITIONAL
PAID-IN CAPITAL
|
59,082,536
|
58,238,845
|
|||||
|
ACCUMULATED
DEFICIT
|
(59,169,74
|
)
|
(59,302,782
|
)
|
|||
|
|
|||||||
|
Total
stockholders’ deficit
|
(63,239
|
)
|
(455,573
|
)
|
|||
|
|
|||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$
|
271
|
$
|
197
|
|||
The
accompanying notes are an integral part of these financial
statements.
F-26
UNAUDITED
STATEMENTS OF OPERATIONS
|
|
THREE
MONTHS ENDED,
|
SIX
MONTHS ENDED
|
|||||||||||
|
|
JUNE
30
|
JUNE 30,
|
|||||||||||
|
|
2007
|
2006
|
2007
|
2006
|
|||||||||
|
Revenue
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||
|
|
|||||||||||||
|
General
and administrative expense
|
7,117
|
48,895
|
69,034
|
122,560
|
|||||||||
|
Stock
based compensation expense
|
-
|
-
|
34,800
|
-
|
|||||||||
|
Gain
on settlement of liabilities
|
-
|
-
|
-
-
|
||||||||||
|
Debt
settlement gain
|
-
|
(280,359
|
)
|
(237,281
|
)
|
(280,359
|
)
|
||||||
|
Interest
expense
|
-
|
168,266
|
413
|
411,342
|
|||||||||
|
|
|||||||||||||
|
Income
(loss) before income taxes
|
(7,117
|
)
|
63,198
|
133,034
|
(253,543
|
)
|
|||||||
|
Provision
for income taxes
|
-
|
-
|
-
|
-
|
|||||||||
|
|
|||||||||||||
|
Net
income (loss)
|
$
|
(7,117
|
)
|
$
|
63,198
|
$
|
133,034
|
$
|
(253,543
|
)
|
|||
|
|
|||||||||||||
|
Net
income (loss) per share - basic and diluted
|
$
|
0.00
|
$
|
0.00
|
$
|
0.07
|
$
|
0.00
|
|||||
|
|
|||||||||||||
|
Weighted
average common shares outstanding
|
|||||||||||||
|
-
basic and diluted
|
2,397,264
|
67,245,928
|
1,920,839
|
67,245,928
|
|||||||||
The
accompanying notes are an integral part of these financial
statements.
F-27
UNAUDITED
STATEMENTS OF CASH FLOWS
|
|
SIX
MONTHS ENDE
|
||||||
|
|
JUNE
30,
|
||||||
|
|
2007
|
2006
|
|||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|||||
|
Net
income (loss)
|
$
|
133,034
|
$
|
(253,543
|
)
|
||
|
Adjustments
to reconcile net income (loss) to net cash
|
|||||||
|
used
in operating activities:
|
|||||||
|
Amortization
of deferred debt discount
|
-
|
250,290
|
|||||
|
Accrual
for litigation and related interest
|
-
|
137,951
|
|||||
|
Gain
on settlement of accounts payable
|
(237,281
|
)
|
(280,359
|
)
|
|||
|
Stock
compensation expense
|
34,800
|
-
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
26,518
|
125,661
|
|||||
|
Payable
to CDSS Wind Down Inc.
|
-
|
20,000
|
|||||
|
|
|||||||
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(42,929
|
)
|
-
|
||||
|
|
|||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|||||||
|
Shares
issued to officer for cash advance
|
36,911
|
-
|
|||||
|
Cash
advance from officer
|
6,092
|
-
|
|||||
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
43,003
|
-
|
|||||
|
Net
increase in cash and cash equivalents
|
74
|
-
|
|||||
|
|
|||||||
|
Cash
and cash equivalents at the beginning of the period
|
197
|
197
|
|||||
|
|
|||||||
|
Cash
and cash equivalents at the end of the period
|
$
|
271
|
$
|
197
|
|||
|
|
|||||||
|
|
|||||||
|
|
|||||||
|
Common
stock issued to related party for legal services
|
$
|
15,000
|
$
|
-
|
|||
|
|
|||||||
|
Common
stock issued to officer to settle advances and notes
payable
|
$
|
63,089
|
$
|
-
|
|||
|
|
|||||||
|
Contribution
from CDSS to pay legal expenses
|
$
|
109,500
|
$
|
-
|
|||
|
|
|||||||
|
Payment
of liability by officer recorded as an advance
|
$
|
-
|
$
|
20,000
|
|||
The
accompanying notes are an integral part of these financial
statements.
F-28
NOTES
TO
FINANCIAL STATEMENTS
JUNE
30,
2007
NOTE
A -
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim
Financial Statements and Basis of Presentation
These
unaudited interim financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and in the opinion of management, reflect all adjustments
(consisting of normal, recurring adjustments) necessary to present fairly,
the
financial position, results of operations and cash flows of CT Holdings
Enterprises, Inc. (“CT Holdings” or the “Company”). On March 13, 2006
the Company changed its name from CT Holdings, Inc. to CT Holdings Enterprises,
Inc.
Some
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
in the United States have been condensed or omitted pursuant to rules and
regulations promulgated by the Securities and Exchange Commission (the
“Commission”). The results of operations for the interim periods
shown herein are not necessarily indicative of the results to be expected
for
any future interim period or for the entire year. These statements
should be read together with the audited financial statements and notes thereto
included in the Company’s Form 10-KSB for the year ended December 31, 2006 on
file with the Commission.
Description
of Business
CT
Holdings provides management expertise including consulting on operations,
marketing and strategic planning and a single source of capital to early
stage
technology companies. The Company was incorporated in Delaware in 1992. The
business model is designed to enable the companies with whom the Company
acquires or invests to become market leaders in their industries. The strategy
over the years has led to the development, acquisition and operation of
technology based businesses with compelling valuations and strong business
models. The goal is to realize the value of these investments for the Company's
shareholders through a subsequent liquidity event such as a sale, merger
or
initial public offering of the investee companies. However, our
business model is constrained by our lack of capital. At June 30, 2007, the
Company does not hold any investments and does not have any products or
services, customers or revenue, and the Company has no other lines of
business.
Liquidity
The
Company has incurred recurring operating losses and has a stockholders' deficit
at June 30, 2007 of $63,239. At June 30, 2007 there is a cash balance of
$271
and current liabilities total $63,510. The Company has limited access to
capital
at June 30, 2007, no plans to raise capital, and management has not identified
sources of capital at June 30, 2007. Past funding needs of the business have
been provided by financings through notes payable, cash advances and additional
investments from related parties, including the Company's CEO and CITN
Investment Inc ("CII"), an affiliate of the Company’s CEO, however there can be
no assurance that such funds will be available from these related parties
in the
future. The Company has been and continues to be dependent upon outside
financing to perform its business development activities, make investments
in
new technology companies and to fund operations.
Reverse
Stock Split
On
February 14, 2007 our shareholders approved a proposal to amend the Company’s
Certificate of Incorporation to combine shares of the Comany’s common stock to
effect a one for 70 reverse stock split. A 1 for 70 reverse stock split would
make available sufficient authorized shares of common stock to settle
commitments to issue shares and to potentially facilitate a corporate
transaction such as a merger or financing. Corporate transactions of this
nature
could improve liquidity, however there can be no assurance that the Company
will
enter into any corporate transaction to improve liquidity. The effect of
this
reverse split has been reflected in all share data for all periods
presented.
F-29
The
Company will continue to require working capital to fund operating expenses.
At
June 30, 2007, the Company has not identified sources of capital nor
does the
Company have any plans to raise sufficient amounts of capital to settle
liabilities or to fund business development activities.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenue and expenses during the reporting period.
Actual
results could differ from those estimates.
Net
Income (Loss) per Common Share
Basic
net
income (loss) per common share is computed by dividing net income (loss) to
common shareholders by the weighted average number of shares of common
stock
outstanding during the period.
Included
in the weighted average number of common shares outstanding for the three
and
six months ended June 30, 2006 are 38,571 shares that would have been
issued when a shareholder exercised his right to convert a note payable
to
common stock and 85,714 shares that would have been issued to the Company’s CEO
when he exercised his right to exchange Parago shares for CT Holdings’ shares if
the Company had the available authorized shares. These shares have
been included in the computation for the date that they would have been
issued. The effect of stock options for 41,679 shares of common stock
outstanding at June 30, 2006 have been excluded from the weighted average
shares
computation as they are antidilutive. The Company had no common stock
equivalents at June 30, 2007; therefore, for the three and six month periods
ended June 30, 2007, diluted earnings per share are the same as basic earnings
per share.
Income
Taxes
In
January 2007, the Company adopted the Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109” (FIN 48). This Interpretation
clarifies the accounting for uncertainty in income taxes recognized in
a
company’s financial statements. FIN 48 requires companies to determine whether
it is “more likely than not” that a tax position will be sustained upon
examination by the appropriate taxing authorieties before any part of thebenefit
can be recorded in the financial statements. it also provides guidance
on the
recognition, measurement and classification of income tax uncertainties,
along
with any related interest and penalties. The Company did not recognize
any
adjustments to our financial statements as a result of our implementation
of FIN
48.
NOTE
B -
RELATED PARTY TRANSACTIONS
On
March
2, 2007, the CEO exercised a right to acquire 250,000 shares of common
stock for
providing up to $100,000 of cash for working capital purposes. At December
31,
2006, the CEO had advanced the Company $46,288 against the $100,000 commitment
and at March 31, 2007, $6,408 remained available under his commitment due
to the
Company. This amount was received by the Company subsequent to March 31,
2007.
On March 9, 2007, in recognition of service to the Company, Mr. Economou,
a
director, was awarded 40,000 shares of common stock, Mr. Rogers, a director,
was
awarded 40,000 shares of common stock, Mr. Sawallich, a director, was awarded
20,000 shares of common stock, and Mr. Connelly, former Chief Financial
Officer,
was awarded 10,000 shares of common stock. During the first quarter of
2007, the
Company issued 50,000 shares to a law firm in which the CEO’s brother-in-law is
a partner, in exchange for a reduction in accrued legal expenses of $15,000.
The
Company also issued 5,000 shares each to two consultants. The Company recorded
stock based compensation expense in the amount of $34,800 related to these
issuances.
Also
on
March 2, 2007, following the effectiveness of the 1 for 70 reverse stock
split,
the 85,715 unissued shares related to a previously exercised option were
issued
to the CEO, 38,572 shares of common stock related to the conversion of
a note
payable to a shareholder were issued to the shareholder and 1,014,286 shares
were issued to CII for an option exercised by CII.
Pursuant
to the terms of the transition services agreement with CDSS until its
termination in December 2006, the Company agreed to pay CDSS $10,000 per
quarter
(reduced in July 2005 from $7,500 per month) for the services of its CEO,
CFO
and accounting and information management staff, as well as office rent
and
indirect overhead expenses. No amount was owed at March 31, 2007 because
all
amounts owed under the transition services agreement were released on December
4, 2006 pursuant to the Agreement discussed above.
During
the three months ended March 31, 2007, CDSS paid $109,500 in legal expenses
on
behalf of the Company. The $109,500 has been recorded as a contribution
from
CDSS.
On
June
30, 2007, the Company received a cash advance from its CEO of approximately
$6,000 for the purpose of paying various vendors.
On
August
7, 2007, the Company issued 500,000 shares of restricted common stock to
Steven
B. Solomon, the Company’s Chief Executive Officer, in connection with his
services to the Company and further advances of funds. The Company issued
the
restricted common stock in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, pursuant
to
a transaction to one accredited investor not involving any public
offering.
F-30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Shareholders
CT
Holdings Enterprises, Inc.
We
have
audited the accompanying balance sheets of CT Holdings Enterprises, Inc.,
formerly CT Holdings, Inc., (the Company) as of December 31, 2006 and 2005,
and
the related statements of operations, stockholders' deficit and cash flows
for
the years then ended. These financial statements are the responsibility of
the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have nor were we engaged to perform, audits of their internal
control over financial reporting. Our audits 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 includes examining,
on a test basis, 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 financial statements referred to above present fairly, in all
material respects, the financial position of CT Holdings Enterprises, Inc.
as of
December 31, 2006 and 2005, and the results of its operations and its cash
flows
for the years then ended in conformity with accounting principles generally
accepted in the United States.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As more fully described in Note A, although
the Company has a significant gain for the year ended December 31, 2006,
historically the Company has incurred recurring operating losses and has
a
significant working capital deficiency at December 31, 2006. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described
in
Note A. The financial statements do not include any adjustments that may
result
from the outcome of this uncertainty.
|
/s/
KBA Group LLP
Dallas,
Texas
March
30, 2007
|
F-31
|
DECEMBER
31,
|
|||||||
|
2006
|
|
2005
|
|||||
|
ASSETS
|
|||||||
|
CURRENT
ASSETS
|
|||||||
|
Cash
|
$
|
197
|
$
|
197
|
|||
|
TOTAL
ASSETS
|
$
|
197
|
$
|
197
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|||||||
|
CURRENT
LIABILITIES
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
392,681
|
$
|
387,654
|
|||
|
Convertible
secured note payable to related party, including accrued interest
of $772
and net of deferred debt discount of $250,290 at December 31,
2005
|
-
|
21,630
|
|||||
|
Demand
note payable to CDSS Wind Down Inc. including accrued interest
payable of
$76,784 at December 31, 2005
|
-
|
301,784
|
|||||
|
Payable
to CDSS Wind Down Inc.
|
-
|
650,000
|
|||||
|
Advance
payable to officer
|
46,288
|
-
|
|||||
|
Note
payable to shareholder including accrued interest of $7,801 and
$6,128
|
16,801
|
15,128
|
|||||
|
Accrual
for litigation including accrued interest of $1,404,590 at December
31,
2005
|
-
|
4,404,590
|
|||||
|
Total
current liabilities
|
455,770
|
5,780,786
|
|||||
|
COMMITMENTS
AND CONTINGENCIES
|
|||||||
|
STOCKHOLDERS’
DEFICIT
|
|||||||
|
Preferred
stock, $.01 par value per share; 1,000,000 shares authorized; no
shares
issued or outstanding
|
-
|
-
|
|||||
|
Common
stock, $.01 par value per share; 60,000,000 shares authorized;
836,370
shares issued and outstanding
|
8,364
|
8,364
|
|||||
|
Common
stock pending issuance(38,572 shares)
|
600,000
|
600,000
|
|||||
|
Additional
paid-in capital
|
58,238,845
|
58,238,845
|
|||||
|
Accumulated
deficit
|
(59,302,782
|
)
|
(64,627,798
|
)
|
|||
|
Total
stockholders’ deficit
|
(455,573
|
)
|
(5,780,589
|
)
|
|||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
$
|
197
|
$
|
197
|
|||
The
accompanying notes are an integral part of these financial
statements.
F-32
CT
HOLDINGS ENTERPRISES, INC.
(formerly
CT Holdings, Inc.)
STATEMENTS
OF OPERATIONS
|
Years
Ended
|
|||||||
|
December
31,
|
|||||||
|
2006
|
|
2005
|
|||||
|
Revenue
|
$
|
-
|
$
|
-
|
|||
|
General
and administrative expense
|
99,185
|
177,631
|
|||||
|
Settlement
of litigation
|
(4,583,852
|
)
|
-
|
||||
|
Gain
on extinguishment of debt from related parties
|
(1,294,330
|
)
|
-
|
||||
|
Related
party interest expense
|
285,922
|
215,489
|
|||||
|
Interest
expense related to litigation
|
179,262
|
278,852
|
|||||
|
Other
income
|
(11,203
|
)
|
-
|
||||
|
Net
income (loss)
|
5,325,016
|
(671,972
|
)
|
||||
|
Net
income (loss) per share
|
|||||||
|
-
basic and diluted
|
$
|
5.54
|
$
|
(0.70
|
)
|
||
|
Weighted
average shares outstanding -
|
|||||||
|
-
basic and diluted
|
960,656
|
960,656
|
|||||
The
accompanying notes are an integral part of these financial
statements.
F-33
CT
HOLDINGS ENTERPRISES, INC.
(formerly
CT Holdings, Inc.)
STATEMENTS
OF CHANGES IN STOCKHOLDERS' DEFICIT
|
Common
Stock
|
|
Common
Stock Pending
|
|
Additional
Paid
|
|
Accumulated
|
|
|
|
||||||||||
|
|
|
Shares
|
|
Amount
|
|
Issue
|
|
Capital
|
|
Deficit
|
|
Total
|
|||||||
|
Balances
at
|
|||||||||||||||||||
|
December
31, 2004
|
836,370
|
$
|
8,364
|
$
|
600,000
|
$
|
57,967,697
|
$
|
(63,955,826
|
)
|
$
|
(5,379,765
|
)
|
||||||
|
Beneficial
conversion feature of note payable to related party
|
-
|
-
|
-
|
271,148
|
-
|
271,148
|
|||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
(671,972
|
)
|
(671,972
|
)
|
|||||||||||
|
Balances
at December 31, 2005
|
836,370
|
8,364
|
600,000
|
58,238,845
|
(64,627,798
|
)
|
(5,780,589
|
)
|
|||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
5,325,016
|
5,325,016
|
|||||||||||||
|
Balances
at December 31, 2006
|
836,370
|
$
|
8,364
|
$
|
600,000
|
$
|
58,238,845
|
$
|
(59,302,782
|
)
|
$
|
(455,573
|
)
|
||||||
The
accompanying notes are an integral part of these financial
statements.
F-34
|
Years
Ended
|
|||||||
|
December
31,
|
|||||||
|
2006
|
|
2005
|
|||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|||||||
|
Net
income (loss)
|
$
|
5,325,016
|
$
|
(671,972
|
)
|
||
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|||||||
|
Amortization
of beneficial conversion feature on debt recorded as interest
expense
|
250,290
|
160,858
|
|||||
|
Accrual
for litigation and related interest expense
|
179,262
|
278,852
|
|||||
|
Settlement
of litigation
|
(4,583,852
|
)
|
-
|
||||
|
Gain
on extinguishment of debt from related parties
|
(1,294,330
|
)
|
-
|
||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
5,027
|
124,491
|
|||||
|
Interest
payable
|
35,632
|
-
|
|||||
|
Payable
to CDSS Wind Down Inc.
|
36,667
|
65,000
|
|||||
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(46,288
|
)
|
(42,771
|
)
|
|||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
-
|
-
|
|||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|||||||
|
Payments
made by officer to vendors on Company’s behalf
|
46,288
|
38,800
|
|||||
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
46,288
|
38,800
|
|||||
|
Net
change in cash and cash equivalents
|
-
|
(3,971
|
)
|
||||
|
Cash
and cash equivalents at the beginning of the year
|
197
|
4,168
|
|||||
|
Cash
and cash equivalents at the end of the year
|
$
|
197
|
$
|
197
|
|||
|
SUPPLEMENTAL
CASH FLOW ITEMS
|
|||||||
|
Interest
paid
|
$
|
-
|
$
|
-
|
|||
|
Income
taxes paid
|
$
|
-
|
$
|
-
|
|||
|
Beneficial
conversion feature of note payable to related party recorded as
deferred
debt discount
|
$
|
-
|
$
|
271,148
|
|||
|
Conversion
of advances and accrued interest into new note payable
|
$
|
-
|
$
|
71,148
|
|||
The
accompanying notes are an integral part of these financial
statements.
F-35
CT
HOLDINGS ENTERPRISES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE
OF BUSINESS
CT
Holdings Enterprises, Inc. (the "Company" or "CT Holdings") provides management
expertise including consulting on operations, marketing and strategic planning
and a single source of capital to early stage technology companies. The Company
was incorporated in Delaware in 1992. On March 13, 2006 the Company changed
its
name to CT Holdings Enterprises, Inc. The business model is designed to enable
the companies with whom the Company acquires or invests to become successful
in
their industries. The strategy over the years has led to the development,
acquisition and operation of technology based businesses with compelling
valuations and strong business models. The goal is to realize the value of
these
investments for the Company's shareholders through a subsequent liquidity event
such as a sale, merger or initial public offering of the investee companies.
At
December 31, 2006 the Company does not hold any investments and does not have
any products or services, customers or revenue, and the Company has no other
lines of business.
LIQUIDITY
The
Company has incurred recurring operating losses and has a significant
stockholders' deficit at December 31, 2006 of approximately $456,000. At
December 31, 2006 the cash balance was $197 and current liabilities total
approximately $456,000. We have limited access to capital, no plans to raise
capital and management has not identified sources of capital from unrelated
third parties. Past funding needs of the business have been provided by
financings through notes payable, cash advances and additional investments
from
related parties, including the Company's CEO and CITN Investment Inc. ("CII"),
an affiliate of the Company's CEO, however there can be no assurance that such
funds will be available from these related parties in the future. The Company
has been and continues to be dependent upon outside financing to perform its
business development activities, make investments in new technology companies
and to fund operations. The Company will continue to require working capital
to
fund operating expenses. The Company has explored investment and funding
alternatives but at December 31, 2006 the Company had not identified any
investments that would provide the ability to raise capital, nor did the Company
have any plans to raise sufficient amounts of capital to settle liabilities
or
to fund business development activities.
On
February 14, 2007 the Company's shareholders approved a proposal to amend the
Company's Certificate of Incorporation to combine shares of the Company's common
stock to effect a one for 70 reverse stock split. A 1 for 70 reverse stock
split
would make available sufficient authorized shares of common stock to settle
commitments to issue shares and to potentially facilitate a corporate
transaction such as a merger or financing. Corporate transactions of this nature
could improve liquidity, however there can be no assurance that the Company
will
enter into any corporate transaction to improve liquidity.
F-36
BASIS
OF PRESENTATION
The
accompanying financial statements of CT Holdings have been prepared in
accordance with accounting principles generally accepted in the United States.
All share and per share information contained in this report has been adjusted
to give effect to the 1 for 70 reverse stock split effective February 28,
2007.
USE
OF ESTIMATES
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the amounts reported in the financial statements. Actual results could
differ from those estimates. A valuation allowance is recorded to reduce
deferred tax assets to the amount that is believed more likely than not to
be
realized.
INVESTMENT
IN UNCONSOLIDATED AFFILIATES
At
December 31, 2006 the Company held no investments in unconsolidated affiliates.
At December 31, 2005 the Company held less than 20% ownership in two
unconsolidated affiliates, Parago, Inc. and River Logic, Inc. Both investments
were accounted for under the cost method of accounting and had no carrying
value
at December 31, 2005.
INCOME
TAXES
Deferred
income taxes are recognized using the asset and liability method. Deferred
income taxes are provided based upon estimated future tax effects of differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes calculated based upon
provisions of enacted laws.
STOCK-BASED
COMPENSATION
On
January 1, 2006, the Company adopted the modified prospective method of SFAS
No.
123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which is a revision
of SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123").
SFAS
No. 123R supersedes APB Opinion No. 25, and amends SFAS No. 95, "Statement
of
Cash Flows". SFAS No. 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. Pro forma disclosure is no longer an
alternative. Under the modified prospective application, SFAS No. 123R is
applied to new awards and to awards modified, repurchased or cancelled after
the
effective date. Compensation cost for the portion of awards for which requisite
service has not been rendered that are outstanding as of the effective date
is
recognized as the requisite service is rendered on or after the effective
date.
The compensation cost for that portion of awards is based on the grant date
fair
value of those awards as calculated for pro-forma disclosures under SFAS
No.
123.
All
awards outstanding at December 31, 2006 had been fully vested in periods
prior
to January 1, 2006 and therefore, the financial statements do not reflect
any
compensation expense related to stock-based compensation.
The
Company does not have any employees or significant operations and does not
anticipate issuing any share-based payments in the future, therefore the
SFAS
123R is not expected to have a significant effect on the Company's financial
condition, cash flows or results of operations. However should the Company's
operations change, and include the issuance of share-based payments, SFAS
No.
123R would require the recording of stock compensation expense in the
future.
Prior
to
January 1, 2006, the Company accounted for stock-based employee compensation
arrangements in accordance with provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and complied
with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No.
123".
F-37
Under
APB
Opinion No. 25, compensation expense for employees is based on the excess,
if
any, on the date of grant, of the fair value of the Company's stock over the
exercise price and is recognized on a straight-line basis over the vesting
term
of the option. All awards outstanding at December 31, 2005 had been fully vested
in periods prior to January 1, 2005 and therefore, no pro forma footnote
disclosure is provided in the financial statements.
The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123 and SFAS No. 148 and Emerging Issues Task
Force Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on
the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable. The measurement date
of the fair value of the equity instrument issued is the earlier of the date
on
which the counterparty's performance is complete or the date on which it is
probable that performance will occur.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
Company's financial instruments, including accounts payable and notes payable
are carried at cost, which approximates fair value due to the short maturity
of
these instruments.
NET
INCOME OR LOSS PER COMMON SHARE
On
February 14, 2007 the Company's shareholders approved a 1 for 70 reverse stock
split and as a result, the number of shares of common stock used in the
computation of net income of loss per share was adjusted to reflect this reverse
stock split for all periods presented. Basic and diluted net income per common
share for the year ended December 31, 2006 was computed by dividing net income
by 960,656 weighted average shares of common stock outstanding during the year.
Included in the weighted average number of common shares outstanding for the
year ended December 31, 2006 are 38,572 shares that would have been issued
when
a shareholder exercised his right to convert a note payable to common stock
(as
discussed in Note D) and 85,715 shares that would have been issued to the CEO
when he exercised his right to exchange Parago shares for CT Holdings shares
if
the Company had the available authorized shares (as discussed in Note E). The
weighted average shares outstanding used in the computation of diluted net
income per share excludes stock options to purchase 39,285 shares of common
stock at December 31, 2006 and the effect of an option to acquire 51% of the
outstanding shares of the Company, approximately 1,014,286 shares at December
31, 2006, held by CITN Investment Inc. ("CII"), an affiliate of the Company's
CEO, because the option exercise prices exceeded the average market price of
the
common stock for the year ended December 31, 2006 resulting in an anti-dilutive
effect to the per share amounts.
Basic
and
diluted net loss per common share for the year ended December 31, 2005, adjusted
for the 1 for 70 reverse stock split, was computed by dividing net loss by
960,656 weighted average shares of common stock outstanding during the year.
Included in the weighted average number of common shares outstanding for the
year ended December 31, 2006 are 38,572 shares that would have been issued
when
a shareholder exercised his right to convert a note payable to common stock
(as
discussed in Note D) and 85,715 shares that would have been issued to the CEO
when he exercised his right to exchange Parago shares for CT Holdings shares
if
the Company had the available authorized shares (as discussed in Note E). Stock
options to purchase 41,250 shares of common stock at December 31, 2005 were
excluded from the computation of diluted loss per share, as the effect would
be
anti-dilutive. In addition, diluted net loss per share excludes the
anti-dilutive effects
of the conversion feature of the Company's convertible note due CITN Investment
Inc. ("CII"), an affiliate of the Company's CEO, at December 31, 2005 and an
option to acquire 51% of the outstanding shares of the Company, approximately
1,014,286 shares at December 31, 2005, held by CII.
F-38
NOTE
B INCOME TAXES
The
significant components of the Company's deferred tax assets are as
follows:
|
December
31,
|
|||||||
|
2006
|
|
2005
|
|||||
|
Deferred
tax assets
|
|||||||
|
Net
operating loss carryforwards
|
$
|
4,578,000
|
$
|
10,948,000
|
|||
|
Capital
loss carryforward
|
1,042,000
|
-
|
|||||
|
Reserve
on investments
|
-
|
1,059,000
|
|||||
|
Accounts
payable and accrued expenses
|
-
|
1,498,000
|
|||||
|
Total
deferred tax assets, net
|
5,620,000
|
13,505,000
|
|||||
|
Valuation
allowance
|
(5,620,000
|
)
|
(13,505,000
|
)
|
|||
|
Total
deferred tax assets, net
|
$
|
-
|
$
|
-
|
|||
The
difference between the provision for income taxes and the amount computed
by
applying the federal statutory rate to loss before provision for income taxes
are as follows:
|
December
31,
|
|
||||||
|
|
|
2006
|
|
2005
|
|||
|
Provision
(benefit) computed at federal statutory rate
|
$
|
1,811,000
|
$
|
(228,000
|
)
|
||
|
Capital
loss
|
1,042,000
|
-
|
|||||
|
Net
operating loss adjustment
|
4,505,000
|
-
|
|||||
|
Permanent
differences
|
158,000
|
79,000
|
|||||
|
Other
|
369,000
|
-
|
|||||
|
Increase
(decrease) in valuation allowance
|
(7,885,000
|
)
|
149,000
|
||||
| $ |
-
|
$
|
-
|
||||
For
federal income tax purposes, at December 31, 2006 the Company had a net
operating loss carryforward of approximately $13,500,000, which is subject
to
annual limitations as prescribed by the Internal Revenue Code, is available
to
offset future taxable income and expires at various dates through 2026. In
2002,
the Company divested of businesses it had owned having net operating loss
carryforwards through the date of divestiture of approximately $13.2 million
and
a related deferred tax asset and offsetting valuation allowance of approximately
$4.5 million. In 2006, the Company clarified its tax position on the net
operating loss carryforwards of these divested businesses and reduced the total
amount of net loss carryforwards by approximately $13.2 million and also reduced
the related deferred tax asset and valuation allowance by approximately $4.5
million. The reduction of the net operating loss carryforward, the deferred
tax
asset and the valuation allowance has no impact on the current year tax
computation as the Company believes that due to a history of recurring operating
losses, the net operating loss carryforwards and the related deferred tax asset
were not realizable at any time since the divestiture of these businesses in
2002.
The
Company also had a capital loss carryforward of approximately $3,100,000,
related to the sale of its investments in Parago and River Logic, which is
also
subject to annual limitations prescribed by the Internal Revenue Code, and
is
available to offset future capital gains through expiration in 2011. A valuation
allowance has been recorded for the entire amount of the net deferred tax asset
due to uncertainty of realization.
F-39
NOTE
C - STOCK OPTIONS
The
Company has issued stock options to purchase common stock to directors,
employees and consultants. Options are granted at no less than fair value at
the
date of grant. Generally, the options vest over no more than three years. See
NOTE E - Related Party Transactions for a discussion of an option held by CITN
Investment Inc., exercisable pursuant to the settlement of a note payable,
to
acquire 51% of the shares outstanding following the effectiveness of a reverse
stock split. There were 39,285 and 41,250 stock options outstanding, fully
vested and exercisable, at December 31, 2006 and 2005, respectively. The
following tables summarize information regarding stock options at December
31,
2006:
|
2006
|
|
2005
|
|
||||||||||||||||
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
Weighted
|
|
||||||
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
Average
|
|
||||||
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Exercise
|
|
||||||
|
|
|
Shares
|
|
Price
|
|
Term
|
|
Value
|
|
Shares
|
|
Price
|
|
||||||
|
Outstanding
at the beginning of the year
|
41,250
|
$
|
16.120
|
41,682
|
$
|
16.932
|
|||||||||||||
|
Granted
|
-
|
-
|
|||||||||||||||||
|
Modified
|
-
|
-
|
|||||||||||||||||
|
Exercised
|
-
|
-
|
|||||||||||||||||
|
Cancelled
|
(1,965
|
)
|
$
|
13.995
|
(432
|
)
|
$
|
94.767
|
|||||||||||
|
Outstanding
at the end of the year
|
39,285
|
$
|
16.227
|
4.30
years
|
$
|
0.00
|
41,250
|
$
|
16.120
|
||||||||||
|
Vested
and expected to vest at December 31, 2006
|
39,285
|
$
|
16.227
|
4.30
Years
|
$
|
0.00
|
41,250
|
$
|
16.120
|
||||||||||
|
Options
exercisable at December 31, 2006
|
39,285
|
$
|
16.227
|
4.30
years
|
$
|
0.00
|
41,250
|
$
|
16.120
|
||||||||||
All
awards outstanding at December 31, 2006 and 2005 had been fully vested in
periods prior to January 1, 2005. Details of option exercise prices are shown
below.
|
Range
of exercise Prices
|
Outstanding/
Exercisable Shares
|
Weighted-average
remaining contractual life (in years)
|
Weighted-
average exercise price
|
||||||||
| $ |
14.0000
|
32,142
|
4.33
|
$
|
14.0000
|
||||||
| $ |
26.2495
|
7,143
|
4.14
|
$
|
26.2495
|
||||||
|
39,285
|
$
|
16.2276
|
|||||||||
The
Company uses the Black-Scholes option-pricing model to value compensation
expense related to its stock options. All awards outstanding at December 31,
2006 and 2005 had been fully vested in periods prior to January 1, 2005 and
as a
result, the Company had no unrecognized compensation expense related to stock
options.
See
NOTE
E - Related Party Transactions for a discussion of an option held by CITN
Investment Inc., exercisable at December 31, 2006 pursuant to the settlement
of
a note payable, to acquire 1,014,286 shares of common stock following the
effectiveness of a reverse stock split.
F-40
NOTE
D - NOTES PAYABLE TO SHAREHOLDERS
The
Company has presented $600,000 as "Common stock pending issuance", a separate
Component of Stockholders' Deficit at December 31, 2006 and 2005. This
represents 38,572 shares of CT Holdings that were to be issued upon the
conversion of a note payable to a shareholder in 2003. Due to the lack of
available authorized shares, the shareholder has waived his right to receive
these shares until such time as the shares become authorized. When these
shares
are issued the Company will record an increase to Common Stock of $386 (par
value) and to additional paid-in capital of $599,614. See NOTE - G SUBSEQUENT
EVENTS for a further discussion of the unissued shares.
The
Company has a note payable which was originally due June 30, 2002 for $9,000
to
a shareholder which was in default at December 31, 2006 and 2005 and because
it
is in default, bears interest at 18% per annum. Accrued interest on the note
payable was $7,801 and $6,128 at December 31, 2006 and 2005.
NOTE
E - RELATED PARTY TRANSACTIONS
At
December 31, 2005, the Company had a convertible note payable due to a related
party, CITN Investment, Inc., a Texas corporation ("CII") and an affiliate
of
the Company's CEO. The convertible note was first issued on May 24, 2004,
when
the Company entered into a Loan and Security Agreement (the "Loan Agreement")
with CII. The Loan Agreement provided for advances by CII to the Company
of up
to $600,000, such advances to be made in the sole discretion of CII.
In
the event the entire $600,000 was advanced to the Company, the loans would
be
convertible, at the option of CII, into 51% of the fully diluted common stock
outstanding, approximately 1,014,286 shares of the Company's common stock,
and a
pro rata amount of such number of shares in the event less than the $600,000
was
advanced to the Company. All advances under the Loan Agreement were secured
by a
pledge of all the Company's assets. On May 24, 2004, the Company was advanced
$200,000 by CII pursuant to the terms of the Loan Agreement and evidenced
by a
Secured Convertible Promissory Note (the "Note"). The Note was amended in
December 2005 as discussed below.
In
December 2005, the Company and CII entered into an Amended and Restated Secured
Convertible Promissory Note (the "Amended Note"). Pursuant to the Amended
Note,
the principal was increased to $271,148 resulting from the combination of
the
principal and accrued interest from the original note with CII and additional
advances of $43,800 plus accrued interest of $1,222 through the issue date
of
the Amended Note. The Amended Note was convertible into approximately 3.4
million shares of common stock. The note accrued interest at 8% per annum
and
was due the earlier of May 24, 2006 or on demand by CII. This Amended Note
was
secured by a pledge of all of the Company's assets. The accrued interest
on the
Amended Note at December 31, 2005 was $772.
The
conversion price of the Amended Note of approximately $0.00113 per share
was
below the fair value per share of the common stock at the date the note was
issued. In addition, the Company issued an option to CII to acquire 51% of
the
fully diluted shares outstanding, approximately 1,014,286 shares of common
stock
at an exercise price of par value per share. Accordingly, the Company recorded
the fair value of the option and beneficial conversion feature of the note
payable of $271,148 as debt discount. The debt discount was being amortized
over
the life of the Note and a $20,858 charge was recorded as interest expense
during the year ended December 31, 2005. The Amended Note was recorded net
of
deferred debt discount of $250,290 at December 31, 2005. As a result of the
amendment, the original debt discount of $140,000 related to the Note was
fully
amortized to interest expense during the year ended December 31,
2005.
If
the
Amended Note was repaid by the Company, CII had an option to purchase 51% of
the
Company's common stock, or 1,014,268 shares of the Company's common stock at
an
exercise price equal to the par value per share ($0.01 per share). The note
was
settled in May 2006 and the option became exercisable (see discussion of the
settlement below). The option would expire on the earlier of May 22, 2011 or
60
days after the effectiveness of a reverse stock split. See NOTE - G SUBSEQUENT
EVENTS for a further discussion of the unissued shares.
On
May
22, 2006 the Company and CII entered into a settlement of the Amended Note,
pursuant to which CII agreed to release the Company from indebtedness and
accrued interest under the Amended Note of $271,148 plus accrued interest of
$9,211 through May 22, 2006, in exchange for the delivery to CII of the shares
of Parago and River Logic owned by the Company. The Company recorded a gain
on
the extinguishment of debt gain with related party for this transaction in
the
amount of $280,359 in the second quarter of 2006.
In
connection with the sale of substantially all of the assets of Citadel Security
Software Inc. ("CDSS"), a former affiliated investee company, the Company
entered into an Agreement dated as of December 4, 2006 (the "Agreement")
with
CDSS. Pursuant to the Agreement with CDSS:
1.
the
Company and CDSS canceled and terminated the Tax Disaffiliation Agreement
dated
as of May 17, 2002, and Transition Services Agreement dated as of May 17,
2002
between the Company and CDSS;
2.
each
party released the other from all outstanding liabilities to each
other;
3.
CDSS
assigned to the Company causes of action and rights of CDSS related to claims
against CDSS's insurance carrier related to prior litigation;
4.
the
Company waived any and all rights in and to any of the assets transferred
by
CDSS pursuant to the asset purchase agreement; and
5.
the
Company waived any prohibition or restriction to the transactions contemplated
by the asset purchase agreement set forth in the Agreement and Plan of
Distribution dated as of May 17, 2002 between the Company and CDSS or
otherwise.
As
a
result of this Agreement included in the gain on the extinguishment of debt
with
related parties is approximately $327,000 representing the release of principal
and interest of owed to CDSS for an unsecured demand note payable and
approximately $687,000 for the gain on the release of a non-interest bearing
payable to CDSS.
During
2006 our CEO paid approximately $46,000 of operating expenses on behalf of
the
Company for which we recorded an advance payable of $46,000. This advance
is
non-interest bearing and is due on demand. During 2005, the Company's CEO
advanced $38,800 and in December 2005, this amount plus a $5,000 note due
to the
Company's CEO were converted to principle in the Amended Note previously
discussed.
F-42
The
Company has an accrued liability to a law firm in which an attorney who is
a
partner and who was a former CT Holdings' employee and is a relative the
Company's CEO of approximately $97,000 and $100,000 at December 31, 2006 and
2005, respectively.
Pursuant
to the terms of the transition services agreement with CDSS until its
termination in December 2006, the Company agreed to pay CDSS $10,000 per quarter
(reduced in July 2005 from $7,500 per month) for the services of its CEO, CFO
and accounting and information management staff, as well as office rent and
indirect overhead expenses. The Company had a liability recorded for $650,000
for amounts payable to CDSS under this agreement at December 31, 2005. No amount
was owed at December 31, 2006 because all amounts owed under the transition
services agreement were released on December 4, 2006 pursuant to the Agreement
discussed above.
In
June
2001, the Company's CEO and a director funded and guaranteed CT Holdings'
participation in a bridge loan financing to Parago. In consideration for this
funding and guarantees, CT Holdings had agreed to permit the CEO to exchange
up
to 5,000,000 (pre 1:1000 reverse stock split) Parago shares into up to 85,715
shares of CT Holdings' common stock. The CEO exercised the exchange right in
February 2004. The CEO waived his right to receive the shares of CT Holdings
until the authorized shares become available. See NOTE - G SUBSEQUENT EVENTS
for
a further discussion of the unissued shares.
NOTE
F - SETTLEMENT OF LAWSUIT
Since
August 1998 the Company had been engaged in litigation with Meyers Associates,
L.P. f/k/a Roan/Meyers Associates, L.P. and f/k/a Janssen-Meyers Associates,
L.P. (collectively "Meyers"). The original lawsuit arose out of an alleged
1995
contract with a predecessor entity of the Company. Since the original lawsuit
was filed, a number of court actions, motions and judgments have been
prosecuted. Two lawsuits with Meyers, further described below, were being
vigorously defended during the years ended December 31, 2006 and 2005. A
settlement of all litigation with Meyers was reached during 2006 and is
discussed below.
In
December 2001, the plaintiffs refiled a lawsuit, previously dismissed by a
federal court, in state court, seeking to enforce a proposed settlement term
sheet executed on July 7, 2000. The case was filed in the Supreme Court of
New
York, that state's trial court, in a case styled Roan Meyers v. CT Holdings.
CT
Holdings filed counterclaims for breach of the term sheet as well as breach
of
the placement agency agreement. Cross motions for partial summary judgments
were
argued but on June 9, 2004 the court entered judgment in favor of Roan-Meyers
in
the amount of $3,000,000 and granted interest at the rate of 9% from October
31,
2000 through the date of final judgment, and thereafter at the statutory rate
allowed by law. The Company appealed the final judgment, and the appellate
court
affirmed the trial court's decision. The $3,000,000 judgment as well as the
interest from October 2000 through December 31, 2005 of $1,404,590 was accrued
at December 31, 2005. The Company continued to accrue interest on the judgment
of approximately $179,000 during the year ended December 31, 2006 until ultimate
settlement of the lawsuit discussed below.
F-43
On
April
8, 2005, Meyers filed a lawsuit in the Court of Chancery of the State of
Delaware, in New Castle County, against the Company, Citadel Security Software,
Inc. (CDSS) including Steven B. Solomon, the Chief Executive and a Director
of
the Company, Chris A. Economou, a Director of the Company, Lawrence Lacerte,
a
former Director of the Company, and Phillip J. Romano, a former Director of
the
Company (the "Individual Defendants"). The suit alleged that in connection
with
an action filed in the Supreme Court of New York, New York County, to enforce
a
Settlement Term Sheet executed on July 7, 2000 by Meyers and CT Holdings, Meyers
was awarded a judgment against CT Holdings in the amount of $3 million plus
interest on the judgment at the rate of 9% from October 31, 2000 until the
date
of entry of that judgment and thereafter at the statutory rate (the "Judgment").
CT Holdings appealed the Judgment. The suit also alleged that CT Holdings'
May
2002 spin-off of its interests in CDSS to CT Holdings' shareholders rendered
CT
Holdings insolvent and constituted a fraudulent conveyance to defraud CT
Holdings' creditors, including Meyers. The suit asserted fraudulent conveyance
claims against CDSS and CT Holdings pursuant to Delaware statutory and common
law. The suit also asserted a claim against CDSS for successor liability as
the
alleged successor in interest or alter ego of CT Holdings. The suit alleged
that
the Individual Defendants who were officers and/or directors of CT Holdings
at
the time of the spin-off breached fiduciary duties allegedly owed to creditors
of CT Holdings, including Meyers, by approving and allowing the spin-off
transaction. The suit seeks to void the spin-off transaction or alternatively
to
hold CDSS liable for the Judgment including interest, to recover damages against
the Individual Defendants in an amount not less than the Judgment including
interest, plus an unspecified amount of punitive, consequential and incidental
damages, as well as attorneys' fees and costs.
On
August
23, 2006, CT Holdings and certain other parties entered into a Release and
Settlement Agreement ("Agreement") by and among Meyers and their related parties
(collectively, the "Meyers Released Parties") on the one hand and defendants
CT
Holdings Enterprises, Citadel Security Software Inc., Steven B. Solomon, Chris
A. Economou, Lawrence Lacerte, Mark Rogers, Phillip J. Romano, Axel Sawallich,
George Sharp and Gilbert Gertner (collectively "Defendants") on the other hand.
The Agreement provides for the settlement of litigation filed by Meyers against
defendants CDSS, CT Holdings Enterprises, certain of CDSS's current and former
directors and officers, Steven B. Solomon, Chris E. Economou, Lawrence Lacerte,
Mark Rodgers, Phillip J. Romano and Axel Sawallich in the Court of Chancery
of
the State of Delaware in and for New Castle County (the "Delaware Action")
asserting various claims, and other litigation against CT Holdings and its
former officers and directors (the "Actions"). Pursuant to the Agreement, CDSS
paid the sum of $1,250,000 to Meyers in two payments, the first payment of
$250,000 was made upon signing of the Agreement in August 2006 and the second
payment of $1,000,000 was made on November 1, 2006 in accordance with the terms
of the Agreement. The Defendants were released by the Plaintiffs from all claims
in the actions 91 days after receipt of the payments, subject to the terms
and
conditions of the agreement. Accordingly, the Company reversed the accrued
liability for Meyers legal claims during 2006 in the amount of $4,583,852 and
recorded a benefit from a settlement of lawsuit in the same amount.
F-44
NOTE
G - SUBSEQUENT EVENTS
On
February 14, 2007 the Company's shareholders approved a proposal to amend the
Company's Certificate of Incorporation to combine shares of the Company's common
stock to effect a one for 70 reverse stock split. A 1 for 70 reverse stock
split
would make available sufficient authorized shares of common stock to settle
commitments to issue shares and to potentially facilitate a corporate
transaction such as a merger or financing. Corporate transactions of this nature
could improve liquidity, however there can be no assurance that the Company
will
enter into any corporate transaction to improve liquidity.
On
March
2, 2007, following the effectiveness of the 1 for 70 reverse stock split, the
85,715 unissued shares related to a previously exercised option were issued
to
the CEO, 38,572 shares of common stock related to the conversion of a note
payable to a shareholder were issued to the shareholder and the option for
1,014,286 shares held by CII exercised by CII.
On
March
2, 2007, the CEO of the Company acquired 250,000 shares of the Company's
common stock for providing up to $100,000 of cash to fund operating expenses
of
the Company.
On
March
9, 2007 the Company awarded 110,000 shares of common stock to three directors
and an officer of the Company. The Company expects to record stock based
compensation expense during the first quarter of 2007 for the fair value
of
common shares of approximately $32,000.
In
August
2007, the Company issued 500,000 shares of its common stock to its Chief
Executive Officer for services rendered and in settlement of an outstanding
payable.
F-45
ANNEX
A
MERGER
AGREEMENT
This Merger Agreement
(“Agreement”) is entered into as of August 10, 2007, by and among CT
Holdings Enterprises, Inc., a Delaware corporation (“CTHE”), XC
Acquisition Corporation, a Delaware corporation and a newly-created wholly-owned
subsidiary of CTHE (“Merger Sub”), and Xcorporeal, Inc., a Delaware
corporation (“Company”) (each a “Party” and collectively the
“Parties”).
RECITALS
A. This Agreement
contemplates a
reverse triangular merger, of Merger Sub with and into Company in a transaction
intended to qualify as a tax free reorganization under Sections 368(a)(1)(A)
and
368(a)(2)(E) of the Code.
B. At the Closing,
all holders
(“Company Stockholders”) of shares of common stock, par value $0.0001
(“Company Shares”) of the Company will receive shares of common stock,
$0.01 par value (“CTHE Shares”) of CTHE in exchange for all of their
Company Shares, and the Company will become a wholly-owned Subsidiary of
CTHE.
NOW,
THEREFORE, in
consideration of the premises and the representations, warranties and covenants
contained herein, the Parties agree as follows.
1.
Basic Transaction.
A. Merger. On
and subject
to the terms and conditions of this Agreement, Merger Sub will merge with
and
into Company (the “Merger”). Pursuant to the Merger, the Company Shares
will be converted into CTHE Shares at the rate set forth herein. Company
will be
the corporation surviving the Merger (after the Closing, the “Surviving
Corporation”), and the separate corporate existence of Merger Sub will
cease.
B. Documents. As
soon as
practicable following the execution of this Agreement, each Party will
promptly
prepare, execute and deliver to the others the various certificates,
instruments, and documents referred to herein.
C. Closing. The
closing of
the Merger will take place as soon as practicable on the business day following
the satisfaction or waiver of all conditions to the obligations of the
Parties
to consummate the transaction, other than conditions with respect to actions
the
respective Parties will take at the Closing itself, or such other time
as the
Parties may mutually determine (the “Closing”).
D. Merger Certificate. At
the Closing of the Merger, CTHE will file with the Secretary of State of
the
State of Delaware a Certificate of Merger between Company and Merger Sub,
in the
form attached hereto as Exhibit A (the “Merger Certificate”).
E. Effect of
Merger.
(1) General.
The Merger will become effective upon filing of the Merger Certificate
with the
Secretary of State of the State of Delaware (the “Effective Time”). The
Merger will have the effect set forth in the DGCL. The Surviving Corporation
may, at any time after the Closing, take any action, including executing
or
delivering any document, in the name and on behalf of either Company or
Merger
Sub in order to carry out and effectuate the transactions contemplated
by this
Agreement.
A-1
(2) Certificate
of Incorporation. The certificate of incorporation of CTHE will be amended
and restated at and as of the Effective Time to the form attached hereto
as
Exhibit B, in substantial conformance with the certificate of
incorporation of Company immediately prior to the Closing, and the name
of CTHE
will be changed to “Xcorporeal, Inc.”
(3) Bylaws.
The bylaws of CTHE will be amended and restated at and as of the Closing
to read
as did the bylaws of Company immediately prior to the Closing.
(4) Directors
and Officers. At the Closing, the officers and directors of CTHE and Merger
Sub immediately prior to the Effective Time shall resign and the officers
and
directors of the Company immediately prior to the Closing will be appointed
as
officers and directors of CTHE and Surviving Corporation, in each case
until
their respective successors are duly elected or appointed and qualified.
(5) Conversion
of Company Shares and Reverse Split of CTHE Shares.
(a) Conversion.
At and as of the Effective Time, (a) each issued and outstanding Company
Share (other than any Dissenting Shares) will, by virtue of the Merger
and
without any further action on behalf of CTHE, Merger Sub, Company, or any
Company Stockholder, automatically be converted into and become one validly
issued, fully paid and non-assessable CTHE Share, (b) each Dissenting Share
will be converted into the right to receive payment from Surviving Corporation
with respect thereto in accordance with the provisions of the DGCL, and
(c) all unissued and treasury Company Shares will be cancelled.
(b) Reverse
Split. At and as of the Effective Time, (a) each 8.27 issued and
outstanding CTHE Shares, par value $0.01, will, by virtue of the Merger
and
without any further action on behalf of CTHE or any CTHE Stockholder,
automatically be converted into and become one validly issued, fully paid
and
non-assessable CTHE Share, par value $0.0001 (the ratio of pre-Merger CTHE
Shares to one post-Merger CTHE Share is referred to herein as the “Conversion
Ratio”), rounding up to the nearest whole share, such that there remain a
total of approximately 350,000 post-Merger CTHE Shares resulting from such
split.
(c) Share
Certificates.
(i) Following
the Closing, upon surrender of an original stock certificate representing
Company Shares or pre-Merger CTHE Shares, CTHE will cause to be issued
a stock
certificate for CTHE Shares to which such Person is entitled, bearing any
necessary or appropriate restrictive legend. CTHE will not pay any dividend
or
make any distribution on Company Shares or CTHE Shares with a record date
at or
after the Closing until the record holder surrenders for exchange his,
her, or
its certificates that represented Company Shares or pre-Merger CTHE Shares.
(ii) If
any certificate evidencing Shares shall has been lost, stolen or destroyed,
upon
the making of an affidavit in form acceptable to CTHE’s Transfer Agent of that
fact by the Person claiming the certificate to be lost, stolen or destroyed
and
an indemnity bond in such amount as the Transfer Agent may direct, as collateral
security against any claim that may be made with respect to the certificate,
CTHE will cause to be issued in exchange for the lost, stolen or destroyed
certificate the applicable number of CTHE Shares.
(d) Conversion
of Warrants. All warrants to purchase Company Shares issued and outstanding
at the Closing will, by virtue of the Merger and without any action on
the part
of
A-2
CTHE, Company
or the
holders of the warrants, be converted into and will become warrants to
purchase
an equal number of CTHE Shares on the same terms.
(e) Conversion
of Options. All options to purchase Company Shares outstanding at the
Closing will, by virtue of the Merger and without any action on the part
of
CTHE, Company or the holders of the options, be assumed by CTHE, and will
become
options to purchase an equal number of CTHE Shares on the same terms.
(f) Option
Plan. At or prior to the Closing, CTHE will adopt a stock option plan in
the
form attached hereto as Exhibit C, which will be substantially
identical to the Company’s 2006 Incentive Compensation Plan with at least
3,900,000 CTHE Shares reserved for issuance thereunder.
(g) Cancellations;
Transfers. As of the Closing of the Merger, the Company Shares and warrants
and options to purchase same (collectively, “Company Securities”) will be
deemed canceled and will cease to exist, and each holder of a Company Security
will cease to have any rights with respect thereto, other than those expressly
set forth in this Section 1.E(5). After the Closing, transfers of
Company Shares outstanding prior to the Closing will not be made on the
stock
transfer books of Surviving Corporation. Notwithstanding anything to the
contrary herein, none of the Surviving Corporation or any Party shall be
liable
to any Person for any amount properly paid to a public official pursuant
to any
applicable abandoned property, escheat or similar law.
2.
Conditions to Obligations to Close.
A. Conditions
to CTHE’s
Obligation. The obligation of each of CTHE and Merger Sub to consummate the
transactions to be performed by it in connection with the Closing is subject
to
satisfaction of the following conditions:
(1) The
representations and warranties of Company set forth in Section 4
will be true and correct in all material respects as if made at and as
of the
Closing, except to the extent that such representations and warranties
are
qualified by the term “material,” or contain terms such as “Adverse Effect” or
“Adverse Change,” in which case such representations and warranties as so
written, including the term “material” or “Material,” will be true and correct
in all respects at and as of the Closing;
(2) Company
will have performed and complied with all of its covenants hereunder in
all
material respects through the Closing, except to the extent that such covenants
are qualified by the term “material,” or contain terms such as “Adverse Effect”
or “Adverse Change,” in which case Company will have performed and complied with
all of such covenants as so written, including the term “material” or
“Material,” in all respects through the Closing;
(3) There
will not be any judgment, order, decree or injunction in effect that would
(a)
prevent consummation of any of the transactions contemplated by this Agreement,
(b) cause any of the transactions contemplated by this Agreement to be
rescinded following consummation, (c) adversely affect the right of CTHE
to own
the capital stock of Surviving Corporation and to control Surviving Corporation
and its Subsidiaries, or (d) adversely affect the right of any of Surviving
Corporation and its Subsidiaries to own its assets and to operate its business;
(4) Company
and its Subsidiaries will not have engaged in any practice, taken any action,
or
entered into any transaction outside the Ordinary Course of Business which
results in a Material Adverse Effect;
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(5) The
Merger will have been duly approved by the requisite number of Company
Stockholders;
(6) Company
will have delivered to CTHE a certificate to the effect that each of the
conditions specified in Sections 2.A(1)-(5) is satisfied in all
respects; and
(7) Company
will have delivered to CTHE an executed counterpart of the Merger Certificate.
CTHE and Merger
Sub may waive any
condition specified in this Section 2.A if it or they execute a
writing so stating at or prior to the Closing.
B. Conditions
to Company’s
Obligation. The obligation of Company to consummate the transactions to be
performed by it in connection with the Closing is subject to satisfaction
of the
following conditions:
(1) The
representations and warranties of CTHE and Merger Sub set forth in
Section 5 will be true and correct in all material respects at and
as of the Closing, except to the extent that such representations and warranties
are qualified by the term “material,” or contain terms such as “Adverse Effect”
or “Adverse Change,” in which case such representations and warranties as so
written, including the term “material” or “Material,” will be true and correct
in all respects at and as of the Closing;
(2) Each
of CTHE and Merger Sub will have performed and complied with all of its
covenants hereunder in all material respects through the Closing, except
to the
extent that such covenants are qualified by the term “material,” or contain
terms such as “Adverse Effect” or “Adverse Change,” in which case CTHE and, in
the case of the Closing of the Merger, Merger Sub will have performed and
complied with all of such covenants as so written, including the term “material”
or “Material,” in all respects through the Closing;
(3) There
will not be any judgment, order, decree or injunction in effect that would
(a)
prevent consummation of any of the transactions contemplated by this Agreement,
or (b) cause any of the transactions contemplated by this Agreement to be
rescinded following consummation;
(4) CTHE
and its Subsidiaries will not have engaged in any practice, taken any action,
or
entered into any transaction outside the Ordinary Course of Business which
results in a Material Adverse Effect;
(5) The
Merger will have been duly approved by the requisite number of CTHE
Stockholders;
(6) CTHE
will have delivered to Company a certificate to the effect that each of
the
conditions specified in Sections 2.B(1)-(5) is satisfied in all
respects;
(7) CTHE
will have delivered to Company an executed counterpart of the Merger
Certificate;
(8) CTHE
will have delivered to Company in mutually agreed form an Indemnity from
its
President and Acknowledgements from a majority-in-interest of the stockholders
listed on Exhibit D.
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(9) CTHE
will have delivered to Company the resignations, effective as of the Closing,
of
each director and officer of CTHE and its Subsidiaries.
Company may waive
any condition
specified in this Section 2.B if it executes a writing so stating at
or prior to the Closing.
3.
Covenants.
(i) Pre-closing
Covenants.
The Parties agree as follows with respect to the period from and after
the
execution of this Agreement until the Closing or termination of this Agreement:
A. General. Each
of the
Parties will use its best efforts to prepare, execute and deliver all documents,
take all actions and do all things necessary, proper, or advisable in order
to
consummate and make effective the transactions contemplated by this Agreement
as
soon as practicable, including the satisfaction, but not waiver, of all
of the
Closing conditions set forth in Section 2.
B. Notices. Company
will
give any notices (and will cause each of its Subsidiaries to give any notices)
to third parties, and will use its best efforts to obtain (and will cause
each
of its Subsidiaries to use its best efforts to obtain) any necessary third-party
consents.
C. SEC and State
Filings.
Each of the Parties will, and will cause each of its Subsidiaries to, give
any
notices to, make any filings with, and use its best efforts to obtain any
authorizations, consents, and approvals of Governmental Authorities in
connection with the matters referred to herein.
D. Further Cooperation. The
filing Party in each instance will use its best efforts to respond to the
comments of the SEC or any state Governmental Authorities on any filings
and
will make any further filings, including amendments and supplements, in
connection therewith that may be necessary, proper, or advisable. CTHE
will
provide Company, and Company will provide CTHE, with whatever information
and
assistance in connection with the foregoing filings the filing Party may
request.
E. Reasonable
Access.
Company and CTHE will (and will cause each of their Subsidiaries to) permit
representatives of CTHE and Company (including legal counsel and accountants)
to
have reasonable access, during normal business hours and on reasonable
notice,
to all information (including tax information) concerning its business,
properties and personnel. The receiving Party will treat and hold as such
any
Confidential Information it receives from the other in the course of the
reviews
contemplated by this Section 3.E, will not use any of the
Confidential Information except in connection with this Agreement, and,
if this
Agreement is terminated for any reason whatsoever, agrees to return to
the
disclosing Party all tangible embodiments (and all copies) thereof that
are in
its possession.
F. Notice of
Developments.
Each Party will give prompt written notice to the others of any material
adverse
development causing a breach of any of its own representations and warranties
in
this Agreement. No disclosure by any Party pursuant to this
Section 3.F, however, will be deemed to amend or supplement the
Company Disclosure Schedule or the CTHE Disclosure Schedule or to prevent
or
cure any misrepresentation, breach of warranty, or breach of covenant.
(ii) Post-closing
Covenant.
Company and CTHE covenant and agree that following the Closing the holders
of
CTHE common stock listed on Exhibit D who execute an Acknowledgement
prior to Closing will have piggyback registration rights substantially
similar
to those set forth in Section 2 of the Registration Rights Agreement filed
as Exhibit 10.2 to Company’s November 27, 2006 current report on Form
8-K, with respect to the shares of CTHE common stock set forth on
Exhibit D, covering the resale for an offering to be made on a
continuous basis pursuant to Rule 415 under the Securities Act,
A-5
(a) for as many such shares as can be added to the shares
set forth in the Company’s prior Form S-3 to equal up to 29% of the total
outstanding CTHE Shares on the filing date of such registration statement,
and
(b) as soon as practicable after the effective date of such registration
statement for any such shares that remain unregistered.
4.
Company’s Representations and Warranties.
The Company represents
and warrants to
CTHE that the statements contained in this Section 4 are correct and
complete as of the date of this Agreement and will be correct and complete
as of
the Closing, as though made then and as though the Closing were substituted
for
the date of this Agreement throughout this Section 4, except as set
forth in the Company SEC Reports or the disclosure schedule provided by
the
Company to CTHE (the “Company Disclosure Schedule”) corresponding to the
Section of this Agreement, to which any of the following representations
and
warranties specifically relate, or as disclosed in another section of the
Company Disclosure Schedule, if it is reasonably apparent on the face of
the
disclosure that it is applicable to another Section of this Agreement,
or in the
Company SEC Reports:
A. Organization,
Qualification,
and Corporate Power. Each of Company and its Subsidiaries is a corporation
duly organized, validly existing, and in good standing under the laws of
the
jurisdiction of its incorporation. Each of Company and its Subsidiaries
is duly
authorized to conduct business and is in good standing under the laws of
each
jurisdiction where such qualification is required. Company and its Subsidiaries
have full corporate power and authority to carry on the business in which
it is
engaged and to own and use the properties owned and used by it.
B. Capitalization. The
entire authorized capital stock of Company consists solely of 40,000,000
shares
of common stock, of which 14,200,050 shares are issued and outstanding,
and
10,000,000 shares of preferred stock, none of which are issued or outstanding.
All of the issued and outstanding Company Shares have been duly authorized
and
are validly issued, fully paid, non-assessable and free of preemptive rights,
and were issued in compliance with all applicable state and federal securities
laws. There are no: (1) other outstanding or authorized shares, options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments of any kind that could require
Company
to issue, sell, or otherwise cause to become outstanding any of its capital
stock.; (2) equity securities, debt securities or instruments convertible
into or exchangeable for shares of such stock; or (3) outstanding or
authorized stock appreciation, phantom stock, profit participation, or
similar
rights with respect to Company.
C. Authorization
of
Transaction. Company has all requisite power and authority, including full
corporate power and authority, to execute and deliver this Agreement and
to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by Company
and
the consummation by Company of the transactions contemplated hereby have
been
duly and validly authorized by all necessary corporate action by Company
and,
except as set forth herein, no other corporate proceedings on the part
of
Company and no shareholder vote or consent are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by Company. This Agreement
and
all other agreements and obligations entered into and undertaken in connection
with the transactions contemplated hereby to which Company is a party
constitutes the valid and legally binding obligations of Company, enforceable
against Company in accordance with their respective terms.
D. Non-Contravention.
Neither the execution and delivery of this Agreement, nor the consummation
of
the transactions contemplated hereby, will (i) violate any constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling,
charge,
or other restriction of any
A-6
government,
governmental agency, or court to which Company or any of its Subsidiaries
is
subject or any provision of the charter or bylaws of Company or any of
its
Subsidiaries, or (ii) conflict with, result in a breach of, constitute
a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to
which
Company or any of its Subsidiaries is a party or by which it is bound or
to
which any of its assets is subject (or result in the imposition of any
Lien upon
any of its assets). Other than in connection with the provisions of the
DGCL,
the Exchange Act, the Securities Act, and state securities laws, neither
Company
nor any of its Subsidiaries needs to give any notice to, make any filing
with,
or obtain any authorization, consent, or approval of any government or
governmental agency in order for the Parties to consummate the transactions
contemplated by this Agreement.
E. Filings with
SEC.
Company has timely made all filings with the SEC that it has been required
to
make under the Securities Act and the Exchange Act (collectively the “Company
Public Reports”) since September 1, 2006, and, to the Knowledge of the
current officers and directors of Company, since Company Public Reports
were
first required to be filed. Each of the Company Public Reports has complied
with
the Securities Act and the Exchange Act in all material respects. None
of the
Company Public Reports, as of their respective dates, contained any untrue
statement of a material fact or omitted to state a material fact necessary
in
order to make the statements made therein, in light of the circumstances
under
which they were made, not misleading.
F. Financial
Statements.
Company has filed an annual report on Form 10-KSB for the fiscal year ended
December 31, 2006 (“Year End”) and quarterly reports on Form 10-QSB
for the fiscal quarters ended March 31 and June 30, 2007 (“Quarter
End”). The financial statements included in or incorporated by reference
into these Company Public Reports (including the related notes and schedules)
have been prepared in accordance with GAAP throughout the periods covered
thereby, present fairly the financial condition of Company and its Subsidiaries
as of the indicated dates and the results of operations of Company and
its
Subsidiaries for the indicated periods and are correct and complete in
all
respects, and are consistent with the books and records of Company and
its
Subsidiaries; provided, however, that the interim statements are subject
to normal year-end adjustments.
G. Events Subsequent
to Year
End. Since Year End and Quarter End, there has not been any Adverse Change.
H. Litigation. There
is no
action, suit, legal or administrative proceeding or investigation pending,
or to
Company’s Knowledge threatened, against or involving Company (either as a
plaintiff or defendant) before any court or governmental agency, authority,
body
or arbitrator. Neither Company nor to its Knowledge any officer, director
or
employee of Company, has been permanently or temporarily enjoined by any
order,
judgment or decree of any court or any governmental agency, authority or
body
from engaging in or continuing any conduct or practice in connection with
the
business, assets, or properties of Company. There in existence on the date
hereof any order, judgment or decree of any court, tribunal or agency enjoining
or requiring Company to take any action of any kind with respect to its
business, assets or properties.
I. Undisclosed
Liabilities.
Neither Company nor any of its Subsidiaries has any liability of any kind,
whether known or unknown, whether asserted or unasserted, whether absolute
or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due, including any liability for Taxes, except
for
(i) liabilities set forth on the face of the balance sheet dated as of Year
End and Quarter End (rather than in any notes thereto), and
(ii) liabilities that have arisen after Year End and Quarter End in the
Ordinary Course of Business (none of which results from, arises out of,
A-7
relates to, is
in the
nature of, or was caused by any breach of contract, breach of warranty,
tort,
infringement, or violation of law).
J. Compliance
with Laws. To
its Knowledge, (a) Company has all requisite licenses, permits and
certificates, including environmental, health and safety permits, from
federal,
state and local authorities necessary to conduct its business and own and
operate its assets including, without limitation all necessary approvals,
licenses, except where the failure to have such permits would not reasonably
be
expected to have an Adverse Effect; (b) Company is not in violation of any
law, regulation or ordinance (including, without limitation, laws, regulations
or ordinances relating to building, zoning, environmental, disposal of
hazardous
waste, land use or similar matters) relating to its properties, the enforcement
of which would have an Adverse Effect; and (c) the business of Company
as
conducted since September 1, 2006, and to the Knowledge of the current
officers and directors of Company since inception, has not violated, and
as of
the Closing does not violate, in any material respect, any federal, state,
local
or foreign laws, regulations or orders, the enforcement of which would
have an
Adverse Effect. Company has not had notice or communication from any federal,
state or local governmental or regulatory authority or otherwise of any
such
violation or noncompliance.
K. Brokers’ Fees. Neither
Company nor any of its Subsidiaries has any liability or obligation to
pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement.
L. Tax Treatment. Company
operates at least one significant historic business line, or owns at least
a
significant portion of its historic business assets, in each case within
the
meaning of Treas. Reg. §1.368-1(d). Neither Company nor, to the Knowledge of
Company, any of its Affiliates has taken or agreed to take action that
would
prevent the Merger from constituting a tax-free reorganization under
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code.
5.
CTHE’s Representations and Warranties.
Each of CTHE
and Merger Sub represents
and warrants to Company that the statements contained in this
Section 5 are correct and complete as of the date of this Agreement
and will be correct and complete as of the Closing (as though made then
and as
though the Closing were substituted for the date of this Agreement throughout
this Section 5, except as set forth in the except as set forth in
the CTHE SEC Reports or the disclosure schedule provided by CTHE to the
Company
(the “CTHE Disclosure Schedule”) corresponding to the Section of this
Agreement, to which any of the following representations and warranties
specifically relate, or as disclosed in another section of the CTHE Disclosure
Schedule, if it is reasonably apparent on the face of the disclosure that
it is
applicable to another Section of this Agreement, or in the CTHE SEC Reports:
A. Organization,
Qualification,
and Corporate Power. Each of CTHE and its Subsidiaries is a corporation duly
organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation. Each of CTHE and its Subsidiaries is
duly
authorized to conduct business and is in good standing under the laws of
each
jurisdiction where such qualification is required. CTHE and its Subsidiaries
have full corporate power and authority to carry on the business in which
it is
engaged and to own and use the properties owned and used by it.
B. Capitalization. The
entire authorized capital stock of CTHE consists solely of 60,000,000 shares
of
common stock, of which 2,894,675 shares are issued and outstanding, and
1,000,000 shares of preferred stock, none of which are issued or outstanding.
All of the issued and outstanding CTHE Shares have been duly authorized
and are
validly issued, fully paid, non-assessable and free of preemptive rights,
and
were issued in compliance with all applicable state and federal securities
laws.
There are no: (1) other
A-8
outstanding or
authorized shares, options, warrants, purchase rights, subscription rights,
conversion rights, exchange rights, or other contracts or commitments of
any
kind that could require CTHE to issue, sell, or otherwise cause to become
outstanding any of its capital stock.; (2) equity securities, debt
securities or instruments convertible into or exchangeable for shares of
such
stock; or (3) outstanding or authorized stock appreciation, phantom stock,
profit participation, or similar rights with respect to CTHE.
C. Authorization
of
Transaction. CTHE has all requisite power and authority, including full
corporate power and authority, to execute and deliver this Agreement and
to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by CTHE
and
the consummation by CTHE of the transactions contemplated hereby have been
duly
and validly authorized by all necessary corporate action by CTHE and, except
as
set forth herein, no other corporate proceedings on the part of CTHE and
no
shareholder vote or consent are necessary to authorize this Agreement or
to
consummate the transactions contemplated hereby. This Agreement has been
duly
and validly executed and delivered by CTHE. This Agreement and all other
agreements and obligations entered into and undertaken in connection with
the
transactions contemplated hereby to which CTHE is a party constitutes the
valid
and legally binding obligations of CTHE, enforceable against CTHE in accordance
with their respective terms.
D. Non-Contravention.
Neither the execution and delivery of this Agreement, nor the consummation
of
the transactions contemplated hereby, will (i) violate any constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling,
charge,
or other restriction of any government, governmental agency, or court to
which
CTHE or any of its Subsidiaries is subject or any provision of the charter
or
bylaws of CTHE or any of its Subsidiaries, or (ii) conflict with, result in
a breach of, constitute a default under, result in the acceleration of,
create
in any party the right to accelerate, terminate, modify, or cancel, or
require
any notice under any agreement, contract, lease, license, instrument, or
other
arrangement to which CTHE or any of its Subsidiaries is a party or by which
it
is bound or to which any of its assets is subject (or result in the imposition
of any Lien upon any of its assets). Other than in connection with the
provisions of the DGCL, the Exchange Act, the Securities Act, and state
securities laws, neither CTHE nor any of its Subsidiaries needs to give
any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order for the Parties
to
consummate the transactions contemplated by this Agreement.
E. Filings with
SEC. CTHE
has timely made all filings with the SEC that it has been required to make
under
the Securities Act and the Exchange Act (collectively the “CTHE Public
Reports”) since January 1, 2006, and, to the Knowledge of the current
officers and directors of CTHE, since CTHE Public Reports were first required
to
be filed. Each of the CTHE Public Reports has complied with the Securities
Act
and the Exchange Act in all material respects. None of the CTHE Public
Reports,
as of their respective dates, contained any untrue statement of a material
fact
or omitted to state a material fact necessary in order to make the statements
made therein, in light of the circumstances under which they were made,
not
misleading.
F. Financial
Statements.
CTHE has filed an annual report on Form 10-KSB for the fiscal year ended
December 31, 2006 (“Year End”) and quarterly reports on Form 10-QSB
for the fiscal quarter ended March 31, 2007 (“Quarter End”). The
financial statements included in or incorporated by reference into these
CTHE
Public Reports (including the related notes and schedules) have been prepared
in
accordance with GAAP throughout the periods covered thereby, present fairly
the
financial condition of CTHE and its Subsidiaries as of the indicated dates
and
the results of operations of CTHE and its Subsidiaries for the indicated
periods
and are correct and complete in all respects, and are consistent with the
books
and records of CTHE and its Subsidiaries; provided, however, that the
interim statements are subject to normal year-end adjustments.
A-9
G. Events Subsequent
to Year
End. Since Year End and Quarter End, there has not been any Adverse Change.
H. Litigation. There
is no
action, suit, legal or administrative proceeding or investigation pending,
or to
CTHE’s Knowledge threatened, against or involving CTHE (either as a plaintiff
or
defendant) before any court or governmental agency, authority, body or
arbitrator. Neither CTHE nor to its Knowledge any officer, director or
employee
of CTHE, has been permanently or temporarily enjoined by any order, judgment
or
decree of any court or any governmental agency, authority or body from
engaging
in or continuing any conduct or practice in connection with the business,
assets, or properties of CTHE. There in existence on the date hereof any
order,
judgment or decree of any court, tribunal or agency enjoining or requiring
CTHE
to take any action of any kind with respect to its business, assets or
properties.
I. Undisclosed
Liabilities.
Neither CTHE nor any of its Subsidiaries has any liability of any kind,
whether
known or unknown, whether asserted or unasserted, whether absolute or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due, including any liability for Taxes, except
for
(i) liabilities set forth on the face of the balance sheet dated as of Year
End and Quarter End (rather than in any notes thereto), and (ii) liabilities
that have arisen after Year End and Quarter End in the Ordinary Course
of
Business (none of which results from, arises out of, relates to, is in
the
nature of, or was caused by any breach of contract, breach of warranty,
tort,
infringement, or violation of law).
J. Compliance
with Laws. To
its Knowledge, (a) CTHE has all requisite licenses, permits and
certificates, including environmental, health and safety permits, from
federal,
state and local authorities necessary to conduct its business and own and
operate its assets including, without limitation all necessary approvals,
licenses, except where the failure to have such permits would not reasonably
be
expected to have an Adverse Effect; (b) CTHE is not in violation of any
law, regulation or ordinance (including, without limitation, laws, regulations
or ordinances relating to building, zoning, environmental, disposal of
hazardous
waste, land use or similar matters) relating to its properties, the enforcement
of which would have an Adverse Effect; and (c) the business of CTHE as
conducted
since September 1, 2006, and to the Knowledge of the current officers and
directors of CTHE since inception, has not violated, and as of the Closing
does
not violate, in any material respect, any federal, state, local or foreign
laws,
regulations or orders, the enforcement of which would have an Adverse Effect.
CTHE has not had notice or communication from any federal, state or local
governmental or regulatory authority or otherwise of any such violation
or
noncompliance.
K. Brokers’ Fees. Neither
CTHE nor any of its Subsidiaries has any liability or obligation to pay
any fees
or commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement.
L. Tax Treatment. Neither
CTHE or Merger Sub nor, to the Knowledge of CTHE, any of their Affiliates
has
taken or agreed to take action that would prevent the Merger from constituting
a
tax-free reorganization under Sections 368(a)(1)(A) and 368(a)(2)(E) of the
Code.
M. No Liabilities. As
of
the Closing, neither CTHE nor any of its Subsidiaries will have any liability
of
any kind, whether known or unknown, asserted or unasserted, absolute or
contingent, accrued or unaccrued, liquidated or unliquidated, due or to
become
due, by virtue of contract, statute, regulation, law, equity, or otherwise.
N. OTCBB Trading. CTHE
Shares are actively and currently quoted on the OTC Bulletin Board, CTHE
meets
all issuer and equity security requirements to permit an NASD member to
quote
the
A-10
CTHE Shares on
the OTC
Bulletin Board, and, to CTHE’s Knowledge, is entitled to continue to be so
quoted following the Merger.
O. Form S-3
Eligibility. CTHE meets all Registrant Requirements (as such term is defined
in Form S-3 promulgated by the SEC) in order to use the registration statement
on Form S-3 for the registration of securities under the Act, including
without
limitation all requirements set forth in Section I.A of the General
Instructions to Form S-3 promulgated by the SEC.
P. Stockholder
Claims.
There are no existing claims against CTHE by any current or former stockholder
of CTHE, and to CTHE’s Knowledge, no facts or circumstances reasonably likely to
result in any such claims.
Q. Operations
of Merger
Sub. Merger Sub is a direct, wholly owned subsidiary of CTHE, was formed
solely for the purpose of engaging in the transactions contemplated by
this
Agreement, has engaged in no other business activities and has conducted
its
operations only as contemplated by this Agreement.
R. Banking Facilities. Its
disclosure schedule sets forth a true, correct, and complete list of:
(1) Each
bank, savings and loan or similar financial institution in which CTHE has
an
account or safety deposit box and the numbers of the accounts or safety
deposit
boxes maintained by CTHE thereat; and
(2) The
names of all signatories authorized to draw on each such account or to
have
access to any such safety deposit box facility.
S. Powers of
Attorney and
Suretyships. CTHE does not have (i) any general powers of attorney
outstanding, whether as grantor or grantee thereof, or (ii) except as
reflected in its financial statements, any obligation or liability, whether
actual, accrued, accruing, contingent or otherwise, as guarantor, surety,
co-signer, endorser, co-maker, indemnitor, or otherwise in respect of the
obligation of any person, corporation, partnership, joint venture, association,
organization or other entity, except as endorser or maker of checks or
letters
of credit, respectively, endorsed or made in the ordinary course of business.
T. Tax Matters.
(1) Within
the times and in the manner prescribed by law, CTHE has filed all federal,
state
and local Tax Returns, and all Tax Returns for other governing bodies having
jurisdiction to levy Taxes upon it, that it was required to file (including
Tax
Returns for any Affiliated Group of which CTHE was a member). All such
Tax
Returns were true, correct and complete in all respects.
(2) All
Taxes owed by CTHE or any Affiliated Group of which CTHE was a member (including
interest, penalties, assessments and deficiencies which have become due,
including without limitation income, franchise, real estate, and sales
and
withholding Taxes), whether or not shown on any Tax Return, have been paid.
(3) CTHE
has withheld and paid all Taxes required to have been withheld and paid
in
connection with any amounts paid or owing to any employee, independent
contractor, creditor, stockholder, or other third party.
A-11
(4) CTHE
has not waived or extended any applicable statute of limitations relating
to the
assessment of federal, state or local Taxes;
(5) No
examinations of the federal, state or local Tax Returns of CTHE are currently
in
progress nor threatened and no deficiencies have been asserted or to its
Knowledge assessed against CTHE as a result of any audit by the Internal
Revenue
Service or any state or local Tax authority and no such deficiency has
been
proposed or threatened.
(6) There
are no pending or threatened audits, assessments or other actions relating
to
any liability in respect of Taxes of CTHE by any Tax authority nor are
there any
matters under discussion with any Tax authority with respect to Taxes of
CTHE.
(7) CTHE
is not a party to or bound by any Tax allocation or sharing agreement.
(8) CTHE
(A) has not been a member of an Affiliated Group filing a consolidated
federal income Tax Return (other than a group of the common parent of which
was
CTHE) or (B) does not have any liability for the Taxes of any Person (other
than CTHE or any members of an Affiliated Group of which CTHE was a member)
under Treasury Regulations Section 1.1502-6 (or any similar provision of
state, local, or foreign law), as a transferee or successor, by contract,
or
otherwise.
(9) CTHE
has not distributed stock of another Person, or has had its stock distributed
by
another Person, in a transaction that was purported or intended to be governed
in whole or in part by Code Section 355 or §361.
(10) CTHE
has not filed a consent pursuant to Section 341(f) of the Code relating
to
collapsible corporations nor has CTHE agreed to have Section 341(f)(2) of
the Code apply to any disposition of a subsection (f) asset as such term is
defined in Section 341(f)(4) of the Code.
(11) CTHE
has filed all required state and federal income tax returns for all periods
through December 31, 2006, and will file all such returns for all periods
prior to Closing. CTHE does not and will not owe any taxes or penalties
for any
such periods.
U. Books and
Records. The
general ledger and books of account of CTHE, all minute books of CTHE,
all
federal, state and local income, franchise, property and other Tax Returns
filed
by CTHE, all reports and filings with the SEC by CTHE, all of which have
been
made available to CTHE, are in all material respects complete and correct
and
have been maintained in accordance with good business practice and in accordance
with all applicable procedures required by laws and regulations.
V. Contracts
and
Commitments. There are no contracts, agreements or understandings, whether
written or oral, to which CTHE is a party or by which CTHE or any of its
property may be bound in any manner as of the Closing Date.
W. Investment
Company. CTHE
is not and never has been an “investment company” as such term is defined in
Section 3 of the Investment Company Act of 1940, as amended.
6.
Termination of Merger Transaction.
A. Termination. Any
of the
Parties may terminate this Agreement only as follows:
(1) CTHE
may terminate this Agreement by giving written notice to Company at any
time
prior to the Closing in the event:
A-12
(a) of
an Uncured Breach by Company;
(b) CTHE
is not reasonably satisfied with the results of its due diligence regarding
Company;
(c) the
Closing shall not have been consummated on or before close of business
on
Friday, August 31, 2007; or
(d) the
board of directors or special committee of CTHE determines in good faith
that
the failure to terminate this Agreement would constitute a breach of the
fiduciary duties of the CTHE board of directors or special committee to
the CTHE
stockholders under applicable law.
(2) Company
may terminate this Agreement by giving written notice to CTHE and Merger
Sub at
any time prior to the Closing in the event:
(a) of
an Uncured Breach by CTHE or Merger Sub;
(b) Company
is not reasonably satisfied with the results of its due diligence regarding
CTHE;
(c) the
Company Shares become quoted on the OTC Bulletin Board;
(d) the
Closing shall not have been consummated on or before close of business
on
Friday, August 31, 2007; or
(e) the
board of directors or special committee of Company determines in good faith
that
the failure to terminate this Agreement would constitute a breach of the
fiduciary duties of the Company board of directors or special committee
to the
Company stockholders under applicable law.
(3) Company
may terminate this Agreement and rescind the Merger by giving written notice
to
CTHE and Merger Sub within 10 days after the Closing in the event that the
CTHE Shares do not continue to be quoted on the OTC Bulletin Board immediately
following the Merger.
(4) Either
Party may terminate this Agreement if a Governmental Authority of competent
jurisdiction shall have issued an order or taken any other action, in each
case
which has become final and non-appealable, and which permanently restrains,
enjoins or otherwise prohibits the Closing.
B. Effect of
Termination.
If this Agreement is terminated pursuant to Section 6.A, the Parties
shall no further obligation of any kind; provided, however, that if the
Agreement is terminated by Company pursuant to Section 6.A(2)(c),
Company shall pay to CTHE an amount equal to its reasonable out-of-pocket
costs
and expenses related this Agreement and the transactions contemplated hereby.
7.
Definitions.
“Adverse Effect”
or “Adverse
Change” means any effect or change that would be, or could reasonably be
expected to be, materially adverse to the business, assets, financial condition,
operating results, operations, or business prospects of Company or CTHE,
as
appropriate, or to the ability of Company or CTHE, as appropriate, to consummate
timely the transactions contemplated by this Agreement, regardless of whether
or
not such adverse effect or change can be or has been cured at any time
or
whether CTHE or Company, as appropriate, has knowledge of such effect or
change
on the date
A-13
hereof, including
any
adverse change, event, development, or effect arising from or relating
to:
(a) general business or economic conditions, including such conditions
related to the business of Company or CTHE, as appropriate, (b) national or
international political or social conditions, including the engagement
by the
United States in hostilities, whether or not pursuant to the declaration
of a
national emergency or war, or the occurrence of any military or terrorist
attack
upon the United States, or any of its territories, possessions, or diplomatic
or
consular offices or upon any military installation, equipment or personnel
of
the United States, (c) financial, banking, or securities markets, including
any general suspension of trading in, or limitation on prices for, securities
on
any national exchange or trading market, (d) changes in GAAP,
(e) changes in laws, rules, regulations, orders, or other binding
directives issued by any governmental entity, and (f) the taking of any
action contemplated by this Agreement and the other agreements contemplated
hereby.
“Affiliate”
has the
meaning set
forth in Rule 12b-2 of the regulations promulgated under the Exchange Act.
“Affiliated
Group” means any
affiliated group within the meaning of Code §1504(a) or any similar group
defined under a similar provision of state, local or foreign law.
“Code”
means
the Internal
Revenue Code of 1986, as amended, or any succeeding law.
“Company SEC
Reports” means each
report, schedule, registration statement, definitive proxy statement and
other
document required to be filed by the Company and its predecessors and officers
and directors under the Exchange Act or the Securities Act as such documents
have been amended since the time of their filing.
“Confidential
Information” means
material non-public information concerning the business and affairs of
Company
and its Subsidiaries, that is confidential or proprietary in nature, relating
to
(a) Company’s proprietary technology, including any patent applications,
trade secrets, methods, data, processes, formulas, instrumentation, techniques,
know-how, procedures, enhancements or improvements, or (b) Company’s
products or services, systems, finances, methods of operation, strategy,
business plans, prospective or existing contracts or other business
arrangements, that Company uses reasonable efforts to identify as Confidential
Information when provided. Confidential Information does not include information
that is or becomes: (i) part of the public domain through no act or
omission of the receiving Party, (ii) developed independently by the
receiving Party, or (iii) lawfully provided to the receiving Party by a
third party not subject to an obligation of confidentiality or otherwise
prohibited from transmitting the information.
“CTHE SEC
Reports” means each
report, schedule, registration statement, definitive proxy statement and
other
document required to be filed by CTHE and its predecessors and officers
and
directors under the Exchange Act or the Securities Act as such documents
have
been amended since the time of their filing.
“DGCL”
means
the General
Corporation Law of the State of Delaware, as amended.
“Dissenting
Share” means any
Company Share held of record by any stockholder who has exercised applicable
appraisal rights under the DGCL.
“Exchange
Act” means the
Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder.
A-14
“GAAP”
means
United States
generally accepted accounting principles as in effect from time to time,
consistently applied.
“Governmental
Authority” means
any national, state, municipal, local or foreign government, any
instrumentality, subdivision, court, administrative agency or commission
or
other authority thereof, or any quasi-governmental or private body exercising
any regulatory, taxing, importing or other governmental or quasi-governmental
authority.
“Knowledge”
means
actual
knowledge after reasonable investigation.
“NASD”
means
NASD, Inc. or any
successor organization which regulates and administers trading in OTC Bulletin
Board securities.
“Ordinary
Course of Business”
means the ordinary course of business consistent with past custom and
practice,
including with respect to nature, quantity and frequency.
“OTC Bulletin
Board” means the
over-the-counter bulletin board trading of securities administered by the
NASD.
“Person”
means
an individual, a
partnership, a corporation, a limited liability company, an association,
a joint
stock company, a trust, a joint venture, an unincorporated organization,
any
other business entity, or a governmental entity (or any department, agency,
or
political subdivision thereof).
“SEC”
means
the Securities and
Exchange Commission.
“Securities
Act” means the
Securities Act of 1933, as amended, and the regulations promulgated thereunder.
“Stockholder
Approval” means the
effective affirmative vote of the holders of a majority of the Company
Shares or
CTHE Shares, as the case may be, in favor of this Agreement and the Merger.
“Subsidiary”
means,
with respect
to any Person, any corporation, limited liability company, partnership,
association, or other business entity of which (a) if a corporation, a
majority of the total voting power of shares of stock entitled (without
regard
to the occurrence of any contingency) to vote in the election of directors,
managers, or trustees thereof is at the time owned or controlled, directly
or
indirectly, by that Person or one or more of the other Subsidiaries of
that
Person or a combination thereof or (b) if a limited liability company,
partnership, association, or other business entity (other than a corporation),
a
majority of the partnership or other similar ownership interests thereof
is at
the time owned or controlled, directly or indirectly, by that Person or
one or
more Subsidiaries of that Person or a combination thereof and for this
purpose,
a Person or Persons owns a majority ownership interest in such a business
entity
(other than a corporation) if such Person or Persons will be allocated
a
majority of such business entity’s gains or losses or will be or control any
managing director or general partner of such business entity (other than
a
corporation). The term “Subsidiary” will include all Subsidiaries of such
Subsidiary.
“Tax” or “Taxes”
means
any
federal, state, local, or foreign income, gross receipts, license, payroll,
employment, excise, severance, stamp, occupation, premium, windfall profits,
environmental (including taxes under Code §59A), customs duties, capital stock,
franchise, profits, withholding, socialsecurity (or similar), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated, or
other
tax of any kind whatsoever,
A-15
including any
interest,
penalty, or addition thereto, whether disputed or not and including any
obligations to indemnify or otherwise assume or succeed to the Tax liability
of
any other Person.
“Tax Return”
means
any return,
declaration, report, claim for refund, or information return or statement
relating to Taxes, including any schedule or attachment thereto, and including
any amendment thereof.
“Uncured Breach”
means
an
unexcused breach of any material representation, warranty or covenant contained
in this Agreement, in any material respect, following written notice reasonably
specifying the breach and the demanded manner of cure, if and when the
breach
has continued without cure for a period of five (5) days after the notice
of breach.
8.
General.
A. Press Releases
and Public
Announcements. No Party will issue any press release or make any public
announcement relating to the subject matter of this Agreement without the
prior
written approval of the other Parties; provided, however, that any Party
may make any public disclosure it believes in good faith based upon advise
of
counsel is required by applicable law or any listing or trading agreement
concerning its publicly traded securities (in which case the disclosing
Party
will use its best efforts to advise the other Party prior to making the
disclosure).
B. No Third-Party
Beneficiaries. This Agreement will not confer any rights or remedies upon
any Person other than the Parties and their respective successors and permitted
assigns.
C. Succession
and
Assignment. This Agreement will be binding upon and inure to the benefit of
the Parties named herein and their respective successors and permitted
assigns.
No Party may assign either this Agreement or any of its rights, interests,
or
obligations hereunder without the prior written approval of the other Parties.
D. Headings. The
section
headings contained in this Agreement are inserted for convenience only
and will
not affect in any way the meaning or interpretation of this Agreement.
E. Notices. All
notices,
requests, demands, claims, and other communications hereunder will be in
writing. Any notice, request, demand, claim, or other communication hereunder
will be deemed duly given (i) when delivered personally to the recipient,
(ii) one (1) business day after being sent to the recipient by
reputable overnight courier service, (iii) one (1) business day after
being sent to the recipient by facsimile transmission or electronic mail,
or
(iv) four (4) business days after being mailed to the recipient by
certified or registered mail, return receipt requested and postage prepaid,
and
addressed to the intended recipient as set forth below:
If to CTHE
or Merger Sub:
CT
Holdings Enterprises, Inc.
2100 McKinney Avenue, Suite 1500
Dallas, TX 75201
Attn: Steven B. Solomon
Fax: (214) 520-0034
Email: ssolomon@ct-holdings.com
2100 McKinney Avenue, Suite 1500
Dallas, TX 75201
Attn: Steven B. Solomon
Fax: (214) 520-0034
Email: ssolomon@ct-holdings.com
A-16
With a copy
to:
Wood
& Sartain, LLP
12655 North Central Expressway, Suite 421
Dallas, TX 75243
Attn: David A. Wood, Esq.
Fax: (972) 701-0302
Email: david@woodsartain.com
12655 North Central Expressway, Suite 421
Dallas, TX 75243
Attn: David A. Wood, Esq.
Fax: (972) 701-0302
Email: david@woodsartain.com
If to Company:
Xcorporeal,
Inc.
11150 Santa Monica Boulevard, Suite 340
Los Angeles, CA 90025
Attention: Terren S. Peizer
Fax: (310) 484-5668
11150 Santa Monica Boulevard, Suite 340
Los Angeles, CA 90025
Attention: Terren S. Peizer
Fax: (310) 484-5668
With a copy
to:
Dreier
Stein & Kahan, LLP
1620 26th Street, North Tower, Sixth Floor
Santa Monica, CA 90404
Attn: John C. Kirkland, Esq.
Fax: (424) 202-6250
Email: jkirkland@dskllp.com
1620 26th Street, North Tower, Sixth Floor
Santa Monica, CA 90404
Attn: John C. Kirkland, Esq.
Fax: (424) 202-6250
Email: jkirkland@dskllp.com
Any Party may
change the address to
which notices, requests, demands, claims, and other communications hereunder
are
to be delivered by giving the other Parties notice in the manner herein
set
forth.
F. Governing
Law. This
Agreement will be governed by and construed in accordance with the domestic
laws
of the State of Delaware without giving effect to any choice or conflict
of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other
than the
State of Delaware.
G. Arbitration. Any
dispute, controversy or claim arising out of or relating to this Agreement,
shall be resolved by final and binding arbitration before a retired judge
at
JAMS or its successor in Santa Monica, California. The prevailing party
shall be
awarded its arbitrator, expert and attorney fees, costs and expenses. Any
interim or final award of the arbitrator may be entered in any court of
competent jurisdiction.
H. Severability. Any
term
or provision of this Agreement that is invalid or unenforceable in any
situation
in any jurisdiction will not affect the validity or enforceability of the
remaining terms and provisions hereof or the validity or enforceability
of the
offending term or provision in any other situation or in any other jurisdiction.
I. Attorneys
and Expenses.
All Parties have been represented by their own separate counsel in connection
with this Agreement and the transactions contemplated hereby: Wood &
Sartain, LLP and its attorneys have solely represented the interests of
CTHE and
Merger Sub, and Dreier Stein & Kahan LLP and its attorneys have solely
represented the interests of Company. Each of the Parties will bear its
own
costs and expenses (including legal fees and expenses) incurred in connection
with this negotiation
A-17
and preparation
of this
Agreement and the transactions contemplated hereby; provided that Company
shall
pay for up to $25,000 of the reasonable, necessary and customary out-of-pocket
costs and expenses (including, if the Closing is consummated, legal fees
and
expenses of negotiation and preparation) of CTHE incurred in connection
with
this Agreement and the transactions contemplated hereby.
J. Construction. The
Parties have participated jointly in the negotiation and drafting of this
Agreement. In the event an ambiguity or question of intent or interpretation
arises, this Agreement will be construed as if drafted jointly by the Parties
and no presumption or burden of proof will arise favoring or disfavoring
any
Party by virtue of the authorship of any of the provisions of this Agreement.
Any reference to any federal, state, local, or foreign statute or law will
be
deemed also to refer to all rules and regulations promulgated thereunder,
unless
the context otherwise requires. The word “including” will mean including without
limitation. Time is of the essence of each provision of this Agreement.
K. Incorporation
of
Exhibits. The Exhibits identified in this Agreement are incorporated herein
by reference and made a part hereof.
L. Amendments
and Waivers.
The Parties may mutually amend any provision of this Agreement at any time
prior
to the Closing with the prior authorization of their respective boards
of
directors; provided, however, that any amendment effected subsequent to
stockholder approval will be subject to the restrictions contained in the
DGCL.
No amendment of any provision of this Agreement will be valid unless the
same
will be in writing and signed by all of the Parties. No waiver by any Party
of
any provision of this Agreement or any default, misrepresentation, or breach
of
warranty or covenant hereunder, whether intentional or not, will be valid
unless
the same will be in writing and signed by the Party making such waiver
nor will
such waiver be deemed to extend to any prior or subsequent default,
misrepresentation, or breach of warranty or covenant hereunder or affect
in any
way any rights arising by virtue of any prior or subsequent such default,
misrepresentation, or breach of warranty or covenant.
M. Survival. All
of the
representations, warranties, and covenants of the Parties contained in
this
Agreement shall survive the Closing, and continue in full force and effect
for a
period of three years thereafter, or the expiration of the applicable statute
of
limitation.
N. Counterparts. This
Agreement may be executed in one or more counterparts, including by means
of
facsimile, each of which will be deemed an original, and all of which together
will constitute one and the same instrument.
A-18
O. Entire Agreement. This
Agreement, including the attached Exhibits and documents referred to herein,
constitutes the entire agreement among the Parties, and supersedes all
prior or
contemporaneous understandings or agreements, whether written or oral.
Neither
party has relied upon any promise, representation or undertaking not expressly
set forth herein. To the extent that there is any conflict between any
provision
in this Agreement and any provision in any other agreement to which the
Parties
are also parties, the provision of this Agreement shall govern.
IN WITNESS WHEREOF,
the Parties hereto
have executed this Agreement as of the date first above written.
| CTHE: CT HOLDINGS ENTERPRISES, INC. |
||||
| By: | ||||
| Steven B. Solomon | ||||
| President and Chief Executive Office | ||||
| MERGER SUB: XC ACQUISITION CORPORATION |
||||
| By: | ||||
| Steven B. Solomon | ||||
| President and Chief Executive Officer | ||||
| COMPANY: XCORPOREAL, INC. |
||||
| By: | ||||
| Terren S. Peizer | ||||
| Executive Chairman of the Board | ||||
A-19
Exhibit D
Piggyback
Registration Rights
| Name | Number of Shares (Post-reverse split) | |||
|
Richard Connelly
|
1,250 | |||
|
Chris A. Economou
|
5,001 | |||
|
Lawrence Lacerte
|
50,879 | |||
|
Mark Rogers
|
5,001 | |||
|
Phil Romano
|
626 | |||
|
Axel Sawallich
|
2,501 | |||
|
Steven B. Solomon
|
169,625 | |||
|
David Wood
|
6,251 | |||
A-22
ANNEX
B
Delaware
General Corporation Law
§
262. Appraisal Rights
(a)
Any
stockholder of a corporation of this State who holds shares of stock on the
date
of the making of a demand pursuant to subsection (d) of this section with
respect to such shares, who continuously holds such shares through the effective
date of the merger or consolidation, who has otherwise complied with subsection
(d) of this section and who has neither voted in favor of the merger or
consolidation nor consented thereto in writing pursuant to § 228 of this title
shall be entitled to an appraisal by the Court of Chancery of the fair value
of
the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and
also
a member of record of a nonstock corporation; the words "stock" and "share"
mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely
of
stock of a corporation, which stock is deposited with the
depository.
(b)
Appraisal
rights shall be available for the shares of any class or series of stock
of a
constituent corporation in a merger or consolidation to be effected pursuant
to
§ 251 (other than a merger effected pursuant to § 251(g) of this title), § 252,
§ 254, § 257, § 258, § 263 or § 264 of this title:
(1)
Provided,
however, that no appraisal rights under this section shall be available for
the
shares of any class or series of stock, which stock, or depository receipts
in
respect thereof, at the record date fixed to determine the stockholders entitled
to receive notice of and to vote at the meeting of stockholders to act upon
the
agreement of merger or consolidation, were either (i) listed on a national
securities exchange or (ii) held of record by more than 2,000 holders; and
further provided that no appraisal rights shall be available for any shares
of
stock of the constituent corporation surviving a merger if the merger did
not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of § 251 of this title.
(2)
Notwithstanding
paragraph (1) of this subsection, appraisal rights under this section shall
be
available for the shares of any class or series of stock of a constituent
corporation if the holders thereof are required by the terms of an agreement
of
merger or consolidation pursuant to §§ 251, 252, 254, 257, 258, 263 and 264 of
this title to accept for such stock anything except:
a.
Shares
of
stock of the corporation surviving or resulting from such merger or
consolidation, or depository receipts in respect thereof;
b.
Shares
of
stock of any other corporation, or depository receipts in respect thereof,
which
shares of stock (or depository receipts in respect thereof) or depository
receipts at the effective date of the merger or consolidation will be either
listed on a national securities exchange or held of record by more than 2,000
holders;
B-1
c.
Cash
in
lieu of fractional shares or fractional depository receipts described in
the
foregoing subparagraphs a. and b. of this paragraph; or
d.
Any
combination of the shares of stock, depository receipts and cash in lieu
of
fractional shares or fractional depository receipts described in the foregoing
subparagraphs a., b. and c. of this paragraph.
(3)
In
the
event all of the stock of a subsidiary Delaware corporation party to a merger
effected under § 253 of this title is not owned by the parent corporation
immediately prior to the merger, appraisal rights shall be available for
the
shares of the subsidiary Delaware corporation.
(c)
Any
corporation may provide in its certificate of incorporation that appraisal
rights under this section shall be available for the shares of any class
or
series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections
(d) and
(e) of this section, shall apply as nearly as is practicable.
(d)
Appraisal
rights shall be perfected as follows:
(1)
If
a
proposed merger or consolidation for which appraisal rights are provided
under
this section is to be submitted for approval at a meeting of stockholders,
the
corporation, not less than 20 days prior to the meeting, shall notify each
of
its stockholders who was such on the record date for such meeting with respect
to shares for which appraisal rights are available pursuant to subsection
(b) or
(c) hereof that appraisal rights are available for any or all of the shares
of
the constituent corporations, and shall include in such notice a copy of
this
section. Each stockholder electing to demand the appraisal of such stockholder's
shares shall deliver to the corporation, before the taking of the vote on
the
merger or consolidation, a written demand for appraisal of such stockholder's
shares. Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends thereby
to
demand the appraisal of such stockholder's shares. A proxy or vote against
the
merger or consolidation shall not constitute such a demand. A stockholder
electing to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
B-2
(2)
If
the
merger or consolidation was approved pursuant to § 228 or § 253 of this title,
then either a constituent corporation before the effective date of the merger
or
consolidation or the surviving or resulting corporation within 10 days
thereafter shall notify each of the holders of any class or series of stock
of
such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section. Such
notice may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date
of the
merger or consolidation. Any stockholder entitled to appraisal rights may,
within 20 days after the date of mailing of such notice, demand in writing
from
the surviving or resulting corporation the appraisal of such holder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i)
each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of
any class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation
or (ii)
the surviving or resulting corporation shall send such a second notice to
all
such holders on or within 10 days after such effective date; provided, however,
that if such second notice is sent more than 20 days following the sending
of
the first notice, such second notice need only be sent to each stockholder
who
is entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary
or
assistant secretary or of the transfer agent of the corporation that is required
to give either notice that such notice has been given shall, in the absence
of
fraud, be prima facie evidence of the facts stated therein. For purposes
of
determining the stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than
10
days prior to the date the notice is given, provided, that if the notice
is
given on or after the effective date of the merger or consolidation, the
record
date shall be such effective date. If no record date is fixed and the notice
is
given prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is
given.
(e)
Within
120 days after the effective date of the merger or consolidation, the surviving
or resulting corporation or any stockholder who has complied with subsections
(a) and (d) of this section hereof and who is otherwise entitled to appraisal
rights, may commence an appraisal proceeding by filing a petition in the
Court
of Chancery demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days after
the effective date of the merger or consolidation, any stockholder who has
not
commenced an appraisal proceeding or joined that proceeding as a named party
shall have the right to withdraw such stockholder's demand for appraisal
and to
accept the terms offered upon the merger or consolidation. Within 120 days
after
the effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (d) of this section
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement
shall
be mailed to the stockholder within 10 days after such stockholder's written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery
of
demands for appraisal under subsection (d) of this section hereof, whichever
is
later. Notwithstanding subsection (a) of this section, a person who is the
beneficial owner of shares of such stock held either in a voting trust or
by a
nominee on behalf of such person may, in such person's own name, file a petition
or request from the corporation the statement described in this
subsection.
B-3
(f)
Upon
the
filing of any such petition by a stockholder, service of a copy thereof shall
be
made upon the surviving or resulting corporation, which shall within 20 days
after such service file in the office of the Register in Chancery in which
the
petition was filed a duly verified list containing the names and addresses
of
all stockholders who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by the
surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by
such a
duly verified list. The Register in Chancery, if so ordered by the Court,
shall
give notice of the time and place fixed for the hearing of such petition
by
registered or certified mail to the surviving or resulting corporation and
to
the stockholders shown on the list at the addresses therein stated. Such
notice
shall also be given by 1 or more publications at least 1 week before the
day of
the hearing, in a newspaper of general circulation published in the City
of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms
of the notices by mail and by publication shall be approved by the Court,
and
the costs thereof shall be borne by the surviving or resulting
corporation.
(g)
At
the
hearing on such petition, the Court shall determine the stockholders who
have
complied with this section and who have become entitled to appraisal rights.
The
Court may require the stockholders who have demanded an appraisal for their
shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of
the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h)
After
the
Court determines the stockholders entitled to an appraisal, the appraisal
proceeding shall be conducted in accordance with the rules of the Court of
Chancery, including any rules specifically governing appraisal proceedings.
Through such proceeding the Court shall determine the fair value of the shares
exclusive of any element of value arising from the accomplishment or expectation
of the merger or consolidation, together with interest, if any, to be paid
upon
the amount determined to be the fair value. In determining such fair value,
the
Court shall take into account all relevant factors. Unless the Court in its
discretion determines otherwise for good cause shown, interest from the
effective date of the merger through the date of payment of the judgment
shall
be compounded quarterly and shall accrue at 5% over the Federal Reserve discount
rate (including any surcharge) as established from time to time during the
period between the effective date of the merger and the date of payment of
the
judgment. Upon application by the surviving or resulting corporation or by
any
stockholder entitled to participate in the appraisal proceeding, the Court
may,
in its discretion, proceed to trial upon the appraisal prior to the final
determination of the stockholders entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting corporation
pursuant to subsection (f) of this section and who has submitted such
stockholder's certificates of stock to the Register in Chancery, if such
is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under
this
section.
B-4
(i)
The
Court
shall direct the payment of the fair value of the shares, together with
interest, if any, by the surviving or resulting corporation to the stockholders
entitled thereto. Payment shall be so made to each such stockholder, in the
case
of holders of uncertificated stock forthwith, and the case of holders of
shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced
as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any
state.
(j)
The
costs
of the proceeding may be determined by the Court and taxed upon the parties
as
the Court deems equitable in the circumstances. Upon application of a
stockholder, the Court may order all or a portion of the expenses incurred
by
any stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorney's fees and the fees and expenses of experts,
to
be charged pro rata against the value of all the shares entitled to an
appraisal.
(k)
From
and
after the effective date of the merger or consolidation, no stockholder who
has
demanded appraisal rights as provided in subsection (d) of this section shall
be
entitled to vote such stock for any purpose or to receive payment of dividends
or other distributions on the stock (except dividends or other distributions
payable to stockholders of record at a date which is prior to the effective
date
of the merger or consolidation); provided, however, that if no petition for
an
appraisal shall be filed within the time provided in subsection (e) of this
section, or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of such stockholder's demand for an appraisal
and an acceptance of the merger or consolidation, either within 60 days after
the effective date of the merger or consolidation as provided in subsection
(e)
of this section or thereafter with the written approval of the corporation,
then
the right of such stockholder to an appraisal shall cease. Notwithstanding
the
foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such approval
may
be conditioned upon such terms as the Court deems just; provided, however
that
this provision shall not affect the right of any stockholder who has not
commenced an appraisal proceeding or joined that proceeding as a named party
to
withdraw such stockholder's demand for appraisal and to accept the terms
offered
upon the merger or consolidation within 60 days after the effective date
of the
merger or consolidation, as set forth in subsection (e) of this
section.
(l)
The
shares of the surviving or resulting corporation to which the shares of such
objecting stockholders would have been converted had they assented to the
merger
or consolidation shall have the status of authorized and unissued shares
of the
surviving or resulting corporation. (8 Del. C. 1953, § 262; 56 Del. Laws, c. 50;
56 Del. Laws, c. 186, § 24; 57 Del. Laws, c. 148, §§ 27-29; 59 Del. Laws, c.
106, § 12; 60 Del. Laws, c. 371, §§ 3-12; 63 Del. Laws, c. 25, § 14; 63 Del.
Laws, c. 152, §§ 1, 2; 64 Del. Laws, c. 112, §§ 46-54; 66 Del. Laws, c. 136, §§
30-32; 66 Del. Laws, c. 352, § 9; 67 Del. Laws, c. 376, §§ 19, 20; 68 Del. Laws,
c. 337, §§ 3, 4; 69 Del. Laws, c. 61, § 10; 69 Del. Laws, c. 262, §§ 1-9; 70
Del. Laws, c. 79, § 16; 70 Del. Laws, c. 186, § 1; 70 Del. Laws, c. 299, §§ 2,
3; 70 Del. Laws, c. 349, § 22; 71 Del. Laws, c. 120, § 15; 71 Del. Laws, c. 339,
§§ 49-52; 73 Del. Laws, c. 82, § 21; 76 Del. Laws, c. 145, §§
11-16.)
B-5
Annex
C
Xcorporeal,
Inc.
(formerly CT Holdings Enterprises, Inc.)
(formerly CT Holdings Enterprises, Inc.)
2007
Incentive Compensation Plan
Xcorporeal,
Inc.
2007
Incentive Compensation Plan
1. Purpose. The
purpose of
this Plan is to assist the Company and its Related Entities in attracting,
motivating, retaining and rewarding high-quality Employees, officers, Directors
and Consultants by enabling such persons to acquire or increase a proprietary
interest in the Company in order to strengthen the mutuality of interests
between such persons and the Company’s shareholders, and providing such persons
with annual and long-term performance incentives to expend their maximum
efforts
in the creation of shareholder value. The Plan is intended to qualify certain
compensation awarded under the Plan for tax deductibility under Section
162(m)
of the Code (as hereafter defined) to the extent deemed appropriate by
the Plan
Administrator.
2. Definitions. For
purposes of the Plan, the following terms shall be defined as set forth
below.
(a) “Applicable
Laws” means the requirements relating to the administration of equity
compensation plans under U.S. state corporate laws, U.S. federal and state
securities laws, the Code, the rules and regulations of any stock exchange
upon
which the Common Stock is listed and the applicable laws of any foreign
country
or jurisdiction where Awards are granted under the Plan.
(b) “Award”
means any award granted pursuant to the terms of this Plan, including an
Option,
Stock Appreciation Right, Restricted Stock, Stock Unit, Stock granted as
a bonus
or in lieu of another award, Dividend Equivalent, Other Stock-Based Award
or
Performance Award, together with any other right or interest, granted to
a
Participant under the Plan.
(c) “Award
Agreement” means the written agreement evidencing an Award granted under the
Plan.
(d) “Beneficiary”
means the person, persons, trust or trusts which have been designated by
a
Participant in his or her most recent written beneficiary designation filed
with
the Plan Administrator to receive the benefits specified under the Plan
upon
such Participant’s death or to which Awards or other rights are transferred if
and to the extent permitted under Section 10(b) hereof. If, upon a Participant’s
death, there is no designated Beneficiary or surviving designated Beneficiary,
then the term Beneficiary means the person, persons, trust or trusts entitled
by
will or the laws of descent and distribution to receive such benefits.
(e) “Board”
means the Company’s Board of Directors.
(f) “Cause”
shall, with respect to any Participant, have the meaning specified in the
Award
Agreement. In the absence of any definition in the Award Agreement, “Cause”
shall have the equivalent meaning or the same meaning as “cause” or “for cause”
set forth in any employment, consulting, change in control or other agreement
for the performance of services between the Participant and the Company
or a
Related Entity or, in the absence of any such definition in such agreement,
such
term shall mean (i) the failure by the Participant to perform his or her
duties as assigned by the Company (or a Related Entity) in a reasonable
manner,
(ii) any
C-1
violation or
breach by
the Participant of his or her employment, consulting or other similar agreement
with the Company (or a Related Entity), if any, (iii) any violation or
breach by the Participant of his or her confidential information and invention
assignment, non-competition, non-solicitation, non-disclosure and/or other
similar agreement with the Company or a Related Entity, if any, (iv) any
act by the Participant of dishonesty or bad faith with respect to the Company
(or a Related Entity), (v) any material violation or breach by the
Participant of the Company’s or a Related Entity’s policy for employee conduct,
if any, (vi) use of alcohol, drugs or other similar substances in a manner
that adversely affects the Participant’s work performance, or (vii) the
commission by the Participant of any act, misdemeanor, or crime reflecting
unfavorably upon the Participant or the Company or any Related Entity.
The good
faith determination by the Plan Administrator of whether the Participant’s
Continuous Service was terminated by the Company for “Cause” shall be final and
binding for all purposes hereunder.
(g) “Change
in Control” means and shall be deemed to have occurred on the earliest of
the following dates:
(i) the
date on which any “person” (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) obtains “beneficial ownership” (as defined in Rule 13d-3
of the Exchange Act) or a pecuniary interest in fifty percent (50%) or
more of
the Voting Stock;
(ii) the
consummation of a merger, consolidation, reorganization or similar transaction
other than a transaction: (1) (a) in which substantially all of the holders
of Company’s Voting Stock hold or receive directly or indirectly fifty percent
(50%) or more of the voting stock of the resulting entity or a parent company
thereof, in substantially the same proportions as their ownership of the
Company
immediately prior to the transaction; or (2) in which the holders of
Company’s capital stock immediately before such transaction will, immediately
after such transaction, hold as a group on a fully diluted basis the ability
to
elect at least a majority of the directors of the surviving corporation
(or a
parent company);
(iii) there
is consummated a sale, lease, exclusive license or other disposition of
all or
substantially all of the consolidated assets of the Company and its
Subsidiaries, other than a sale, lease, license or other disposition of
all or
substantially all of the consolidated assets of the Company and its Subsidiaries
to an entity, fifty percent (50%) or more of the combined voting power
of the
voting securities of which are owned by shareholders of the Company in
substantially the same proportions as their ownership of the Company immediately
prior to such sale, lease, license or other disposition; or
(iv) individuals
who, on the date this Plan is adopted by the Board, are Directors (the
“Incumbent Board”) cease for any reason to constitute at least a majority of the
Directors; provided, however, that if the appointment or election (or nomination
for election) of any new Director was approved or recommended by a majority
vote
of the members of the Incumbent Board then still in office, such new member
shall, for purposes of this Plan, be considered as a member of the Incumbent
Board.
For purposes
of determining whether a
Change in Control has occurred, a transaction includes all transactions
in a
series of related transactions, and terms used in this definition but not
C-2
defined are used
as
defined in the Plan. The term Change in Control shall not include a sale
of
assets, merger or other transaction effected exclusively for the purpose
of
changing the domicile of the Company.
Notwithstanding
the foregoing or any
other provision of this Plan, the definition of Change in Control (or any
analogous term) in an individual written agreement between the Company
and the
Participant shall supersede the foregoing definition with respect to Awards
subject to such agreement (it being understood, however, that if no definition
of Change in Control or any analogous term is set forth in such an individual
written agreement, the foregoing definition shall apply).
(h) “Code”
means the Internal Revenue Code of 1986, as amended from time to time,
including
regulations thereunder and successor provisions and regulations thereto.
(i) “Committee”
means a committee designated by the Board to administer the Plan with respect
to
at least a group of Employees, Directors or Consultants.
(j) “Company”
means Xcorporeal, Inc., a Delaware corporation, formerly CT Holdings
Enterprises, Inc.
(k) “Consultant”
means any person (other than an Employee or a Director, solely with respect
to
rendering services in such person’s capacity as a director) who is engaged by
the Company or any Related Entity to render consulting or advisory services
to
the Company or such Related Entity.
(l) “Continuous
Service” means uninterrupted provision of services to the Company or any
Related Entity in the capacity as either an officer, Employee, Director
or
Consultant. Continuous Service shall not be considered to be interrupted
in the
case of (i) any approved leave of absence, (ii) transfers among the
Company, any Related Entities, or any successor entities, in the capacity
as
either an officer, Employee, Director or Consultant or (iii) any change in
status as long as the individual remains in the service of the Company
or a
Related Entity in the capacity as either an officer, Employee, Director,
Consultant (except as otherwise provided in the Award Agreement). An approved
leave of absence shall include sick leave, military leave, or any other
authorized personal leave.
(m) “Corporate
Transaction” means the occurrence, in a single transaction or in a series of
related transactions, of any one or more of the following events:
(i) a
sale, lease, exclusive license or other disposition of a substantial portion
of
the consolidated assets of the Company and its Subsidiaries, as determined
by
the Plan Administrator, in its discretion;
(ii) a
sale or other disposition of more than twenty percent (20%) of the outstanding
securities of the Company; or
(iii) a
merger, consolidation, reorganization or similar transaction, whether or
not the
Company is the surviving corporation.
C-3
(n) “Covered
Employee” means an Eligible Person who is a Covered Employee as specified in
Section 7(d) of the Plan.
(o) “Director”
means a member of the Board or the board of directors of any Related Entity.
(p) “Disability”
means a permanent and total disability (within the meaning of Section 22(e)
of
the Code), as determined by a medical doctor satisfactory to the Plan
Administrator.
(q) “Dividend
Equivalent” means a right, granted to a Participant under Section 6(g)
hereof, to receive cash, Shares, other Awards or other property equal in
value
to dividends paid with respect to a specified number of Shares or other
periodic
payments.
(r) “Effective
Date” means the effective date of this Plan, which shall be the date this
Plan is adopted by the Board, subject to the approval of the shareholders
of the
Company.
(s) “Eligible
Person” means each officer, Director, Employee or Consultant. The foregoing
notwithstanding, only employees of the Company, any Parent or any Subsidiary
shall be Eligible Persons for purposes of receiving a grant of Incentive
Stock
Options. An Employee on leave of absence may be considered as still in
the
employ of the Company or a Related Entity for purposes of eligibility for
participation in the Plan.
(t) “Employee”
means any person, including an officer or Director, who is an employee
of the
Company or any Related Entity. The payment of a director’s fee by the Company or
a Related Entity shall not be sufficient to constitute “employment” by the
Company.
(u) “Exchange
Act” means the Securities Exchange Act of 1934, as amended from time to
time, including rules thereunder and successor provisions and rules thereto.
(v) “Fair
Market Value” means the fair market value of Shares, Awards or other
property as determined by the Plan Administrator, or under procedures
established by the Plan Administrator. Unless otherwise determined by the
Plan
Administrator, the Fair Market Value of Shares as of any given date, after
which
the Shares are publicly traded on a stock exchange or market, shall be
the
closing sale price per Share reported on a consolidated basis for stock
listed
on the principal stock exchange or market on which Shares is traded on
the date
as of which such value is being determined or, if there is no sale on that
date,
then on the last previous day on which a sale was reported.
(w) “Good
Reason” shall, with respect to any Participant, have the meaning specified
in the Award Agreement. In the absence of any definition in the Award Agreement,
“Good Reason” shall have the equivalent meaning (or the same meaning as “good
reason” or “for good reason”) set forth in any employment, consulting, change in
control or other agreement for the performance of services between the
Participant and the Company or a Related Entity or, in the absence of any
such
definition in such agreement(s), such term shall mean (i) the assignment to
the Participant of any duties inconsistent in any material respect with
the
Participant’s position (including status, offices, titles and reporting
requirements), authority, duties or responsibilities as assigned by the
Company
(or a Related Entity) or any other action by the Company (or a Related
C-4
Entity) which
results
in a material diminution in such position, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial
and
inadvertent action not taken in bad faith and which is remedied by the
Company
(or a Related Entity) promptly after receipt of notice thereof given by
the
Participant; (ii) any failure by the Company (or a Related Entity) to
comply with its obligations to the Participant as agreed upon, other than
an
isolated, insubstantial and inadvertent failure not occurring in bad faith
and
which is remedied by the Company (or a Related Entity) promptly after receipt
of
notice thereof given by the Participant; (iii) the Company’s (or Related
Entity’s) requiring the Participant to be based at any office or location more
than fifty (50) miles from the location of employment as of the date of
Award, except for travel reasonably required in the performance of the
Participant’s responsibilities; (iv) any purported termination by the
Company (or a Related Entity) of the Participant’s Continuous Service otherwise
than for Cause, as defined in Section 2(f), death, or by reason of the
Participant’s Disability as defined in Section 2(o); or (v) any
reduction in the Participant’s base salary (unless such reduction is part of
Company-wide reduction that affects a majority of the persons of comparable
level to the Participant).
(x) “Incentive
Stock Option” means any Option intended to be designated as an incentive
stock option within the meaning of Section 422 of the Code or any successor
provision thereto.
(y) “Non-Employee
Director” means a Director of the Company who is not an Employee.
(z) “Non-Qualified
Stock Option” means any Option that is not intended to be designated
as an incentive stock option within the meaning of Section 422 of the Code
or any successor provision thereto.
(aa) “Option”
means a right, granted to a Participant under Section 6(b) hereof, to purchase
Shares or other Awards at a specified price during specified time periods.
(bb) “Other
Stock-Based Awards” means Awards granted to a Participant pursuant to
Section 6(h) hereof.
(cc) “Parent”
means any corporation (other than the Company), whether now or hereafter
existing, in an unbroken chain of corporations ending with the Company,
if each
of the corporations in the chain (other than the Company) owns stock possessing
fifty percent (50%) or more of the combined voting power of all classes
of stock
in one of the other corporations in the chain.
(dd) “Participant”
means a person who has been granted an Award under the Plan which remains
outstanding, including a person who is no longer an Eligible Person.
(ee) “Performance
Award” means a right, granted to an Eligible Person under Sections 6(h) or
7
hereof, to receive Awards based upon performance criteria specified by
the Plan
Administrator.
(ff) “Performance
Period” means that period established by the Plan Administrator at the time
any Performance Award is granted or at any time thereafter during which
C-5
any performance
goals
specified by the Plan Administrator with respect to such Award are to be
measured.
(gg) “Plan”
means this Xcorporeal, Inc. 2006 Incentive Compensation Plan.
(hh) “Plan
Administrator” means the Board, its Compensation Committee, or any Committee
delegated by the Board to administer the Plan. There may be different Plan
Administrators with respect to different groups of Eligible Persons.
(ii) “Related
Entity” means any Parent, Subsidiary and any business, corporation,
partnership, limited liability company or other entity designated by the
Plan
Administrator in which the Company, a Parent or a Subsidiary, directly
or
indirectly, holds a substantial ownership interest.
(jj) “Restricted
Stock” means Stock granted to a Participant under Section 6(d) hereof, that
is subject to certain restrictions, including a risk of forfeiture.
(kk) “Rule 16b-3”
and “Rule 16a-1(c)(3)” means Rule 16b-3 and Rule 16a-1(c)(3),
as from time to time in effect and applicable to the Plan and Participants,
promulgated by the Securities and Exchange Commission under Section 16 of
the Exchange Act.
(ll) “Share”
means a share of the Company’s Common Stock, and the share(s) of such other
securities as may be substituted (or resubstituted) for Stock pursuant
to
Section 10(c) hereof.
(mm) “Stock”
means the Company’s Common Stock, and such other securities as may be
substituted (or resubstituted) for the Company’s Common Stock pursuant to
Section 10(c) hereof.
(nn) “Stock
Appreciation Right” means a right granted to a Participant pursuant to
Section 6(c) hereof.
(oo) “Stock
Unit” means a right, granted to a Participant pursuant to Section 6(e)
hereof, to receive Shares, cash or a combination thereof at the end of
a
specified period of time.
(pp) “Subsidiary”
means any corporation (other than the Company), whether now or hereafter
existing, in an unbroken chain of corporations beginning with the Company,
if
each of the corporations other than the last corporation in the unbroken
chain
owns stock possessing fifty percent (50%) or more of the total combined
voting
power of all classes of stock in one of the other corporations in such
chain.
(qq) “Voting
Stock” means the stock of the Company with a right to vote for the election
of Directors of the Company.
C-6
3. Administration.
(a) Administration
by Board. The Board shall administer the Plan unless and until the Board
delegates administration to a Committee, as provided in Section 3(c). The
Board and/or Committee(s) administering the Plan shall be the “Plan
Administrator.”
(b) Powers
of the Plan Administrator. The Plan Administrator shall have the power,
subject to, and within the limitations of, the express provisions of the
Plan:
(i) To
determine from time to time which of the persons eligible under the Plan
shall
be granted Awards; when and how each Award shall be granted; what type
or
combination of types of Award shall be granted; the provisions of each
Award
granted (which need not be identical), including the time or times when
a person
shall be permitted to receive Shares or cash pursuant to an Award; and
the
number of Shares or amount of cash with respect to which an Award shall
be
granted to each such person.
(ii) To
construe and interpret the Plan and Awards granted under it, and to establish,
amend and revoke rules and regulations for its administration. The Plan
Administrator, in the exercise of this power, may correct any defect, omission
or inconsistency in the Plan or in any Award Agreement, in a manner and
to the
extent it shall deem necessary or expedient to make the Plan fully effective.
(iii) To
amend the Plan or an Award as provided in Section 10(e).
(iv) To
terminate or suspend the Plan as provided in Section 10(e).
(v) To
adopt such modifications, procedures, and subplans as may be necessary
or
desirable to comply with provisions of the laws of foreign countries in
which
the Company or Related Entities may operate to assure the viability of
the
benefits from Awards granted to Participants performing services in such
countries and to meet the objectives of the Plan.
(vi) To
effect, at any time and from time to time, with the consent of any adversely
affected Participant, (1) the reduction of the exercise price of any
outstanding Award under the Plan, if any, (2) the cancellation of any
outstanding Award and the grant in substitution therefor of (A) a new Award
under the Plan or another equity plan of the Company covering the same
or a
different number of Shares, (B) cash and/or (C) other valuable
consideration (as determined by the Plan Administrator, in its sole discretion)
or (3) any other action that is treated as a repricing under generally
accepted accounting principles.
(vii) Generally,
to exercise such powers and to perform such acts as the Plan Administrator
deems
necessary or appropriate to promote the best interests of the Company and
that
are not in conflict with the provisions of the Plan.
(c) Delegation
to Committee.
(i) General.
The Board may delegate administration of the Plan to a Committee or Committees
of more members of the Board, and the term “Committee” shall apply
C-7
to any person
or
persons to whom such authority has been delegated. If administration is
delegated to a Committee, the Committee shall have, in connection with
the
administration of the Plan, the powers theretofore possessed by the Board,
to
the extent delegated by the Board, including the power to delegate to a
subcommittee any of the administrative powers the Committee is authorized
to
exercise, subject, however, to such resolutions, not inconsistent with
the
provisions of the Plan, as may be adopted from time to time by the Board.
The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
(ii) Section 162(m)
and Rule 16b-3 Compliance. In the discretion of the Board, the
Committee may consist solely of two or more “Outside Directors”, in accordance
with Section 162(m) of the Code, and/or solely of two or more “Non-Employee
Directors”, in accordance with Rule 16b-3. In addition, the Plan
Administrator may delegate to a committee of two or more members of the
Board
the authority to grant Awards to Eligible Persons who are either (a) not
then Covered Employees and are not expected to be Covered Employees at
the time
of recognition of income resulting from such Award, (b) not persons with
respect to whom the Company wishes to comply with Section 162(m) of the
Code or
(c) not then subject to Section 16 of the Exchange Act.
(d) Effect
of Plan Administrator’s Decision. All determinations, interpretations and
constructions made by the Plan Administrator shall be made in good faith
and
shall not be subject to review by any person and shall be final, binding
and
conclusive on all persons.
(e) Arbitration.
Any dispute or claim concerning any Award granted (or not granted) pursuant
to
the Plan or any disputes or claims relating to or arising out of the Plan
shall
be fully, finally and exclusively resolved by binding and confidential
arbitration conducted before a retired judge pursuant to the rules of JAMS
in
the nearest city in which JAMS conducts business to the city in which the
Participant is employed by the Company. The Company shall pay all arbitration
fees. In addition to any other relief, the arbitrator may award to the
prevailing party recovery of its attorneys’ fees and costs. By accepting an
Award, the Participant and the Company waive their respective rights to
have any
such disputes or claims tried by a judge or jury.
(f) Limitation
of Liability. The Board and any Committee(s), and each member thereof, who
act as the Plan Administrator, shall be entitled to, in good faith, rely
or act
upon any report or other information furnished to him or her by any officer
or
Employee, the Company’s independent auditors, Consultants or any other agents
assisting in the administration of the Plan. Members of the Board and any
Committee(s), and any officer or Employee acting at the direction or on
behalf
of the Board and any Committee(s), shall not be personally liable for any
action
or determination taken or made in good faith with respect to the Plan,
and
shall, to the extent permitted by law, be fully indemnified and protected
by the
Company with respect to any such action or determination.
4. Shares Issuable
Under the
Plan.
(a) Number
of Shares Available for Issuance Under Plan. Subject to adjustment as
provided in Section 10(c) hereof, the total number of Shares reserved and
available
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for issuance
in
connection with Awards shall be 3,900,000 Shares. Any Shares issued under
the
Plan may consist, in whole or in part, of authorized and unissued Shares
or
treasury Shares.
(b) Availability
of Shares Not Issued pursuant to Awards.
(i) If
any Shares subject to an Award are forfeited, expire or otherwise terminate
without issuance of such Shares or any Award is settled for cash or otherwise
does not result in the issuance of all or a portion of the Shares subject
to
such Award, the Shares shall, to the extent of such forfeiture, expiration,
termination, cash settlement or non-issuance, be available for Awards under
the
Plan, subject to Section 4(b)(iv) below.
(ii) If
any Shares issued pursuant to an Award are forfeited back to or repurchased
by
the Company, including, but not limited to, any repurchase or forfeiture
caused
by the failure to meet a contingency or condition required for the vesting
of
such Shares, then the Shares forfeited or repurchased shall revert to and
become
available for issuance under the Plan, subject to Section 4(b)(iv) below.
(iii) In
the event that any Option or other Award granted hereunder is exercised
through
the withholding of Shares from the Award by the Company or withholding
tax
liabilities arising from such Option or other Award are satisfied by the
withholding of Shares from the Award by the Company, then only the number
of
Shares issued net of the Shares withheld shall be counted as issued for
purposes
of determining the maximum number of Shares available for grant under the
Plan,
subject to Section 4(b)(iv) below.
(iv) Notwithstanding
anything in this Section 4(b) to the contrary, solely for purposes of
determining whether Shares are available for the grant of Incentive Stock
Options, the maximum aggregate number of Shares that may be granted under
this
Plan through Incentive Stock Options shall be determined without regard
to any
Shares restored pursuant to this Section 4(b) that, if taken into account,
would
cause the Plan, for purposes of the grant of Incentive Stock Options, to
fail
the requirement under Code Section 422 that the Plan designate a maximum
aggregate number of Shares that may be issued.
(c) Application
of Limitations. The limitation contained in this Section 4 shall apply
not only to Awards that are settled by the delivery of Shares but also
to Awards
relating to Shares but settled only in cash (such as cash-only Stock
Appreciation Rights). The Plan Administrator may adopt reasonable counting
procedures to ensure appropriate counting, avoid double counting (as, for
example, in the case of tandem or substitute awards) and may make adjustments
if
the number of Shares actually delivered differs from the number of Shares
previously counted in connection with an Award.
5. Eligibility;
Per-Person
Award Limitations.
(a) Eligibility.
Awards may be granted under the Plan only to Eligible Persons.
(b) Per-Person
Award Limitations. In any one calendar year, an Eligible Person may not be
granted Options or Stock Appreciation Rights under which more than 2,000,000
Shares could be received by the Participant, subject to adjustment as provided
in Section 10(c). In any one calendar year, an Eligible Person may not be
granted Awards (other than
C-9
an Option or
Stock
Appreciation Right) under which more than 2,000,000 Shares could be received
by
the Participant, subject to adjustment as provided in Section 10(c). In
addition, in any one calendar year, an Eligible Person may not be granted
Performance Awards (other than Options or Stock Appreciation Rights) under
which
more than $10,000,000 could be received by the Participant.
6. Terms of
Awards.
(a) General.
Awards may be granted on the terms and conditions set forth in this
Section 6. In addition, the Plan Administrator may impose on any Award or
the exercise thereof, at the date of grant or thereafter (subject to
Section 10(e)), such additional terms and conditions, not inconsistent with
the provisions of the Plan, as the Plan Administrator shall determine,
including
terms requiring forfeiture of Awards in the event of termination of the
Participant’s Continuous Service and terms permitting a Participant to make
elections relating to his or her Award. The Plan Administrator shall retain
full
power and discretion to accelerate, waive or modify, at any time, any term
or
condition of an Award that is not mandatory under the Plan.
(b) Options.
The Plan Administrator is authorized to grant Options to any Eligible Person
on
the following terms and conditions:
(i) Stock
Option Agreement. Each grant of an Option shall be evidenced by an Award
Agreement. Such Award Agreement shall be subject to all applicable terms
and
conditions of the Plan and may be subject to any other terms and conditions
which are not inconsistent with the Plan and which the Plan Administrator
deems
appropriate for inclusion in the Award Agreement. The provisions of the
various
Award Agreements entered into under the Plan need not be identical.
(ii) Number
of Shares. Each Award Agreement shall specify the number of Shares that are
subject to the Option and shall provide for the adjustment of such number
in
accordance with Section 10(c) hereof. The Award Agreement shall also specify
whether the Stock Option is an Incentive Stock Option or a Non-Qualified
Stock
Option.
(iii) Exercise
Price.
(A) In
General. Each Award Agreement shall state the price at which Shares subject
to the Option may be purchased (the “Exercise Price”), which shall be, with
respect to Incentive Stock Options, not less than 100% of the Fair Market
Value
of the Stock on the date of grant. In the case of Non-Qualified Stock Options,
the Exercise Price shall be determined in the sole discretion of the Plan
Administrator; provided, however, that notwithstanding any other provision
of
the Plan, any Non-Qualified Stock Option granted with a per Share exercise
price
less than the per Share Fair Market Value on the date of grant shall be
structured to avoid the imposition of any excise tax under Code
Section 409A, unless otherwise specifically determined by the Plan
Administrator.
(B) Ten
Percent Shareholder. If a Participant owns or is deemed to own (by reason of
the attribution rules applicable under Section 424(d) of the Code) more
than 10%
of the combined voting power of all classes of stock of the Company or
any
Parent or
C-10
Subsidiary, any
Incentive Stock Option granted to such Employee must have an exercise price
per
Share of at least 110% of the Fair Market Value of a Share on the date
of grant.
(iv) Time
and Method of Exercise. The Plan Administrator shall determine the time or
times at which or the circumstances under which an Option may be exercised
in
whole or in part (including based on achievement of performance goals and/or
future service requirements), the time or times at which Options shall
cease to
be or become exercisable following termination of Continuous Service or
upon
other conditions, the methods by which the exercise price may be paid or
deemed
to be paid (including, in the discretion of the Plan Administrator, a cashless
exercise procedure), the form of such payment, including, without limitation,
cash, Stock, net exercise, other Awards or awards granted under other plans
of
the Company or a Related Entity, other property (including notes or other
contractual obligations of Participants to make payment on a deferred basis)
or
any other form of consideration legally permissible, and the methods by
or forms
in which Stock will be delivered or deemed to be delivered to Participants.
(v) Termination
of Service. Subject to earlier termination of the Option as otherwise
provided in the Plan and unless otherwise provided by the Plan Administrator
with respect to an Option and set forth in the Award Agreement, an Option
shall
be exercisable after a Participant’s termination of Continuous Service only
during the applicable time period determined in accordance with this Section
and
thereafter shall terminate and no longer be exercisable:
(A) Death
or Disability. If the Participant’s Continuous Service terminates because of
the death or Disability of the Participant, the Option, to the extent
unexercised and exercisable on the date on which the Participant’s Continuous
Service terminated, may be exercised by the Participant (or the Participant’s
legal representative or estate) at any time prior to the expiration of
twelve
(12) months (or such other period of time as determined by the Plan
Administrator, in its discretion) after the date on which the Participant’s
Continuous Service terminated, but in any event only with respect to the
vested
portion of the Option and no later than the date of expiration of the Option’s
term as set forth in the Award Agreement evidencing such Option (the “Option
Expiration Date”).
(B) Termination
for Cause. Notwithstanding any other provision of the Plan to the contrary,
if the Participant’s Continuous Service is terminated for Cause, the Option
shall terminate and cease to be exercisable immediately upon such termination
of
Continuous Service.
(C) Other
Termination of Service. If the Participant’s Continuous Service terminates
for any reason, except Disability, death or Cause, the Option, to the extent
unexercised and exercisable by the Participant on the date on which the
Participant’s Continuous Service terminated, may be exercised by the Participant
at any time prior to the expiration of three (3) months (or such longer
period
of time as determined by the Plan Administrator, in its discretion) after
the
date on which the Participant’s Continuous Service terminated, but in any event
only with respect to the vested portion of the Option and no later than
the
Option Expiration Date.
C-11
(vi) Incentive
Stock Options. The terms of any Incentive Stock Option granted under the
Plan shall comply in all respects with the provisions of Section 422 of the
Code. If and to the extent required to comply with Section 422 of the Code,
Options granted as Incentive Stock Options shall be subject to the following
special terms and conditions:
(1) The
Option shall not be exercisable more than ten years after the date such
Incentive Stock Option is granted; provided, however, that if a Participant
owns
or is deemed to own (by reason of the attribution rules of Section 424(d)
of the
Code) more than 10% of the combined voting power of all classes of stock
of the
Company or any Parent or Subsidiary and the Incentive Stock Option is granted
to
such Participant, the Incentive Stock Option shall not be exercisable (to
the
extent required by the Code at the time of the grant) for no more than
five
years from the date of grant; and
(2) If
the aggregate Fair Market Value (determined as of the date the Incentive
Stock
Option is granted) of the Shares with respect to which Incentive Stock
Options
granted under the Plan and all other option plans of the Company, its Parent
or
any Subsidiary are exercisable for the first time by a Participant during
any
calendar year in excess of $100,000, then such Participant’s Incentive Stock
Option(s) or portions thereof that exceed such $100,000 limit shall be
treated
as Non-Qualified Stock Options (in the reverse order in which they were
granted,
so that the last Incentive Stock Option will be the first treated as a
Non-Qualified Stock Option). This paragraph shall only apply to the extent
such
limitation is applicable under the Code at the time of the grant.
(c) Stock
Appreciation Rights. The Plan Administrator is authorized to grant Stock
Appreciation Rights to Participants on the following terms and conditions:
(i) Agreement.
Each grant of a Stock Appreciation Right shall be evidenced by an Award
Agreement. Such Award Agreement shall be subject to all applicable terms
and
conditions of the Plan and may be subject to any other terms and conditions
which are not inconsistent with the Plan and which the Plan Administrator
deems
appropriate for inclusion in the Award Agreement. The provisions of the
various
Award Agreements entered into under the Plan need not be identical.
(ii) Right
to Payment. A Stock Appreciation Right shall confer on the Participant to
whom it is granted a right to receive, upon exercise thereof, the excess
of
(A) the Fair Market Value of one Share on the date of exercise over
(B) the grant price of the Stock Appreciation Right as determined by the
Plan Administrator.
(iii) Other
Terms. The Plan Administrator shall determine at the date of grant or
thereafter, the time or times at which and the circumstances under which
a Stock
Appreciation Right may be exercised in whole or in part (including based
on
achievement of performance goals and/or future service requirements), the
time
or times at which Stock Appreciation Rights shall cease to be or become
exercisable following termination of Continuous Service or upon other
conditions, the form of payment upon exercise of Shares, cash or other
property,
the method of exercise, method of settlement, form of consideration payable
in
settlement (either cash, Shares or other property), method by or forms
in which
Stock will be delivered or deemed to be delivered to Participants, whether
or
not a Stock Appreciation Right
C-12
shall be in tandem
or
in combination with any other Award, and any other terms and conditions
of any
Stock Appreciation Right. Stock Appreciation Rights may be either freestanding
or in tandem with other Awards. Notwithstanding any other provision of
the Plan,
unless otherwise exempt from Section 409A of the Code or otherwise
specifically determined by the Plan Administrator, each Stock Appreciation
Right
shall be structured to avoid the imposition of any excise tax under
Section 409A of the Code.
(d) Restricted
Stock. The Plan Administrator is authorized to grant Restricted Stock to
any
Eligible Person on the following terms and conditions:
(i) Grant
and Restrictions. Restricted Stock shall be subject to such restrictions on
transferability, risk of forfeiture and other restrictions, if any, as
the Plan
Administrator may impose, or as otherwise provided in this Plan. The terms
of
any Restricted Stock granted under the Plan shall be set forth in a written
Award Agreement which shall contain provisions determined by the Plan
Administrator and not inconsistent with the Plan. The restrictions may
lapse
separately or in combination at such times, under such circumstances (including
based on achievement of performance goals and/or future service requirements),
in such installments or otherwise, as the Plan Administrator may determine
at
the date of grant or thereafter. Except to the extent restricted under
the terms
of the Plan and any Award Agreement relating to the Restricted Stock, a
Participant granted Restricted Stock shall have all of the rights of a
shareholder, including the right to vote the Restricted Stock and the right
to
receive dividends thereon (subject to any mandatory reinvestment or other
requirement imposed by the Plan Administrator). During the restricted period
applicable to the Restricted Stock, subject to Section 10(b) below, the
Restricted Stock may not be sold, transferred, pledged, hypothecated, margined
or otherwise encumbered by the Participant.
(ii) Forfeiture.
Except as otherwise determined by the Plan Administrator, upon termination
of a
Participant’s Continuous Service during the applicable restriction period, the
Participant’s Restricted Stock that is at that time subject to a risk of
forfeiture that has not lapsed or otherwise been satisfied shall be forfeited
to
or reacquired by the Company; provided that the Plan Administrator may
provide,
by rule or regulation or in any Award Agreement or may determine in any
individual case, that restrictions or forfeiture conditions relating to
Restricted Stock shall be waived in whole or in part in the event of
terminations resulting from specified causes, and the Plan Administrator
may in
other cases waive in whole or in part the forfeiture of Restricted Stock.
(iii) Certificates
for Shares. Restricted Stock granted under the Plan may be evidenced in such
manner as the Plan Administrator shall determine. If certificates representing
Restricted Stock are registered in the name of the Participant, the Plan
Administrator may require that such certificates bear an appropriate legend
referring to the terms, conditions and restrictions applicable to such
Restricted Stock, that the Company retain physical possession of the
certificates, that the certificates be kept with an escrow agent and that
the
Participant deliver a stock power to the Company, endorsed in blank, relating
to
the Restricted Stock.
(iv) Dividends
and Splits. As a condition to the grant of an Award of Restricted Stock, the
Plan Administrator may require that any cash dividends paid on a Share
of
Restricted Stock be automatically reinvested in additional Shares of Restricted
Stock or applied to
C-13
the purchase
of
additional Awards under the Plan. Unless otherwise determined by the Plan
Administrator, Shares distributed in connection with a stock split or stock
dividend, and other property distributed as a dividend, shall be subject
to
restrictions and a risk of forfeiture to the same extent as the Restricted
Stock
with respect to which such Shares or other property has been distributed.
(e) Stock
Units. The Plan Administrator is authorized to grant Stock Units to
Participants, which are rights to receive Shares, cash or other property,
or a
combination thereof at the end of a specified time period, subject to the
following terms and conditions:
(i) Award
and Restrictions. Satisfaction of an Award of Stock Units shall occur upon
expiration of the time period specified for such Stock Units by the Plan
Administrator (or, if permitted by the Plan Administrator, as elected by
the
Participant). In addition, Stock Units shall be subject to such restrictions
(which may include a risk of forfeiture) as the Plan Administrator may
impose,
if any, which restrictions may lapse at the expiration of the time period
or at
earlier specified times (including based on achievement of performance
goals
and/or future service requirements), separately or in combination, in
installments or otherwise, as the Plan Administrator may determine. The
terms of
an Award of Stock Units shall be set forth in a written Award Agreement
which
shall contain provisions determined by the Plan Administrator and not
inconsistent with the Plan. Stock Units may be satisfied by delivery of
Stock,
cash equal to the Fair Market Value of the specified number of Shares covered
by
the Stock Units, or a combination thereof, as determined by the Plan
Administrator at the date of grant or thereafter. Prior to satisfaction
of an
Award of Stock Units, an Award of Stock Units carries no voting or dividend
or
other rights associated with Share ownership. Notwithstanding any other
provision of the Plan, unless otherwise exempt from Section 409A of the
Code or otherwise specifically determined by the Plan Administrator, each
Stock
Unit shall be structured to avoid the imposition of any excise tax under
Section 409A of the Code.
(ii) Forfeiture.
Except as otherwise determined by the Plan Administrator, upon termination
of a
Participant’s Continuous Service during the applicable time period thereof to
which forfeiture conditions apply (as provided in the Award Agreement evidencing
the Stock Units), the Participant’s Stock Units (other than those Stock Units
subject to deferral at the election of the Participant) shall be forfeited;
provided that the Plan Administrator may provide, by rule or regulation
or in
any Award Agreement or may determine in any individual case, that restrictions
or forfeiture conditions relating to Stock Units shall be waived in whole
or in
part in the event of terminations resulting from specified causes, and
the Plan
Administrator may in other cases waive in whole or in part the forfeiture
of
Stock Units.
(iii) Dividend
Equivalents. Unless otherwise determined by the Plan Administrator at date
of grant, any Dividend Equivalents that are granted with respect to any
Award of
Stock Units shall be either (A) paid with respect to such Stock Units at
the dividend payment date in cash or in Shares of unrestricted Stock having
a
Fair Market Value equal to the amount of such dividends or (B) deferred
with respect to such Stock Units and the amount or value thereof automatically
deemed reinvested in additional Stock Units, other Awards or other investment
vehicles, as the Plan Administrator shall determine or permit the Participant
to
elect.
C-14
(f) Bonus
Stock and Awards in Lieu of Obligations. The Plan Administrator is
authorized to grant Shares as a bonus or to grant Shares or other Awards
in lieu
of Company obligations to pay cash or deliver other property under the
Plan or
under other plans or compensatory arrangements, provided that, in the case
of
Participants subject to Section 16 of the Exchange Act, the amount of such
grants remains within the discretion of the Plan Administrator to the extent
necessary to ensure that acquisitions of Shares or other Awards are exempt
from
liability under Section 16(b) of the Exchange Act. Shares or Awards granted
hereunder shall be subject to such other terms as shall be determined by
the
Plan Administrator.
(g) Dividend
Equivalents. The Plan Administrator is authorized to grant Dividend
Equivalents to any Eligible Person entitling the Eligible Person to receive
cash, Shares, other Awards, or other property equal in value to dividends
paid
with respect to a specified number of Shares, or other periodic payments.
Dividend Equivalents may be awarded on a free-standing basis or in connection
with another Award. The terms of an Award of Dividend Equivalents shall
be set
forth in a written Award Agreement which shall contain provisions determined
by
the Plan Administrator and not inconsistent with the Plan. The Plan
Administrator may provide that Dividend Equivalents shall be paid or distributed
when accrued or shall be deemed to have been reinvested in additional Stock,
Awards, or other investment vehicles, and subject to such restrictions
on
transferability and risks of forfeiture, as the Plan Administrator may
specify.
Notwithstanding any other provision of the Plan, unless otherwise exempt
from
Section 409A of the Code or otherwise specifically determined by the Plan
Administrator, each Dividend Equivalent shall be structured to avoid the
imposition of any excise tax under Section 409A of the Code.
(h) Performance
Awards. The Plan Administrator is authorized to grant Performance Awards
to
any Eligible Person payable in cash, Shares, other property, or other Awards,
on
terms and conditions established by the Plan Administrator, subject to
the
provisions of Section 7 if and to the extent that the Plan Administrator
shall, in its sole discretion, determine that an Award shall be subject
to those
provisions. The performance criteria to be achieved during any Performance
Period and the length of the Performance Period shall be determined by
the Plan
Administrator upon the grant of each Performance Award. Except as provided
in
this Plan or as may be provided in an Award Agreement, Performance Awards
will
be distributed only after the end of the relevant Performance Period. The
performance goals to be achieved for each Performance Period shall be
conclusively determined by the Plan Administrator and may be based upon
the
criteria set forth in Section 7(b), or in the case of an Award that the
Plan Administrator determines shall not be subject to Section 7 hereof, any
other criteria that the Plan Administrator, in its sole discretion, shall
determine should be used for that purpose. The amount of the Award to be
distributed shall be conclusively determined by the Plan Administrator.
Performance Awards may be paid in a lump sum or in installments following
the
close of the Performance Period or, in accordance with procedures established
by
the Plan Administrator, on a deferred basis.
(i) Other
Stock-Based Awards. The Plan Administrator is authorized, subject to
limitations under applicable law, to grant to any Eligible Person such
other
Awards that may be denominated or payable in, valued in whole or in part
by
reference to, or otherwise based on, or related to, Shares, as deemed by
the
Plan Administrator to be consistent with the purposes of the Plan, including,
without limitation, convertible or exchangeable debt securities, other
rights
convertible or exchangeable into Stock, purchase rights for Stock, Awards
with
value and payment
C-15
contingent upon
performance of the Company or any other factors designated by the Plan
Administrator, and Awards valued by reference to the book value of Stock
or the
value of securities of or the performance of specified Related Entities
or
business units. The Plan Administrator shall determine the terms and conditions
of such Awards. The terms of any Award pursuant to this Section shall be
set
forth in a written Award Agreement which shall contain provisions determined
by
the Plan Administrator and not inconsistent with the Plan. Stock delivered
pursuant to an Award in the nature of a purchase right granted under this
Section 6(h) shall be purchased for such consideration (including without
limitation loans from the Company or a Related Entity), paid for at such
times,
by such methods, and in such forms, including, without limitation, cash,
Stock,
other Awards or other property, as the Plan Administrator shall determine.
Cash
awards, as an element of or supplement to any other Award under the Plan,
may
also be granted pursuant to this Section 6(h). Notwithstanding any other
provision of the Plan, unless otherwise exempt from Section 409A of the
Code or otherwise specifically determined by the Plan Administrator, each
such
Award shall be structured to avoid the imposition of any excise tax under
Section 409A of the Code.
7. Tax Qualified
Performance
Awards.
(a) Covered
Employees. A Committee, composed in compliance with the requirements of
Section 162(m) of the Code, in its discretion, may determine at the time
an
Award is granted to an Eligible Person who is, or is likely to be, as of
the end
of the tax year in which the Company would claim a tax deduction in connection
with such Award, a Covered Employee, that the provisions of this Section 7
shall be applicable to such Award.
(b) Performance
Criteria. If an Award is subject to this Section 7, then the lapsing of
restrictions thereon and the distribution of cash, Shares or other property
pursuant thereto, as applicable, shall be contingent upon achievement of
one or
more objective performance goals. Performance goals shall be objective
and shall
otherwise meet the requirements of Section 162(m) of the Code and regulations
thereunder including the requirement that the level or levels of performance
targeted by the Committee result in the achievement of performance goals
being
“substantially uncertain.” One or more of the following business criteria for
the Company, on a consolidated basis, and/or for Related Entities, or for
business or geographical units of the Company and/or a Related Entity (except
with respect to the total stockholder return and earnings per share criteria),
shall be used by the Committee in establishing performance goals for such
Awards: (1) earnings per Share; (2) revenues or gross margins;
(3) cash flow; (4) operating margin; (5) return on net assets,
investment, capital, or equity; (6) economic value added; (7) direct
contribution; (8) net income; pretax earnings; earnings before interest and
taxes; earnings before interest, taxes, depreciation and amortization;
earnings
after interest expense and before extraordinary or special items; operating
income; income before interest income or expense, unusual items and income
taxes, local, state or federal and excluding budgeted and actual bonuses
which
might be paid under any ongoing bonus plans of the Company; (9) working
capital; (10) management of fixed costs or variable costs;
(11) identification or consummation of investment opportunities or
completion of specified projects in accordance with corporate business
plans,
including strategic mergers, acquisitions or divestitures; (12) total
stockholder return; and (13) debt reduction. Any of the above goals may be
determined on an absolute or relative basis or as compared to the performance
of
a published or special index deemed applicable by the Committee including,
but
not limited to, the Standard & Poor’s 500 Stock Index or a group of
companies that
C-16
are comparable
to the
Company. The Committee shall exclude the impact of an event or occurrence
which
the Committee determines should appropriately be excluded, including without
limitation (i) restructurings, discontinued operations, extraordinary
items, and other unusual or non-recurring charges, (ii) an event either not
directly related to the operations of the Company or not within the reasonable
control of the Company’s management, or (iii) a change in accounting
standards required by generally accepted accounting principles.
(c) Performance
Period; Timing For Establishing Performance Goals. Achievement of
performance goals in respect of such Performance Awards shall be measured
over a
Performance Period, as specified by the Committee. Performance goals shall
be
established not later than ninety (90) days after the beginning of any
Performance Period applicable to such Performance Awards, or at such other
date
as may be required or permitted for “performance-based compensation” under
Section 162(m) of the Code.
(d) Adjustments.
The Committee may, in its discretion, reduce the amount of a settlement
otherwise to be made in connection with Awards subject to this Section 7,
but may not exercise discretion to increase any such amount payable to
a Covered
Employee in respect of an Award subject to this Section 7. The Committee
shall specify the circumstances in which such Awards shall be paid or forfeited
in the event of termination of Continuous Service by the Participant prior
to
the end of a Performance Period or settlement of Awards.
(e) Committee
Certification. Within a reasonable period of time after the performance
criteria have been satisfied (but no later than three (3) months after the
satisfaction of the performance criteria), to the extent necessary to qualify
the payments as “performance based compensation” under Section 162(m) of the
Code, the Committee shall certify, by resolution or other appropriate action
in
writing, that the performance criteria and any other material terms previously
established by the Committee or set forth in the Plan, have been satisfied.
To
the extent that the performance criteria have been satisfied, but the Committee
has not certified such result within three (3) months after such
satisfaction, then the Participant shall receive the payment provided for
under
the Participant’s Award.
8. Certain Provisions
Applicable to Awards or Sales.
(a) Stand-Alone,
Additional, Tandem and Substitute Awards. Awards granted under the Plan may,
in the discretion of the Plan Administrator, be granted either alone or
in
addition to, in tandem with or in substitution or exchange for, any other
Award
or any award granted under another plan of the Company, any Related Entity
or
any business entity to be acquired by the Company or a Related Entity or
any
other right of a Participant to receive payment from the Company or any
Related
Entity. Such additional, tandem, and substitute or exchange Awards may
be
granted at any time. If an Award is granted in substitution or exchange
for
another Award or award, the Plan Administrator shall require the surrender
of
such other Award or award in consideration for the grant of the new Award.
In
addition, Awards may be granted in lieu of cash compensation, including
in lieu
of cash amounts payable under other plans of the Company or any Related
Entity.
(b) Form
and Timing of Payment Under Awards; Deferrals. Subject to the terms of the
Plan and any applicable Award Agreement, payments to be made by the Company
or
C-17
a Related Entity
upon
the exercise of an Option or other Award or settlement of an Award may
be made
in such forms as the Plan Administrator shall determine, including, without
limitation, cash, other Awards or other property, and may be made in a
single
payment or transfer, in installments or on a deferred basis. The settlement
of
any Award may be accelerated, and cash paid in lieu of Shares in connection
with
such settlement, in the discretion of the Plan Administrator or upon occurrence
of one or more specified events (in addition to a Change in Control).
Installment or deferred payments may be required by the Plan Administrator
(subject to Section 10(g) of the Plan) or permitted at the election of
the
Participant on terms and conditions established by the Plan Administrator.
Payments may include, without limitation, provisions for the payment or
crediting of a reasonable interest rate on installment or deferred payments
or
the grant or crediting of Dividend Equivalents or other amounts in respect
of
installment or deferred payments denominated in Shares.
(c) Exemptions
from Section 16(b) Liability. It is the intent of the Company that this Plan
comply in all respects with applicable provisions of Rule 16b-3 or
Rule 16a-1(c)(3) to the extent necessary to ensure that neither the grant
of any Awards to nor other transaction by a Participant who is subject
to
Section 16 of the Exchange Act is subject to liability under Section 16(b)
thereof (except for transactions acknowledged in writing to be non-exempt
by
such Participant). Accordingly, if any provision of this Plan or any Award
Agreement does not comply with the requirements of Rule 16b-3 or
Rule 16a-1(c)(3) as then applicable to any such transaction, such provision
will be construed or deemed amended to the extent necessary to conform
to the
applicable requirements of Rule 16b-3 or Rule 16a-1(c)(3) so that such
Participant shall avoid liability under Section 16(b).
(d) Code
Section 409A. If and to the extent that the Plan Administrator believes
that any Awards may constitute “deferred compensation” under Section 409A
of the Code, the terms and conditions set forth in the Award Agreement
for that
Award shall be drafted in a manner that is intended to comply with, and
shall be
interpreted in a manner consistent with, the applicable requirements of
Section 409A of the Code, unless otherwise agreed to in writing by the
Participant and the Company.
9. Change in
Control; Corporate
Transaction.
(a) Change
in Control.
(i) The
Plan Administrator may, in its discretion, accelerate the vesting,
exercisability, lapsing of restrictions or expiration of deferral of any
Award,
including upon a Change in Control. In addition, the Plan Administrator
may
provide in an Award Agreement that the performance goals relating to any
Award
will be deemed to have been met upon the occurrence of any Change in Control.
(ii) In
addition to the terms of Sections 9(a)(i) above, the effect of a “change in
control,” may be provided (1) in an employment, compensation or severance
agreement, if any, between the Company or any Related Entity and the
Participant, relating to the Participant’s employment, compensation or severance
with or from the Company or such Related Entity or (2) in the Award
Agreement.
C-18
(b) Corporate
Transactions. In the event of a Corporate Transaction, any surviving
corporation or acquiring corporation (together, the “Successor Corporation”) may
either (i) assume any or all Awards outstanding under the Plan;
(ii) continue any or all Awards outstanding under the Plan; or
(iii) substitute similar stock awards for outstanding Awards (it being
understood that similar awards include, but are not limited to, awards
to
acquire the same consideration paid to the shareholders or the Company,
as the
case may be, pursuant to the Corporate Transaction). In the event that
the
Successor Corporation does not assume or continue any or all such outstanding
Awards or substitute similar stock awards for such outstanding Awards,
then with
respect to Awards that have been not assumed, continued or substituted,
such
Awards shall terminate if not exercised (if applicable) at or prior to
such
effective time (contingent upon the effectiveness of the Corporate Transaction).
The
Administrator, in its sole discretion, shall determine whether each Award
is
assumed, continued, substituted or terminated. Notwithstanding the foregoing,
to
the extent that substantially all of the holders of the Company’s Voting Stock
hold or receive directly or indirectly ninety percent (90%) or more of
the
Voting Stock of the resulting entity or a parent company thereof, in
substantially the same proportions as their ownership of the Company immediately
prior to the transaction, the Awards shall be either assumed or substituted
by
the successor corporation or its parent or continued by the Company.
The Plan
Administrator, in its discretion and without the consent of any Participant,
may
(but is not obligated to) either (i) accelerate the vesting of any Awards
(determined on an Award by Award basis), including permitting the lapse
of any
repurchase rights held by the Company (and, if applicable, the time at
which
such Awards may be exercised), in full or as to some percentage of the
Award, to
a date prior to the effective time of such Corporate Transaction as the
Plan
Administrator shall determine (contingent upon the effectiveness of the
Corporate Transaction) or (ii) provide for a cash payment in exchange for
the termination of an Award or any portion thereof (determined on an Award
by
Award basis) where such cash payment is equal to the Fair Market Value
of the
Shares that the Participant would receive if the Award were fully vested
and
exercised (if applicable) as of such date (less any applicable exercise
price).
Notwithstanding
any other provision in this Plan to the contrary, with respect to Restricted
Stock and any other Award granted under the Plan with respect to which
the
Company has any reacquisition or repurchase rights, the reacquisition or
repurchase rights for such Awards may be assigned by the Company to the
successor of the Company (or the successor’s parent company) in connection with
such Corporate Transaction. In the event any such rights are not continued
with
the Company or assigned to the Successor Corporation, then such rights
shall
lapse and the Award shall be fully vested as of the effective time of the
Corporate Transaction. In addition, the Plan Administrator, in its discretion,
may (but is not obligated to) provide that any reacquisition or repurchase
rights held by the Company with respect to any such Awards (determined
on an
Award by Award basis) shall lapse in whole or in part (contingent upon
the
effectiveness of the Corporate Transaction).
(c) Dissolution
or Liquidation. In the event of a dissolution or liquidation of the Company,
then all outstanding Awards shall terminate immediately prior to the completion
of such dissolution or liquidation, and Shares subject to the Company’s
repurchase option may be
C-19
repurchased by
the
Company notwithstanding the fact that the holder of such stock is still
in
Continuous Service.
10. General Provisions.
(a) Compliance
With Legal and Other Requirements. The Company may, to the extent deemed
necessary or advisable by the Plan Administrator, postpone the issuance
or
delivery of Shares or payment of other benefits under any Award until completion
of such registration or qualification of such Shares or other required
action
under any federal or state law, rule or regulation, listing or other required
action with respect to any stock exchange or automated quotation system
upon
which the Shares or other Company securities are listed or quoted or compliance
with any other obligation of the Company, as the Plan Administrator may
consider
appropriate, and may require any Participant to make such representations,
furnish such information and comply with or be subject to such other conditions
as it may consider appropriate in connection with the issuance or delivery
of
Shares or payment of other benefits in compliance with applicable laws,
rules,
and regulations, listing requirements or other obligations. The foregoing
notwithstanding, in connection with a Change in Control, the Company shall
take
or cause to be taken no action, and shall undertake or permit to arise
no legal
or contractual obligation, that results or would result in any postponement
of
the issuance or delivery of Shares or payment of benefits under any Award
or the
imposition of any other conditions on such issuance, delivery or payment,
to the
extent that such postponement or other condition would represent a greater
burden on a Participant than existed on the ninetieth (90th) day
preceding the Change in Control.
(b) Limits
on Transferability; Beneficiaries.
(i) General.
Except as provided in the Award Agreement, a Participant may not assign,
sell,
transfer or otherwise encumber or subject to any lien any Award or other
right
or interest granted under this Plan, in whole or in part, other than by
will or
by operation of the laws of descent and distribution, and such Awards or
rights
that may be exercisable shall be exercised during the lifetime of the
Participant only by the Participant or his or her guardian or legal
representative.
(ii) Permitted
Transfer of Option. The Plan Administrator, in its sole discretion, may
permit the transfer of an Option (but not an Incentive Stock Option or
any other
right to purchase Shares other than an Option) as follows: (A) by gift to a
member of the Participant’s Immediate Family or (B) by transfer by
instrument to a trust providing that the Option is to be passed to beneficiaries
upon death of the Participant. For purposes of this Section 10(b)(ii),
“Immediate Family” shall mean the Participant’s spouse (including a former
spouse subject to terms of a domestic relations order); child, stepchild,
grandchild, child-in-law; parent, stepparent, grandparent, parent-in-law;
sibling and sibling-in-law, and shall include adoptive relationships. If
a
determination is made by counsel for the Company that the restrictions
contained
in this Section 10(b)(ii) are not required by applicable federal or state
securities laws under the circumstances, then the Plan Administrator, in
its
sole discretion, may permit the transfer of Awards (other than Incentive
Stock
Options and Stock Appreciation Rights in tandem therewith) to one or more
Beneficiaries or other transferees during the lifetime of the Participant,
which
may be exercised by such transferees in accordance with the terms of such
Award,
but only if and to the extent permitted by the Plan Administrator pursuant
to
the express terms of an Award
C-20
Agreement (subject
to
any terms and conditions which the Plan Administrator may impose thereon,
and
further subject to any prohibitions and restrictions on such transfers
pursuant
to Rule 16b-3). A Beneficiary, transferee or other person claiming any
rights under the Plan from or through any Participant shall be subject
to all
terms and conditions of the Plan and any Award Agreement applicable to
such
Participant, except as otherwise determined by the Plan Administrator,
and to
any additional terms and conditions deemed necessary or appropriate by
the Plan
Administrator.
(c) Adjustments.
(i) Adjustments
to Awards. In the event that any dividend or other distribution (whether in
the form of cash, Shares or other property), recapitalization, forward
or
reverse split, reorganization, merger, consolidation, spin-off, combination,
repurchase, share exchange, liquidation, dissolution or other similar corporate
transaction or event affects the Shares and/or such other securities of
the
Company or any other issuer such that a substitution, exchange or adjustment
is
determined by the Plan Administrator to be appropriate, then the Plan
Administrator shall, in such manner as it may deem equitable, substitute,
exchange or adjust any or all of (A) the number and kind of Shares which
may be
delivered in connection with Awards granted thereafter, (B) the number and
kind of Shares by which annual per-person Award limitations are measured
under
Section 5 hereof, (C) the number and kind of Shares subject to or
deliverable in respect of outstanding Awards, (D) the exercise price, grant
price or purchase price relating to any Award and/or make provision for
payment
of cash or other property in respect of any outstanding Award, and (E) any
other aspect of any Award that the Plan Administrator determines to be
appropriate.
(ii) Other
Adjustments. The Plan Administrator (which shall be a Committee to the
extent such authority is required to be exercised by a Committee to comply
with
Code Section 162(m)) is authorized to make adjustments in the terms and
conditions of, and the criteria included in, Awards (including Awards subject
to
performance goals) in recognition of unusual or nonrecurring events (including,
without limitation, acquisitions and dispositions of businesses and assets)
affecting the Company, any Related Entity or any business unit, or the
financial
statements of the Company or any Related Entity, or in response to changes
in
applicable laws, regulations, accounting principles, tax rates and regulations
or business conditions or in view of the Plan Administrator’s assessment of the
business strategy of the Company, any Related Entity or business unit thereof,
performance of comparable organizations, economic and business conditions,
personal performance of a Participant, and any other circumstances deemed
relevant; provided that no such adjustment shall be authorized or made
if and to
the extent that such authority or the making of such adjustment would cause
Options, Stock Appreciation Rights or Performance Awards granted to Participants
designated by the Plan Administrator as Covered Employees and intended
to
qualify as “performance-based compensation” under Code Section 162(m) and the
regulations thereunder to otherwise fail to qualify as “performance-based
compensation” under Code Section 162(m) and regulations thereunder.
(d) Taxes.
The Company and any Related Entity are authorized to withhold from any
Award
granted, any payment relating to an Award under the Plan, including from
a
distribution of Shares or any payroll or other payment to a Participant,
amounts
of withholding and other taxes due or potentially payable in connection
with any
transaction involving an Award, and to take such other action as the Plan
Administrator may deem advisable to enable the Company
C-21
and Participants
to
satisfy obligations for the payment of withholding taxes and other tax
obligations relating to any Award. This authority shall include authority
to
withhold or receive Shares or other property and to make cash payments
in
respect thereof in satisfaction of a Participant’s tax obligations, either on a
mandatory or elective basis in the discretion of the Plan Administrator.
(e) Changes
to the Plan and Awards. The Board may amend, alter, suspend, discontinue or
terminate the Plan or the Committee’s authority to grant Awards under the Plan,
without the consent of shareholders or Participants. Any amendment or alteration
to the Plan shall be subject to the approval of the Company’s shareholders if
such shareholder approval is deemed necessary and advisable by the Board.
However, without the consent of an affected Participant, no such amendment,
alteration, suspension, discontinuance or termination of the Plan may materially
and adversely affect the rights of such Participant under any previously
granted
and outstanding Award. The Plan Administrator may waive any conditions
or rights
under or amend, alter, suspend, discontinue or terminate any Award theretofore
granted and any Award Agreement relating thereto, except as otherwise provided
in the Plan; provided that, without the consent of an affected Participant,
no
such action may materially and adversely affect the rights of such Participant
under such Award.
(f) Limitation
on Rights Conferred Under Plan. Neither the Plan nor any action taken
hereunder shall be construed as (i) giving any Eligible Person or
Participant the right to continue as an Eligible Person or Participant
or in the
employ of the Company or a Related Entity; (ii) interfering in any way
with the
right of the Company or a Related Entity to terminate any Eligible Person’s or
Participant’s Continuous Service at any time, (iii) giving an Eligible
Person or Participant any claim to be granted any Award under the Plan
or to be
treated uniformly with other Participants and Employees or (iv) conferring
on a Participant any of the rights of a shareholder of the Company unless
and
until the Participant is duly issued or transferred Shares in accordance
with
the terms of an Award.
(g) Unfunded
Status of Awards; Creation of Trusts. The Plan is intended to constitute an
“unfunded” plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant or obligations to deliver Shares
pursuant
to an Award, nothing contained in the Plan or any Award shall give any
such
Participant any rights that are greater than those of a general creditor
of the
Company; provided that the Plan Administrator may authorize the creation
of
trusts and deposit therein cash, Shares, other Awards or other property
or make
other arrangements to meet the Company’s obligations under the Plan. Such trusts
or other arrangements shall be consistent with the “unfunded” status of the Plan
unless the Plan Administrator otherwise determines with the consent of
each
affected Participant. The trustee of such trusts may be authorized to dispose
of
trust assets and reinvest the proceeds in alternative investments, subject
to
such terms and conditions as the Plan Administrator may specify and in
accordance with applicable law.
(h) Nonexclusivity
of the Plan. Neither the adoption of the Plan by the Board nor its
submission to the shareholders of the Company for approval shall be construed
as
creating any limitations on the power of the Plan Administrator to adopt
such
other incentive arrangements as it may deem desirable including incentive
arrangements and awards which do not qualify under Code Section 162(m).
C-22
(i) Fractional
Shares. No fractional Shares shall be issued or delivered pursuant to the
Plan or any Award. The Plan Administrator shall determine whether cash,
other
Awards or other property shall be issued or paid in lieu of such fractional
shares or whether such fractional shares or any rights thereto shall be
forfeited or otherwise eliminated.
(j) Governing
Law. The validity, construction and effect of the Plan, any rules and
regulations under the Plan, and any Award Agreement shall be determined
in
accordance with the laws of the State of Delaware without giving effect
to
principles of conflicts of laws, and applicable federal law.
(k) Plan
Effective Date and Shareholder Approval; Termination of Plan. The Plan shall
become effective on the Effective Date, subject to approval of its adoption
by
the Board by shareholders of the Company eligible to vote in the election
of
directors, by a vote sufficient to meet the requirements of Code Sections
162(m)
(if applicable) and 422, Rule 16b-3 under the Exchange Act (if applicable),
applicable and other laws, regulations, and obligations of the Company
applicable to the Plan. Awards may be granted subject to shareholder approval,
but may not be exercised or otherwise settled in the event shareholder
approval
is not obtained. The Plan shall terminate no later than ten (10) years from
the date of the later of (x) the Effective Date and (y) the date an
increase in the number of Shares reserved for issuance under the Plan is
approved by the Board (subject such increase is also approved by the
shareholders).
C-23
Annex
D
AMENDED
AND
RESTATED
CERTIFICATE OF INCORPORATION
OF
CT HOLDINGS ENTERPRISES, INC.
CERTIFICATE OF INCORPORATION
OF
CT HOLDINGS ENTERPRISES, INC.
The corporation
organized and existing
under and by virtue of the General Corporation Law of the State of Delaware
does
hereby certify:
That at a meeting
of the board of
directors of CT Holdings Enterprises, Inc., resolutions were duly adopted
setting forth an Amended and Restated Certificate of Incorporation of the
corporation, declaring said Amended and Restated Certificate of Incorporation
to
be advisable and calling a meeting of the stockholders of the corporation
for
consideration thereof. The resolution set forth the proposed Amended and
Restated Certificate of Incorporation as follows:
1. The name of the
corporation is
Xcorporeal, Inc. (the “Corporation”).
2. The address of
the
Corporation’s registered office in the State of Delaware is 615 South DuPont
Highway, Dover, Delaware 19901, County of Kent. The name of its registered
agent
at such address is National Corporate Research, Ltd.
3. The purpose of
the Corporation
is to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware (“DGCL”).
4. Capital Stock.
(a)
Authorized
Capital Stock. The total number of shares of capital stock
that the Corporation is authorized to issue is Fifty Million (50,000,000)
shares, consisting of Forty Million (40,000,000) shares of common stock,
par
value $0.0001 per share (“Common Stock”), and Ten Million (10,000,000) shares of
preferred stock, par value of $0.0001 per share (“preferred stock”).
(b)
Preferred
Stock. The Board of Directors of the Corporation is hereby
expressly authorized, by resolution or resolutions thereof, to provide
out of
the unissued shares of preferred stock for one or more series of preferred
stock, and, with respect to each such series, to fix the number of shares
constituting such series and the designation of such series, the powers
(including voting powers), if any, of the shares of such series and the
preferences and relative, participating, optional or other special rights,
if
any, and any qualifications, limitations or restrictions of the shares
of such
series. The designations, powers, preferences and relative, participating,
optional and other special rights of each series of preferred stock, if
any, and
the qualifications, limitations or restrictions thereof, if any, may differ
from
those of any and all other series of preferred stock at any time outstanding.
The Board of Directors is also expressly
D-1
authorized to
increase
or decrease the number of shares of any series so created, subsequent to
the
issue of that series but not below the number of shares of such series
then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they
had
prior to the adoption of the resolution originally fixing the number of
shares
of such series.
(c)
Common Stock.
(i) Voting
Rights. Except as otherwise required by law, or as otherwise fixed by
resolution or resolutions of the Board of Directors with respect to one
or more
series of preferred stock, the entire voting power and all voting rights
shall
be vested exclusively in the Common Stock, and each stockholder of the
Corporation who at the time possesses voting power for any purpose shall
be
entitled to one vote for each share of such stock standing in his or her
name on
the books of the Corporation.
(ii) Dividends.
Subject to the rights, preferences, privileges, restrictions and other
matters
pertaining to the preferred stock that may, at that time be outstanding,
the
holders of the Common Stock shall be entitled to receive, when, as and
if
declared by the Board of Directors, out of any assets of the Corporation
legally
available therefore, such dividends as may be declared from time to time
by the
Board of Directors.
(iii) Liquidation;
Dissolution. In the event of any liquidation, dissolution or winding up
(either voluntary or involuntary) of the Corporation, the holders of shares
of
Common Stock shall be entitled to receive the assets and funds of the
Corporation available for distribution after payments to creditors and
to the
holders of any preferred stock of the Corporation that may at the time
be
outstanding, in proportion to the number of shares held by them, respectively,
without regard to class.
(d) Reverse
Stock Split. Effective at [___] a.m./p.m. on [___], 2007 (the “Effective
Time”), every 8.27 shares of the Corporation’s Common Stock issued and
outstanding immediately prior to the Effective Time (the “Old Common Stock”),
will automatically and without any action on the part of the respective
holders
thereof be combined and converted into one (1) share of Common Stock of
the
Corporation (the “New Common Stock”). The combination and conversion of the Old
Common Stock shall be referred to as the “Reverse Stock Split.”
(i) No
fractional shares of New Common Stock shall be issued to the holders of
record
of Old Common Stock in connection with the Reverse Stock Split and the
Corporation shall not recognize on its stock record books any purported
transfer
of any fractional share of New Common Stock. All shares of Old Common Stock
(including fractions thereof) held by a holder immediately prior to the
Reverse
Stock Split shall be aggregated for purposes of determining whether the
Reverse
Stock Split would result in the issuance of a fractional share. Any fractional
share resulting from such aggregation of Old Common Stock upon the Reverse
Stock
Split shall be rounded up, so that a holder of pre-split shares would receive,
in lieu of any fraction of a post-split share to which the holder would
otherwise be entitled, an entire post-split share. No cash payment shall
be made
to reduce or eliminate any fractional share interest.
D-2
(ii) The
Corporation shall not be obligated to issue certificates evidencing the
shares
of New Common Stock outstanding as a result of the Reverse Stock Split
unless
and until the holder notifies the Corporation or its transfer agent that
such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Corporation to indemnify the Corporation from any loss
incurred by it in connection with such certificates. Each stock certificate
that, immediately prior to the Effective Time, represented shares of Old
Common
Stock shall, from and after the Effective Time, automatically and without
the
necessity of presenting the same for exchange, represent that number of
whole
shares of New Common Stock into which the shares of Old Common Stock represented
by such certificate shall have been reclassified, provided, however, that
each
holder of record of a certificate that represented shares of Old Common
Stock
shall receive, upon surrender of such certificate, a new certificate
representing the number of whole shares of New Common Stock into which
the
shares of Old Common Stock represented by such certificate shall have been
reclassified.
5. Board of
Directors.
(a) Management.
The management of the business and the conduct of the affairs of the Corporation
shall be vested in the Board of Directors. The number of directors that
shall
constitute the Board of Directors shall be fixed exclusively by resolutions
adopted by the Board of Directors.
(b) Term
of Office. A director shall hold office until his or her successor shall be
elected and qualified or until such director’s earlier death, resignation,
retirement or removal from office.
(c) Removal.
Subject to any limitation imposed by law or any rights of holders of preferred
stock, the Board of Directors or any individual director may be removed
from
office at any time with or without cause by the affirmative vote of the
holders
of a majority of the voting power of all the then outstanding shares of
capital
stock of the Corporation entitled to vote, voting together as a single
class.
(d) Vacancies.
Subject to any limitation imposed by law or any rights of holders of preferred
stock, any vacancies (including newly created directorships) shall be filled
only by the affirmative vote of a majority of the directors then in office,
although less than a quorum, or by a sole remaining director. Directors
appointed to fill vacancies created by the resignation or termination of
a
director will serve the remainder of the term of the resigning or terminated
director.
(e) No
Written Ballot. Unless and except to the extent that the bylaws of the
Corporation shall so require, the election of directors of the Corporation
need
not be by written ballot.
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(f) Amendment
of Bylaws. In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors is expressly
authorized to make, alter, amend and repeal the bylaws of the Corporation,
subject to the power of the stockholders of the Corporation to alter, amend
or
repeal any bylaw whether adopted by them or otherwise, in accordance with
the
bylaws.
6. Special Meetings
of
Stockholders. Except as otherwise required by law and subject to the rights,
if any, of the holders of any series of preferred stock, special meetings
of the
stockholders of the Corporation for any purpose or purposes may be called
at any
time only by the Chairman of the Board of Directors, the Chief Executive
Officer, the President or the Secretary of the Corporation, in each case
pursuant to a resolution of the Board of Directors, and special meetings
of
stockholders of the Corporation may not be called by any other person or
persons.
7. Amendment
of Certificate of
Incorporation. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in
the
manner now or hereafter prescribed by statute, and all rights conferred
upon
stockholders herein are granted subject to this reservation.
8. Indemnification;
Limitation
of Liability. Except to the extent that the DGCL prohibits the elimination
or limitation of liability of directors for breaches of fiduciary duty,
no
director of the Corporation shall be personally liable to the Corporation
or its
stockholders for monetary damages for any breach of fiduciary duty as a
director. No amendment to or repeal of this Section 8 of the relevant
provisions of the DGCL shall apply to or have any effect on the liability
or
alleged liability of any director of the Corporation for or with respect
to any
acts or omissions of such director occurring prior to such amendment or
repeal.
The foregoing
Amended and Restated
Certificate of Incorporation has been duly approved by the Board of Directors
of
CT Holdings Enterprises, Inc. in accordance with the provisions of Section
242
of the General Corporation Law of the State of Delaware.
The stockholders
of CT Holdings
Enterprises, Inc. approved the Amended and Restated Certificate of Incorporation
of the Corporation in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
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IN WITNESS WHEREOF,
CT Holdings
Enterprises, Inc. has caused this Amended and Restated Certificate of
Incorporation to be signed by its Executive Chairman of the Board this
___ day
of August, 2007.
| CT HOLDINGS ENTERPRISES,
INC., a Delaware corporation |
||||
| By: | /s/ Terren S. Peizer | |||
| Terren S. Peizer | ||||
| Executive Chairman of the Board | ||||
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