UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
X Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
_____ Transition Report Pursuant to Section 13 or 15 (d) of the of
the Securities Exchange Act of 1934
Commission File Number: 0-11914
CAPRIUS, INC.
(Name of Small Business Issuer in its charter)
Delaware 2-2457487
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Parker Plaza, Fort Lee, NJ 07024
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (201) 592-8838
Securities to be registered under Section 12(b) of the Exchange Act:
None
Securities to be registered under Section 12 (g) of the Exchange Act:
Common Stock, par value $ .01 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed
under Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes __
No X
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X].
Revenues for the fiscal year ended September 30, 2003: $600,579
The aggregate market value of the voting stock held by non-affiliates
of the Registrant computed by reference to the price at which the stock was
sold, or the average bid and ask prices of such stock as of December 31, 2003:
$1,137,244
The number of shares outstanding of Registrant's Common Stock, $ .01
par value, outstanding on December 31, 2003: 20,446,562 shares
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Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: Yes No X
INDEX
Page No.
PART I
Item 1. Description of Business 3
Item 2. Description of Property 10
Item 3. Legal Proceedings 10
Item 4 Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 12
Item 6. Management's Discussion and Analysis or Plan of Operations 12
Item 7. Financial Statements 17
Item 8. Changes In and Disagreements with Accountants on Accounting 18
and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control 18
Persons; Compliance with Section 16 (a) of the Exchange Act.
Item 10. Executive Compensation 20
Item 11. Security Ownership of Certain Beneficial Owners and Management 22
and Related Stockholder Matters
Item 12. Certain Relationships and Related Transactions 23
Item 13. Exhibits and Reports on Form 8-K 25
Item 14. Controls and Procedures 29
SIGNATURES 32
2
PART I
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Caprius, Inc. ("Caprius" or the "Company") was founded in 1983 and
through June 1999 essentially operated in the business of medical imaging
systems as well as healthcare imaging and rehabilitation services. On June 28,
1999, the Company acquired Opus Diagnostics Inc. ("Opus") and began
manufacturing and selling medical diagnostic assays constituting the Therapeutic
Drug Monitoring ("TDM") Business. In the first quarter of fiscal 2003, the
Company made major changes in its business through the sale of the TDM Business
and the purchase of a majority interest in M.C.M. Environmental Technologies,
Inc. ("MCM"). Until fiscal year end 2003, the Company continued to own and
operate a comprehensive imaging center located in Lauderhill, Florida.
Effective September 30, 2003, the Company completed the sale of the
Strax Institute ("Strax") to Eastern Medical Technologies, Inc. ("EMT") a
Delaware corporation pursuant to a Stock Purchase Agreement among the Company,
EMT and the other parties thereto. The proceeds from the sale were $412,000 and
may be subject to adjustment based upon collections of the accounts receivable
outstanding as of the date of closing.
On December 17, 2002, the Company closed the acquisition of 57.53% of
the capital stock of MCM, which is engaged in the medical infectious waste
disposal business, for a purchase price of $2.4 million. MCM developed and
manufactures the SteriMed(R) System which is sold or rented worldwide. The
SteriMed(R) System is a patented environmentally friendly on-site disinfecting
and disposal unit that can process regulated clinical waste including sharps,
dialysis filters, pads, bandages, plastic tubing and even glass, in a 12 minute
cycle. The units simultaneously shred, grind, mix and disinfect the waste with
the proprietary SterCid(R) solution. Upon closing, Caprius designees were
elected to three of the five seats on MCM's Board of Directors, with George
Aaron, President and CEO, and Jonathan Joels, CFO, filling two seats.
Additionally, as part of the transaction, certain debt of MCM to its existing
stockholders and to certain third parties was converted to equity or
restructured. On June 12, 2002, the Company and MCM had signed a Letter of
Intent to enter into an agreement whereby the Company would have the right to
acquire 51% of the outstanding stock on a fully diluted basis of MCM. Concurrent
with the signing of the Letter of Intent, Caprius provided MCM with a loan
totaling $245,000. The Company obtained the monies to make the loan to MCM
through funds provided by a short-term loan from officers and employees of the
Company as well as related family members in the amount of $250,000. At the time
of the acquisition of MCM, the Company's outstanding loans to MCM aggregated
$565,000 which were paid by reducing the cash portion of the purchase price.
Commencing June 2004, pursuant to a Stockholders Agreement, the stockholders of
MCM (other than the Company) shall have the right to put all of their MCM shares
to MCM, and MCM shall have the right to call all of such shares, at a price
based upon a pre-set determination calculated at such time. At the Company's
option, the purchase price for the remaining MCM shares may be paid in cash or
the Company's common stock.
On October 9, 2002, Opus sold the assets of the TDM Business to
Seradyn, Inc., a Delaware corporation ("Seradyn"), pursuant to a Purchase and
Sale Agreement among Opus, Caprius, and Seradyn for a purchase price of
$6,000,000 and entered into a Royalty Agreement and a Consulting Agreement.
On September 25, 2002, warrant holders representing 3,297,700 shares of
Common Stock took the opportunity to exercise their warrants in the Company's
warrant price reduction program. The Company had offered warrant holders of
4,319,750 shares of Common Stock the opportunity to exercise their warrants at a
reduced exercise price for a period of 14 days during September 2002. The
purpose of this program was to give the Company a quick and inexpensive means to
obtain funds for short-term working capital requirements. The reduced exercise
price for each of the outstanding warrants was equal to 20% of its present
exercise price, but not less than $0.11 per share. As a result, the Company
raised an aggregate of $409,668 and also substantially reduced the number of its
outstanding warrants.
3
MCM ENVIRONMENTAL TECHNOLOGIES INC.
DESCRIPTION OF MCM ENVIRONMENTAL TECHNOLOGIES INC. (MCM) BUSINESS-
BACKGROUND OF THE REGULATED MEDICAL WASTE INDUSTRY IN THE UNITED STATES
In 1988, the Federal Government passed the Medical Waste Tracking Act
("MWTA"). This act defined medical waste and the types of medical waste that
were to be regulated. In addition to defining categories of medical waste, the
law mandated that generators of Regulated Medical Waste ("RMW") be responsible
for and adhere to strict guidelines and procedures when disposing of RMW. The
mandates included a "cradle to grave" responsibility for any RMW produced by a
facility, the necessity to track the disposal of RMW and defined standards for
segregating, packaging, labeling and transporting of RMW.
The MWTA led to the development of individual state laws regulating
how RMW is to be disposed of. As a result of these laws, it became necessary for
medical waste generating facilities to institute new procedures and processes
for transporting medical waste from the facility to an offsite treatment and
disposal center, or obtain their own on-site system for treatment and disposal
acceptable to the regulators. By 1999, Health Care Without Harm, a coalition of
240 member organizations, estimated that 250,000 tons of RMW was produced
annually.
The other major impact on the RMW market was the adoption of the Clean
Air Amendments of 1997. This act dramatically reduced or eliminated the type of
emissions that are permitted from the incineration of RMW. Due to this
generators of RMW, which were incinerating their waste, were forced into costly
upgrades of their incinerators or to find other methods of disposal. Hospital
incinerators decreased from 6,200 in 1988 to 115 in 2003 (Mackinac Chapter,
Sierra Club Newsletter Aug-Oct 2003).
Most generators of RMW use waste management firms to transport, treat,
and dispose of their waste. Due to the legislative and other market factors, the
costs for this type of service have been increasing at a dramatic pace. At the
same time, many medical waste generators are coming under increasing pressure to
reduce expenses as a result of the decreasing percentage of reimbursement from
Medicare and other third party providers. Additionally, the added liability of
RMW generators as a result of the "cradle to grave" manifest requirement has
made it more attractive to use medical waste management methods that do not
require manifest systems. The combination of these pressures is forcing medical
waste generators to seek innovative methods for their waste disposal. MCM
believes these factors create a demand for an onsite RMW treatment option. MCM
has identified and is working with specific segments and niches within the RMW
market on which it feels it might capitalize. The specifics of these will be
discussed in the Marketing section.
BACKGROUND OF THE REGULATED MEDICAL WASTE INDUSTRY OUTSIDE OF THE UNITED STATES
The industrialized countries of the European Union and Japan are
implementing medical waste laws that are or will be similar to US regulations.
In 1994, the European Commission implemented a directive where member states had
to adhere to the provisions of the United Nations Economic Commission for Europe
("UNECE") European Agreement on the International Carriage of Dangerous Goods by
Road. This requires that clinical or medical waste would be packed, marked,
labeled, and documented according to defined specifications. Regulations and
cost factors have prompted European RMW generators to seek alternative medical
waste disposal options. MCM recognizes an excellent opportunity for SteriMed
sales in Europe, and is working with regulators, potential joint venture
partners and distributors.
Throughout the less industrialized and third world countries, the
disposal of hospital waste is coming under increasing scrutiny and regulations.
Many countries are in the process of updating and enforcing regulations
regarding the disposal of RMW. MCM is attempting to establish relationships
worldwide directly or through distributors, in many of these countries.
4
THE MCM STERIMED(R) SYSTEM
The SteriMed(R) System is a patented environmentally friendly on-site
disinfecting and disposal unit that can process regulated clinical waste,
including sharps, dialysis filters, pads, bandages, plastic tubing and even
glass, in a 12 minute cycle. The units simultaneously shred, grind, mix and
disinfect the waste with the proprietary SterCid(R) solution. After treatment,
the material may be discarded as unrecognizable conventional solid waste, in
accordance with appropriate regulatory requirements. The resultant treated waste
is as low as 10% of the original volume.
As the technology for disinfection is chemical based, within the
definitions used in the industry, it is considered as an alternative treatment
technology.
The SteriMed(R) System is comprised of two different sized units, and
the required SterCid(R) disinfectant solution which can be utilized with both
units. The larger SteriMed(R) can treat up to 20 gallons (75 liters) of medical
waste per cycle. The smaller version, SteriMed Junior(R), can treat 4 gallons
(15 liters) per cycle.
SterCid(R) is MCM's proprietary chemical treatment used in the
SteriMed(R) System. SterCid(R) is greater than 90% biodegradable and is
registered with the U.S. Environmental Protection Agency ("EPA") under the
Federal Insecticide, Fungicide, Rodenticide Act of 1972 ("FIFRA"). During the
SteriMed(R) treatment cycle, the concentration of SterCid(R) is less than 0.09%
of the total volume of liquids. SterCid is formulated with a pleasant smell,
eliminating the usual foul odor generated by clinical waste.
Both Sterimed(R) units are safe and easy to operate, involving 1/2 day
of training. Once the start button is activated, water and SterCid(R) are
automatically released into the treatment chamber. The shredding, grinding and
mixing of the waste is then initiated to expose all surfaces of the medical
waste to the chemical solution during the 12 minute processing cycle. At the end
of each cycle, the disinfected waste is automatically moved to a separate
collection area, putting it into a regular black bag, ready for disposal as
regular solid waste.
Both SteriMed(R) and the Sterimed Junior(R) are equipped with an
integrated monitoring system, including a PLC display, which indicates each of
the system's functions to guide the operator through its operations. Access to
the PLC program is secured, accessible only by MCM's technicians to prevent
operators from overriding the treatment process. Relevant information concerning
treatment parameters may be electronically forwarded, at the end of each
treatment cycle, to a designated printer at any location within the facility. In
addition, the system is capable, at the option of the facility, to have the
treatment parameters for all cycles in a day forwarded to MCM's maintenance
center.
REGULATIONS AND REGULATORY COMPLIANCE FOR ALTERNATIVE MEDICAL WASTE TREATMENT
TECHNOLOGIES IN THE UNITED STATES
The use of the Ster-Cid(R) disinfectant in the Sterimed(R) System is
regulated by the EPA under FIFRA.
The MCM Sterimed(R) systems are regulated at the state level by the
individual states Environmental, Conservation, Natural Resources, or Health
Department. Each state has its own specific approval requirements. Generally,
most states require an application for registration or approval be submitted
along with back up information, including but not limited to operating manuals,
service manuals, and procedures. Additionally, many states require contingency
and safety plans be submitted, and that efficacy testing be performed. MCM has
demonstrated through efficacy testing that it can reduce the level of Bacillus
subtilis (now named Bacillus atrophaeus) spores to 6Log10, or by one-million
(0.000001). This meets or exceeds most state regulatory requirements.
The Sterimed(R) Senior has been cleared for marketing in forty three
states and the SteriMed Junior in thirty seven states. It is the MCM's objective
to obtain approvals from the remaining states in 2004. MCM's Ster-Cid(R)
disinfectant is registered in forty nine states.
Local and county level authorities generally require that discharge
permits be obtained from Publicly Owned Treatment Works (POTW) by all facilities
5
that discharge a substantial amount of liquids or specifically regulated
substances to the sewer system. The SteriMed(R) system process effluent has been
characterized and found to be within the lower range of the general discharge
limits set forth by the National Pollutant Discharge Elimination System (NPDES)
Permitting Program, which are used to establish POTW discharge limits.
These approvals allow the MCM Sterimed System effluent to be discharged
to a municipal sewer and the treated disinfected waste to be disposed of in a
municipal landfill.
The SteriMed(R) process, unlike many other waste medical disposal
technologies, is not subject to the Clean Air Act Amendments of 1990 because
there is no incineration or generation of toxic fumes in the process. It is also
not subject to the Hazardous Materials Transportation Authorization Act of 1994
as there is no transportation of hazardous waste involved.
REGULATIONS AND REGULATORY COMPLIANCE FOR ALTERNATIVE MEDICAL WASTE TREATMENT
TECHNOLOGIES OUTSIDE OF THE UNITED STATES
CE Mark compliancy is an expected requirement for equipment sold in the
European Union ("EU"). The larger SteriMed(R) is CE Mark compliant. In order to
meet the specific requirements of the individual members of the EU, MCM will
undertake further efficacy testing in order to demonstrate that the Sterimed(R)
conforms to all the standards. At present, MCM is marketing in non-EU countries.
COMPETITION
RMW has routinely been treated and disposed of by of incineration. Due
to the pollution generated by medical waste incinerators, novel technologies
have been developed for the disposal of RMW. Some of the issues confronting
these technologies are: energy requirements, space requirements, unpleasant
odor, radiation exposure, excessive heat, volume capacity and reduction, steam
and vapor containment, and chemical pollution. The use of the Sterimed System
eliminates concern about these issues: space and energy requirements are
minimal, there are no odors, radiation, steam, vapor or heat generated, solid
waste volume is reduced by up to 90% and the disinfecting chemical is 94%
biodegradable. The following are the various competitive technologies:
Autoclave (steam under pressure): Autoclaves and retort systems are the
most common alternative method to incineration used to treat medical waste.
Autoclaves are widely accepted because they have historically been used to
sterilize medical instruments. However, there are drawbacks as autoclaves may
have limitations on the type of waste they can treat, the ability to achieve
volume reduction, and odor problems.
Microwave Technology: Microwave technology is a process of disinfection
that exposes material to moist heat and steam generated by microwave energy. The
waves of microwave energy operate at a very high frequency of around 2.45
billion times per second. This generates the heat needed to change water to
steam and carry out the disinfection process at a temperature between 95 and 100
degrees centigrade. Use of this technology requires that proper precautions be
taken to exclude the treatment of hazardous material so that toxic emissions do
not occur. Also offensive odors may be generated around the unit. The capital
cost is relatively high.
Thermal Processes: Thermal processes are dry heat processes and do not
use water or steam, but forced convection, circulating heated air around the
waste or using radiant heaters. Companies have developed both large and small
dry-heat systems, operating at temperatures between 350oF-700oF. Use of dry heat
requires longer treatment times.
High Heat Thermal Processes: High heat thermal processes operate at or
above incineration temperatures, from 1,000oF to 15,000oF. Pyrolysis, which does
not include combustion or burning, contains chemical reactions that create
gaseous and residual waste products. The emissions are lower than that created
by incineration, but the pyrolysis demands heat generation by resistance heating
such as with bio-oxidation, induction heating, natural gas or a combination of
plasma, resistance hearing and superheated steam.
6
Radiation: Electron beam technology creates ionized radiation, damaging
cells of microorganisms. Workers must be protected with shields and remain in
areas secured from the radiation.
Chemical Technologies: Disinfecting chemical agents that integrate
shredding and mixing to ensure adequate exposure are used by a variety of
competitors. Chlorine based chemicals, using sodium hypochlorite and chlorine
dioxide, are somewhat controversial as to their environmental effects and their
impact on wastewater. Non-chloride technologies are varied and include peracetic
acid, ozone gas, lime based dry powder, acid and metal catalysts as well as
alkaline hydrolysis technology used for tissue and animal waste.
Among the competitors of MCM are Stericycle, Inc., Steris Corporation,
Sanitec, Inc. Positive Impact Waste Solutions, Inc., Waste Processing Solutions
Company, Global Environmental Technologies, LLC, and Waste Reduction, Inc.
COMPETITIVE FEATURES OF THE MCM STERIMED SYSTEM
Seizing the opportunity afforded by the regulatory changes and pricing
pressures in the healthcare industry, MCM is positioning its products as viable
alternatives to the traditional medical waste disposal methods. The SteriMed(R)
system seeks to offer medical waste generators a true on-site option that is
less risky, less expensive, and more environmentally friendly than the
alternatives. The main competitive advantages of the SteriMed(R) System are:
Safety
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a) No need to pack containers of medical waste
b) No need to transport infectious waste through facilities
with patients c) No need to ship infectious medical waste on
public roads
d) Environmentally sound approach for disinfection - uses
biodegradable chemicals; does not release smoke, odor, steam
or other emissions to the air; removes the need for
incineration
e) Noise level during cycle is approx. 70.1dB(A), regarded
below levels of noise safety concerns by most government
regulations
Labor
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a) Reduce the exposure to infectious waste by limiting the time
an employee handles, stores and packs the waste
b) No need to administer and track waste that is shipped from
the facility
c) SteriMed(R) ease of use
d) Employee can do other functions while SteriMed treatment
cycle is operational
Convenience
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a) Can be easily installed requiring only electricity, water
and sewage outlet. No special ventilation or lighting
required.
b) SteriMed(R) can fit through regular door
c) Limited training required for the operator
d) Due to size, units can be strategically placed in a health
care facility near high waste generation sites (e.g. floor
of operating room, infectious disease ward)
Cost Saving
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a) Less labor time
b) No transportation costs to incineration site
c) MCM's preferred business model is to rent the SteriMed(R)
System to the facilities generating the infectious clinical
waste. This model obviates the need for capital investment,
and should also reduce previous operating expenses in
disposing of medical waste.
Compliant with Federal and States regulations
---------------------------------------------
Enables infectious medical waste generating facilities to
replace existing systems while meeting federal, state and local
environmental as well as health regulations.
7
These features are intended to make the SteriMed(R) System a very
attractive solution to health care organizations, especially those that are
forced to reconsider their current medical waste management programs because of
federal and state regulations or because of pressures to reduce operating costs.
MARKETING STRATEGY
MCM has designed and is implementing a marketing program which
maximizes the uniqueness and strengths of the Sterimed Systems while enhancing
our customers' cash flow and minimizing their financial restraints. Our sales
focus is to those sites which best fit the capabilities and requirements of our
systems. These include those sites generating approximately 2,000 to 12,000
pounds of RMW per month and are able to provide a room with a minimum of 75
square feet with proper plumbing and electricity for the storage and operation
of the machine. Within the United States these facilities include dialysis
centers, surgical centers, blood banks, commercial laboratories (both research
and clinical), large physician group practices and specific sites within
hospitals.
Many of these facilities are owned by national or international
corporations operating many facilities. By focusing our sales efforts to these
corporations we will be able to have multiple machine placements within the same
organization. This offers many advantages to the customer and MCM. Not only will
we be able to maximize our selling efforts, we will also be able to compound our
warranty and service effectiveness. This strategy should enable MCM to maximize
its resources and quickly obtain market penetration. MCM is presently working
with a number of these companies in the implementation of this strategy.
MCM does not have the depth of marketing that many of its competitors
have and thus is reliant upon generating interest in its products by virtue of
its technical advantages. This aspect is emphasized in its limited budget
allocated for marketing.
MANUFACTURING
MCM recognizes that to be successful, it needs to manufacture units
that are;
1) Robust
2) Reliable
3) Reproducible in their activity
Presently, the SteriMed(R) is manufactured at MCM's facilities in
Moshav Moledet, Israel. The SteriMed-Junior(R) is being manufactured at a third
party manufacturer in Israel. The Company is actively seeking extra capacity for
manufacturing, including within the U.S. The inability to find such
manufacturers will constrain MCM's growth potential. MCM is reliant upon certain
critical components from third parties in order to manufacture its products.
MAINTENANCE AND CUSTOMER SERVICE MODEL
Critical to the successful use of the MCM Sterimed System is the proper
training of the personnel carrying out the installation, operation and service
of the equipment. The MCM technical service staff assists clients in the
installation of units and training of their staff. MCM has a comprehensive
training program for its technical service staff and on-site operators. This
training program is strongly geared to safety and maintenance to assure ongoing
safe and smooth operation of the unit. After installation and training,
operation of the unit is monitored by our technical staff to assure proper
performance. MCM technical staff is on call to assist in fixing problems or
perform repairs. Our goal is to minimize problems through ongoing training and
strict adherence to maintenance schedules. MCM Customer Service staff is
available to help with any questions or issues our customers might have. These
two MCM service groups comprise a team that is able to provide professional
after sale customer care.
8
TRADEMARKS PATENTS
There exist various medical waste treatment technologies that can be
combined and employed in different ways, making trademarks and patents very
important pieces of intellectual property to possess in the medical waste
treatment industry. MCM has acquired trademarks and patents for its SteriMed(R)
and Ster-Cid(R) products in the following countries:
TRADEMARKS:
-----------
Israel
U.S.A.
CTM (European)
Japan
Australia
Mexico
Russia
Hungary
PATENTS:
--------
Israel
Australia
Japan
U.S.A
Canada
Europe- Austria, Belgium, Germany, Spain, France, UK, Italy,
Netherlands
Brazil
Mexico
Russia
South Africa
China
India
In addition, MCM has applied for trademarks and patents in other jurisdictions.
STRAX INSTITUTE BUSINESS
Prior to September 30, 2003, the Company operated Strax, a
comprehensive breast imaging center located in Lauderhill, Florida. Strax was a
multi-modality breast care center performing approximately 20,000 procedures
annually comprising of x-ray mammography, ultrasound, stereotactic biopsy and
bone densitometry. Following the sale of Strax, the Company has been providing
certain specified transitional services for up to 180 days after closing
pursuant to a Management Services Agreement. Additionally, two of the Company's
executive officers are restricted for a period of five years from competing in
the mammography and bone densitometry business in the States of Florida and New
Jersey.
THERAPEUTIC DRUG MONITORING BUSINESS
Prior to October 9, 2002, Opus was engaged in the development,
distribution and sale of diagnostic assays, controls and calibrators for
therapeutic drug monitoring ("TDM") which were sold under the trademark
INNOFLUOR(R) in kit form for use on the Abbott TDx and TDxFLx instruments. Opus
received and accepted an unsolicited offer from Seradyn to purchase the assets
of its TDM Business for $6 million plus future royalties. Seradyn had been a
contract manufacturer of the Opus TDM kits. Under a two year Consulting
Agreement ending on October 8, 2004, Opus consults Seradyn with ongoing projects
for an annual fee of $50,000. The purchased assets included three diagnostic
assays still in development, for which Opus will receive royalty payments upon
the commercialization of any of these assays based upon varying percentages of
net sales for up to ten years from closing. The Company has ascertained that one
of the assays under development for a new drug for anti-rejection in
9
transplantation is nearing completion. Assuming that the drug receives the
required regulatory approvals and the assay development is successfully
completed, Opus will begin to generate royalty income based upon the sales of
this assay during calendar year 2004. Caprius, Opus and its three executive
officers entered into non-compete agreements with Seradyn restricting them for
five years from competing in the TDM business.
EMPLOYEES
As of December 31, 2003, the Company employed 6 full time employees,
including 3 senior managers, at its New Jersey corporate headquarters.
MCM currently employs 3 full time employees in the U.S. and 10 full
time and 2 part time employees at its facility in Israel.
None of the Company's or MCM's employees are represented by labor
organizations and the Company is not aware of any activities seeking such
organization. The Company considers its relations with employees to be good.
As the level of the Company's activities grow, additional personnel may
be required.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 2,758 square feet of office space in Fort Lee, New
Jersey for executive and administrative personnel pursuant to a lease that
expires on June 30, 2005 at a base monthly rental of approximately $6,665 plus
escalation.
MCM leases approximately 1,500 square feet of warehousing space in
Ridgefield, NJ at a monthly cost $1,850. This lease expires on April 30, 2005
and is subject to a 5% increment yearly. In Israel, MCM leases 2,300 square feet
of industrial space at a monthly cost of approximately $750 plus municipal
taxes. The current lease expires on March 31, 2004. MCM intends to renew this
loan.
The Company believes the premises leased are adequate for its current
and near term requirements.
ITEM 3. LEGAL PROCEEDINGS
In June 2002, Jack Nelson, a former executive officer and director of
the Company, commenced two legal proceedings against the Company and George
Aaron and Jonathan Joels, executive officers, directors and principal
stockholders of the Company. The two complaints allege that the individual
defendants made alleged misrepresentations to the plaintiff upon their
acquisition of a controlling interest in the Company in 1999 and thereafter made
other alleged misrepresentations and took other actions as to the plaintiff to
the supposed detriment of the plaintiff and the Company. One action was brought
in Superior Court of New Jersey, Bergen County ("State Court Action"), and the
other was brought as a derivative action in Federal District Court in New Jersey
("Federal Derivative Action"). The counts in the complaints are for breach of
contract, breach of fiduciary duty and misrepresentation. The complaint in the
Federal Derivative Action also alleges that certain actions by the defendants in
connection with the 1999 acquisition transaction and also as Company officers
violated the Federal Racketeer Influenced and Corrupt Organizations Act (RICO).
No amount of damages was specified in either action. The Company has answered
the complaints and has asserted affirmative defenses. The parties exchanged
written discovery in the State Court Action. No depositions were taken. In
January 2003, motions were made on behalf of the Company and Messrs. Aaron and
Joels to dismiss both the Federal Derivative Action and the State Court Action.
On April 25, 2003, the Court in the State Court Action denied the portion of the
motion which sought dismissal of the breach of contract claim but granted the
motion to dismiss with respect to the counts for fraud and misrepresentation and
respondeat superior against the Company based upon such fraud, but gave the
plaintiff leave to amend his complaint to replead with sufficient specificity
the counts predicated upon alleged fraud. An amended complaint was filed in the
State Court Action on May 15, 2003. The Company answered the amended complaint
and asserted affirmative defenses. The Court also ordered the parties to proceed
10
with mediation in an attempt to resolve the dispute. Mediation took place on
June 24, 2003, and concluded without resolution of the action. On or about
September 5, 2003, the Company resolved the State Court Action by making an
Offer of Judgment, which was accepted by the plaintiff. Under the terms of the
Offer of Judgment, which was made without any admission or finding of liability
on the part of the defendants, the Company made a payment of $125,000 to the
plaintiff and the action was discontinued. The motion to dismiss the Federal
Derivative Action is currently pending before the Federal Court. In addition,
the plaintiff has filed a cross-motion to amend his complaint to add allegations
of securities violations against George Aaron, Jonathan Joels, Shrikant Mehta
and former Director, Sanjay Mody.
In September 2002, the Company was served with a complaint naming the
Company and its principal officers and directors in the Federal District Court
of New Jersey as a purported class action. The allegations in the complaint
cover the period between February 14, 2000 and June 20, 2002. The plaintiff is a
relative of the wife of the plaintiff in the previously disclosed direct and
derivative actions against the defendants. The allegations in the purported
class action are substantially similar to those in the other two actions. The
complaint seeks an unspecified amount of monetary damages, as well as the
removal of the defendant officers as shareholders of the Company. No answer has
yet been filed to this complaint as the parties agreed to extend the Company's
time to answer the complaint. In January, 2003, an order was entered in the
Federal District Court in New Jersey consolidating the derivative action and the
class action. The order further provides that the time for the defendants to
answer or otherwise move with respect to the complaint in the class action is
extended. The order also provides that all discovery in the consolidated actions
is stayed pending resolution of the motions to dismiss. On April 9, 2003, an
amended complaint was filed in the purported class action naming an additional
plaintiff. On September 23, 2003, the Court entered an order: (1) appointing
plaintiffs Eugene Schwartz and Dallas Williams as lead plaintiffs; and (2)
appointing the law firm of Lowenstein Sandler as lead counsel for the class. On
November 21, 2003, the defendants made a motion to dismiss the purported class
action. That motion is currently pending.
The independent directors have authorized the Company to advance the
legal expenses of Messrs. Aaron and Joels in these litigations with respect to
claims against them in their corporate capacities, subject to review of the
legal bills and compliance with applicable law.
In September 2002, BDC Corp., d/b/a BDC Consulting Corp., brought an
action against the Company and Mr. Aaron in the Circuit Court for the
Seventeenth Judicial Circuit, Broward County, Florida seeking an unspecified
amount of damages arising from the defendants' alleged tortious interference
with a series of agreements between the plaintiff and third party MCM pursuant
to which the plaintiff had intended to purchase MCM. See Item 1 of this report
for information regarding the Company's investment in MCM. Although the Company
believed there was no merit to the plaintiff's claim, the Company and Mr. Aaron
settled the action for the sum of $83,000 in order to avoid a lengthy and
expensive litigation. The purchaser of Strax is an entity controlled by the same
person who is a principal in BDC Corp. Under the Company's Purchase Agreement
with MCM, MCM, its subsidiaries and certain pre-existing shareholders of MCM
have certain obligations to indemnify the Company with respect to damages,
losses, liabilities, costs and expenses arising out of any claim or controversy
in respect to the BDC complaint. The Company has made a claim for
indemnification.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our Common Stock has traded on the OTC Bulletin Board under the
symbol CAPR since June 8, 1999, upon the delisting of the Common Stock from the
NASDAQ Small Cap Market. If the Company fails to file this 10-KSB within the
prescribed timeframe of the OTC Bulletin Board, the Company will be listed on
11
the pink sheets as of February 19, 2004. As of September 30, 2003, the publicly
traded warrants had expired and the market terminated upon their expiration.
The following table sets forth, for the calendar quarters indicated,
the reported high and low bid quotations per share of the Common Stock as
reported on the OTCBB. Such quotations reflect inter-dealer prices, without
retail mark-up, markdown or commission, and may not necessarily represent actual
transactions.
Common Stock High Low
---- ---
2003 (year ended September 30, 2003)
Fourth Quarter $ 0.31 0.10
Third Quarter 0.13 0.10
Second Quarter 0.13 0.08
First Quarter 0.15 0.07
2002 (year ended September 30, 2002)
Fourth Quarter $ 0.14 0.05
Third Quarter 0.10 0.06
Second Quarter 0.08 0.05
First Quarter 0.09 0.04
The Company has paid no dividends on its shares of Common Stock since
its inception in July 1983 nor does the Company expect to declare any dividends
on its Common Stock in the foreseeable future.
On September 30, 2003, there were approximately 1,250 holders of record
of the Common Stock. Since a large number of shares of Common Stock are held in
street or nominee name, it is believed that there are a substantial number of
additional beneficial owners of the Company's Common Stock.
(b) Not applicable
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto for the years ended
September 30, 2003 and 2002.
RESULTS OF OPERATIONS
As more fully described in Note L to the consolidated financial
statements, the Company completed the sale of its comprehensive breast imaging
business (Strax) as of September 30, 2003. As a result, the Company's
consolidated statements of operations for the fiscal years ended 2003 and 2002
have been restated to reflect the Strax business as discontinued operations.
As more fully described in Note J to the consolidated financial
statements, the Company completed the sale of its TDM business segment effective
October 9, 2002. As a result, the Company's consolidated balance sheet for the
fiscal years ended 2003 and 2002 have been restated to reflect the TDM business
as a discontinued operation. The Company's consolidated statements of operations
for the fiscal years ended 2003 and 2002 were restated to reflect the TDM
business as discontinued operations.
12
Fiscal Year Ended September 30, 2003 Compared to Fiscal Year Ended September 30,
2002
Revenues generated for fiscal 2003 were primarily generated by MCM
product sales and rental revenues which totaled $550,579 for the fiscal year
ended September 30, 2003. There are no comparisons for the prior fiscal year as
the Company commenced this business effective December 17, 2002. Consulting
income which was generated for the fiscal year ended September 30, 2003 was in
connection to the sale of the TDM business.
Selling, general and administrative expenses totaled $4,155,660 for
Fiscal 2003 versus $1,582,636 for Fiscal 2002. This increase reflects the costs
related to the acquisition and ongoing operations MCM in both the US and its
overseas subsidiary, as well as substantial increases in both legal and
insurance fees.
The operating loss from operations totaled $4,052,867 for Fiscal 2003
versus $1,582,636 for Fiscal 2002. This increase represents the acquisition of
the operations of MCM. Income from operations of the discontinued TDM business,
including the gain on disposal, totaled $3,287,587. The loss from operations
from the discontinued Strax business, including the gain on disposal of
$125,658, totaled $18,830.
LIQUIDITY AND CAPITAL RESOURCES
The Company has for the past several years met its need for capital
in its various businesses through loans from officers, directors and related
parties other than the monies received from the sales of the TDM business, which
were primarily used to finance the recently acquired MCM business. Due to the
poor equity market for companies such as Caprius, there has been significant
difficulty in obtaining funds from traditional sources.
During January and February 2004, the Company authorized a short-term
bridge loan for an aggregate of up to $500,000 through the issuance of loan
notes due on July 31, 2005. The funds will be utilized primarily for general
working capital. To date, the Company has raised $400,000, the majority of which
was provided by management of the Company. The loan notes bear interest at a
rate of 11% per annum and are secured by a first lien on the royalties due to
Opus Diagnostics Inc. from Seradyn, Inc. in accordance with their Royalty
Agreement. For every three dollars ($3.00) loaned, the lender received two
warrants to purchase one share of Caprius Common Stock, exercisable at $0.25 per
share for a period of five years. The exercise price was in excess of the market
price on the day the loans were authorized.
Effective September 30, 2003, the Company completed the sale of Strax.
The purchase price was $412,000 and may be subject to adjustment based upon
collections of the accounts receivable outstanding as of the date of closing.
Fifty percent of the purchase price, which had been held in escrow, was paid on
closing and the balance is payable in installments commencing January 1, 2004
and ending December 31, 2004, evidenced by a note secured by the accounts
receivables of Strax Institute, Inc, the entity into which the purchaser placed
the Strax assets. The Company utilized the funds for general working capital
purposes.
During October 2002, the Company's subsidiary, Opus, sold the assets of
its TDM Business to Seradyn. The purchase price was $6,000,000, subject to
adjustment on a dollar for dollar basis to the extent the net asset value of the
purchased assets as shown on a post-closing proforma asset statement was greater
the $420,000 or less than $380,000. The Company has received a further payment
of $54,970 from Seradyn as a post closing payment adjustment. $600,000 of the
purchase price was deposited into an escrow account to be held for indemnity
claims, of which $300,000 would be released after one year. As there were no
claims on the escrowed money, Seradyn released all of the escrowed funds to the
Company during October and December 2003. The Company used the net cash proceeds
to pay down debts and liabilities, repayment of the short-term loan and, in
December 2002, used $1,835,000 as part of the MCM purchase price. The balance of
the funds were used for general working capital purposes.
During September 2002, warrant holders representing 3,297,700 shares of
Common Stock exercised their warrants in the Company's warrant price reduction
program. As a result, the Company raised an aggregate of $409,668 and also
13
substantially reduced the number of its outstanding warrants. The Company used
the proceeds for general working capital purposes.
Also during September 2002, the Company entered into a short-term line
of credit arrangement with one of its board members, Shrikant Mehta, whereby Mr.
Mehta agreed to extend a $500,000 line of credit to the Company for up to 18
months at an interest rate of 11% per annum. In return for the provision of the
line of credit, Mr. Mehta was granted warrants to purchase 500,000 shares of
Common Stock, exercisable at $0.11 per share for a period of five years. In
February 2004, Mr. Mehta and the Company were unable to reach mutually
satisfactory terms for the underlying provisions of the loan, and therefore Mr.
Mehta relinquished his offer for the line of credit and returned the warrants
granted to him related to this arrangement.
During June 2002, the Company obtained a short-term loan in the
principal amount of $250,000, with interest at prime plus 3% per annum and due
on September 30, 2003 (see Note E to the Notes to the Consolidated Financial
Statements herein). The proceeds of the short-term loan were used to fund an
initial loan to MCM (the "MCM Loan") of up to $250,000. On October 10, 2002, the
holders of the short-term loan were repaid an aggregate of $250,000 plus accrued
interest. For each $1.00 principal amount loaned, the lender received a warrant
to purchase one share of the Company's Common Stock, exercisable after six
months at $0.09 per share for a period of five years.
During February and March 2001, the Company completed a short-term
bridge loan of $300,000 through the issuance of loan notes from officers,
directors, related parties and others due on February 28, 2002 together with
warrants, the proceeds of which were used principally for working capital and
purchase of raw materials previously owned by Oxis, the previous manufacturer
and owner of the Opus products. The $300,000 bridge loan notes were secured by
the assets of Strax and were due for repayment on February 28, 2002. The bridge
loan holders extended the repayment date to October 31, 2002 and continued to
receive interest at the rate of 11%. On October 10, 2002, the Company repaid the
bridge loan holders in an aggregate of $300,000 plus accrued interest.
In light of the cash requirement needed to develop the MCM business,
the Company is actively seeking funding. The Company will continue its efforts
to seek additional funds through funding options, including banking facilities,
equipment financing, government-funded grants and private equity offerings.
There can be no assurance that such funding initiatives will be successful due
to the difficulty in raising equity from third parties given the Company's low
stock price and current revenue base, and if successful, will not be dilutive to
existing stockholders. These funds are required to permit the Company to expand
its marketing efforts and for the manufacture of its SteriMed(R) System as well
as for general working capital requirements. To date, Management and their
affiliates have been the primary resource of funding. In addition, depending
upon the outcome of the pending legal actions, additional funding for legal
expenses could also be required. Consequently, the Company's viability could be
threatened. Accordingly, the auditors' report on the 2003 financial statements
contains an explanatory paragraph expressing a substantial doubt about the
Company's ability to continue as a going concern.
Net cash used in operations for Fiscal 2003 amounted to $5,059,056. Net
cash provided by investing activities for Fiscal 2003 amounted to $5,911,125.
Net cash flows used for financing activities for Fiscal 2003 amounted to
$582,532.
CONTRACTUAL OBLIGATIONS
The following table sets forth our contractual obligations as of September 30,
2003.
TOTAL LESS THAN 1-3 YEARS MORE THAN
----- --------- --------- ---------
1 YEAR 5 YEARS
------ -------
Long Term Debt Obligations............. - - - -
Capital Lease Obligations.............. - - - -
Operating Lease Obligations............ $165,350 $118,700 $46,650 -
CONTINGENT OBLIGATIONS
Our principal contractual commitments include payments under operating leases.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures. On an on-going basis, management
evaluates the Company's estimates and assumptions, including but not limited to
those related to revenue recognition and the impairment of long-lived assets,
goodwill and other intangible assets. Management bases its estimates on
historical experience and various other assumptions that it believes 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 are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
14
1. Revenue recognition
The medical infectious waste business recognizes revenues from
either the sale or rental of its SteriMed units. Revenues for
sales are recognized at the time that the unit is shipped to the
customer. Rental revenues are recognized based upon either
services provided for each month of activity or evenly over the
year in the event that a fixed rental agreement is in place.
2. Goodwill and other intangibles
Goodwill and other intangibles associated with the MCM
acquisition will be subject to an annual assessment for
impairment by applying a fair-value based test. The valuation
will be based upon estimates of future income of the reporting
unit and estimates of the market value of the unit.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." This statement superseded EITF No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity". Under this statement, a liability or a cost
associated with a disposal or exit activity is recognized at fair value when the
liability is incurred rather than at the date of an entity's commitment to an
exit plan as required under EITF 94-3. The provision of this statement is
effective for exit or disposal activities that are initiated after December 31,
2002, with early adoption permitted. The Company is currently evaluating the
effect that the adoption of SFAS No. 146 will have on its consolidated financial
position and results of operations.
In November 2002, the Emerging Issues Task Force (EITF) reached
consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.
Revenue arrangements with multiple deliverables include arrangements which
provide for the delivery or performance of multiple products, services and/or
rights to use assets where performance may occur at different points in time or
over different periods of time. EITF Issue No. 00-21 was effective for the
Company beginning July 1, 2003 and did not have a material effect on the
Company's results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation in the event companies adopt SFAS No. 123 and account for
stock options under the fair value method. SFAS No. 148 also amends the
disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim Financial
Reporting (APB 28), to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. While the Statement does not
amend SFAS No. 123 to require companies to account for employee stock options
using the fair value method, the disclosure provisions of SFAS No. 148 are
applicable to all companies with stock-based employee compensation, regardless
of whether they account for that compensation using the fair value method of
SFAS No. 123 or the intrinsic value method of APB Opinion No. 25 Accounting for
Stock Issued to Employees (APB 25).
In May 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The changes in this Statement improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly. This
Statement is effective for contracts entered into or modified after June 30,
2003. The adoption of SFAS 149 is not expected to have a material affect on our
financial position, results of operations, or cash flows.
15
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS
No. 150 is the first phase of the FASB's project on liabilities and equity. SFAS
No. 150 provides guidance on how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity. Many
of these instruments were previously classified as equity. For example, if an
employer's issuance of its shares to a key employee requires the employer to
redeem the shares upon the employee's death, then those shares must be
classified as a liability, not as equity. For publicly-held companies, SFAS No.
150 is effective for financial instruments entered into or modified after May
31, 2003. SFAS No. 150 requires companies to record the cumulative effect of
financial instruments existing at the adoption date. The Company does not
believe the adoption of SFAS 150 will have a significant effect on the Company's
operations, financial position or cash flows.
FORWARD LOOKING STATEMENTS
The Company is including the following cautionary statement in this
Annual Report of Form 10-KSB to make applicable and take advantage of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 for
any forward-looking statements made by, or on behalf of, the Company.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements which are other than statements of historical facts. Certain
statements contained herein are forward-looking statements and accordingly
involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward-looking statements. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectation, beliefs or
projections will result or be achieved or accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward-looking statements: technological
advances by the Company's competitors, changes in health care reform, including
reimbursement programs, changes to regulatory requirements relating to
environmental approvals for the treatment of infectious medical waste, capital
needs to fund any delays or extensions of development programs, delays in the
manufacture of new and existing products by the Company or third party
contractors, the loss of any key employees, the outcome of existing litigations,
delays in obtaining federal, state or local regulatory clearance for new
installations and operations, changes in governmental regulations, the location
of the MCM business in Israel, and availability of capital on terms satisfactory
to the Company. The Company disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
RISK FACTORS
The medical infectious waste disposal industry is subject to extensive
federal, state and local laws and regulations, both in the US and overseas. Our
business requires us to obtain many different approvals and permits or other
types of governmental authorizations for each jurisdiction in which we operate.
Other risks that we face are more specifically defined as follows:
MANUFACTURING
o Dependent on third party contractors for SteriMed(R)JR
o Long term durability of components
o Limited manufacturing capacity for SteriMed(R) Seniors
within existing premises
o Dependent on third party suppliers for components
o Managerial effort in coordinating international
manufacturing sites
REGULATORY
o Potential changes in regulatory standards which the
SteriMed(R) System might not meet
o There may be future restrictions to the use of any chemical
ingredient of the SterCid(R) formulation
o Significant increases in compliance costs
16
FINANCIAL RESOURCES
o Capital equipment such as the SteriMed(R) System requires
substantial capital base order to build up inventory and /or
lease equipment to third parties.
o In order to maintain reasonable liquidity, the Company needs
to raise funds which might be dilutive to shareholders.
o There is no assurance that the Company will have adequate
financing on acceptable terms when needed.
o The Company's report from its independent auditors for the
year ended September 30, 2003 contains an explanatory
paragraph regarding the Company's ability to continue as a
going concern.
o Acquisition opportunities that the Company might undertake
could be dilutive to shareholders.
o The exposure to currency fluctuations on international sales
and manufacturing.
PERSONNEL
o The Company is reliant upon qualified personnel with
technical skills.
ITEM 7. FINANCIAL STATEMENTS
PAGE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS NUMBER
------------------------------------------ ------
Independent Auditors' Report F-2
Consolidated Balance Sheets at September 30, 2003 and 2002 F-3
Consolidated Statements of Operations for the years ended F-4
September 30, 2003 and 2002
Consolidated Statements of Stockholders' Equity for years
ended September 30, 2003 and 2002 F-5
Consolidated Statements of Cash Flows for the years ended
September 30, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-7 to F-20
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
As of December 31, 2003, the directors and executive officers of the
Company were:
Name Age Position
---- --- --------
George Aaron 51 Chairman of the Board,
President and Chief Executive
Officer
17
Jonathan Joels 47 Chief Financial Officer,
Treasurer, Secretary and
Director
Elliott Koppel 59 VP Sales and Marketing
Shrikant Mehta 59 Director
Sol Triebwasser, Ph.D.(1)(2) 81 Director
--------------------
(1) Member of the Audit Committee
(2) Member of the Compensation/Option Committee
The principal occupations and brief summary of the background of each
Director and executive officer of Caprius during the past five years is as
follows:
GEORGE AARON. Mr. Aaron has been Chairman of the Board, President and
CEO of the Company since June 1999. From 1992 to 1998, Mr. Aaron was the
co-founder and CEO of a drug discovery company, Portman Pharmaceuticals, Inc.,
and currently serves on the Board of Directors of Peptor Limited, the company
that acquired Portman Pharmaceuticals. Mr. Aaron was also a co-founder of the
bioseparation/agtech company, CBD Technologies, Inc., of which he remains a
Director. From 1983 to 1988, Mr. Aaron was the founder and CEO of a diagnostic
company, Technogenetics, Inc., that he took public and which was later acquired.
Prior to 1983, Mr. Aaron was founder and is a Partner in the Portman Group, Inc.
and headed international business development at Schering-Plough Corporation.
Mr. Aaron is a graduate of the University of Maryland.
JONATHAN JOELS. Mr. Joels has been CFO, Treasurer and Secretary of the
Company since June 1999. From 1992 to 1998, Mr. Joels was the co-founder and CFO
of Portman Pharmaceuticals, Inc. Mr. Joels was also a co-founder of CBD
Technologies, Inc. Mr. Joels' experience includes serving as a principal in
Portman Group, Inc.; CFO of London & Leeds Corp., a subsidiary of a large UK
multinational public company; and as a Chartered Accountant, holding positions
with both Ernst & Young and Hacker Young between 1977 and 1981. Mr. Joels
qualified and was admitted to the Institute of Chartered Accountant in England
and Wales in 1981 and holds a BA Honors Degree in Accountancy (1977) from the
City of London School of Business Studies.
ELLIOTT KOPPEL. Mr. Koppel has been VP of Marketing and Sales of the
Company since June 1999. From 1996 to June 1999 he served as CEO of ELK
Enterprises, a consulting and advertising company for the Medical Device
industry. From 1993 to 1996, he was VP Sales and Marketing for Clark
Laboratories Inc. From 1992 to 1993, Mr. Koppel was Director of the Immunology
Business Unit at Schiapparelli BioSystems. From 1990 to 1992, he was VP of Sales
and Marketing at Enzo BioChem. From 1986 to 1990, Mr. Koppel was VP of Clinical
Sciences, Inc. Between 1974 and 1986 he held the positions of Sales
Representative, Regional Manager, and International Marketing Manager at Warner
Lambert Diagnostics. Prior to 1974 Mr. Koppel was Sales Representative and
Product Manager with Ortho Diagnostics. Mr. Koppel holds a BS in Commerce from
Rider University.
SHRIKANT MEHTA. Mr. Mehta became a director in 2000. Mr. Mehta has been
President and CEO of Combine International, Inc., a wholesale manufacturer of
fine jewelry since 1974. He has also served on the Board of Directors of
Distinctive Devices, Inc (OTCBB: DDVS) and of various private corporations. He
holds a BS in Electrical Engineering from Case Institute of Technology and an MS
in Electrical Engineering from Wayne State University.
18
SOL TRIEBWASSER, PH.D. Dr. Triebwasser became a director in the mid
1980's. Dr. Triebwasser was Director of Technical Journals and Professional
Relations for the IBM Corporation in Yorktown Heights, New York until 1996. He
is currently a Research Staff member emeritus at IBM. Since receiving his Ph.D.
in physics from Columbia University in 1952, he had managed various projects in
device research and applications at IBM. Dr. Triebwasser is a fellow of the
Institute for Electrical and Electronic Engineers, the American Physical Society
and the American Association for the Advancement of Science.
Mr. Aaron and Mr. Joels are brothers-in-law.
The Board of Directors met 6 times in fiscal 2003. Each of the
Directors attended at least 75% of the meetings.
The Board of Directors has standing Audit and Compensation/Option
Committees.
The Audit Committee reviews with the Company's independent public
accountants the scope and timing of the accountants' audit services and any
other services they are asked to perform, their report on the Company's
financial statements following completion of their audit and the Company's
policies and procedures with respect to internal accounting and financial
controls. In addition, the Audit Committee reviews the independence of the
independent public accountants and makes annual recommendations to the Board of
Directors for the appointment of independent public accountants for the ensuing
year. In May 2002, the Board of Directors and the Audit Committee approved and
adopted the Board of Directors'Audit Committee Charter.
The Compensation/Option Committee reviews and recommends to the Board
of Directors the compensation and benefits of all officers of the Company,
reviews general policy matters relating to compensation and benefits of
employees of the Company and administers the Company's Stock Option Plans.
COMPENSATION OF DIRECTORS
In October 2002, Mr. Mehta and Mr. Sanjay Mody, a former director, were
granted options outside of the Company's Stock Option Plan to purchase 500,000
shares of Common Stock at a price of $ 0.15 per share vesting over two years,
and Dr. Triebwasser was granted options under the Company's 2002 Stock Option
Plan to purchase 100,000 shares of Common Stock at a price of $0.15 per share
vesting over two years. Effective October 2002, the non-employee director's fee
is $20,000 per annum.
See "Certain Relationships and Related Transactions" for information
regarding a consulting agreement with Mr. Mehta.
COMPLIANCE WITH SECTION 16(a)
-----------------------------
Based solely in its review of copies of Forms 3 and 4 received by it or
representations from certain reporting persons, the Company believes that,
during the fiscal year ended September 30, 2003, there was compliance with
Section 16 (a) filing requirements applicable to its officers, directors and 10%
stockholders.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid by
the Company to (i) its Chief Executive Officer and (ii) its most highly
compensated officers whose cash compensation exceeded $100,000 for services
performed during the year ended September 30, 2003.
19
ANNUAL COMPENSATION LONG TERM COMPENSATION
Awards Payouts
------ -------
Securities
Other Restricted Underlying
Name and Annual Stock Options LTIP All Other
Principal Salary Bonus Compensation Award(s) SARs Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) ($)
---------------------------------------------------------------------------------------------------------------------------
George Aaron 2003 240,000 160,000 -0- -0- 300,000 -0- -0-
President/CEO 2002 160,000 -0- -0- -0- -0- -0- -0-
2001 160,000 -0- -0- -0- -0- -0- -0-
---------------------------------------------------------------------------------------------------------------------------
Jonathan Joels 2003 176,000 112,000 -0- -0- 300,000 -0- -0-
CFO 2002 112,000 -0- -0- -0- -0- -0- -0-
2001 112,000 -0- -0- -0- -0- -0- -0-
---------------------------------------------------------------------------------------------------------------------------
Elliott Koppel 2003 92,000 28,000 -0- -0- 100,000 -0- -0-
---------------------------------------------------------------------------------------------------------------------------
As of September 30, 2003, the Company does not have any written
employment agreements with any of its executive officers. Mr. Aaron, Mr. Joels
and Mr. Koppel have been paid annual base salaries of $240,000,$176,000, and
$92,000 respectively and the Company leases automobiles for Messrs. Aaron and
Joels in amounts not to exceed $1,000 and $750 per month, respectively, and also
pays their automobile operating expenses. Mr. Koppel is reimbursed $700 per
month for automobile expenses plus normal automobile expenses excluding
insurance. Messrs. aaron, Joels and Koppel are reimbursed for other expenses
incurred by them on behalf of the Company in accordance with Company policies.
In October 2002, Messrs. Aaron, Joels and Koppel were paid performance related
bonuses of $160,000, $112,000 and $28,000.
The Company does not have any annuity, retirement, pension or deferred
compensation plan or other arrangements under which any executive officers are
entitled to participate without similar participation by other employees. As of
September 30, 2003, under the Company's 401 (k) plan there was no matching
contribution by the Company.
--------------------------------------------------------------------------------
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Individual
Grants
(a) (b) (c) (d) (e)
% of
Total
Number of Options/
Securities SARS
Name Underlying Granted to Exercise
Options/ mployee(s) on Base Expiration
SARs in Fiscal Price Date
Granted (#) Year ($/Sh)
--------------------------------------------------------------------------------
20
George Aaron 300,000 34.8% $0.15 10/17/12
Jonathan Joels 300,000 34.8% $0.15 10/17/12
Elliott Koppel 100,000 11.6% $0.15 10/17/12
-----------------------------------------------------------------------
FISCAL YEAR END OPTION VALUE
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT SEPT. 30, 2003 AT SEPT. 30, 2002
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE ($)
---- ------------------------- ---------------
George Aaron 200,000/200,000 $-0-
Jonathan Joels 200,000/200,000 $-0-
Elliott Koppel 333,333/ 66,667 $-0-
STOCK OPTION PLAN
Due to the pending expiration of both the 1993 Employee Stock Option
Plan and 1993 Non-Employee Stock Option Plan, in May 2002 the Company adopted
the 2002 Stock Option Plan ("2002 Plan") which was ratified at the Company's
Stockholder meeting of June 26, 2002. The 2002 Plan covers 1,500,000 shares of
Common Stock reserved for issuance pursuant to the exercise of options granted
thereunder. Under the 2002 Plan, options may be awarded to both employees and
directors. These options may be qualified or not qualified pursuant to the
regulations of the Internal Revenue Code.
During October 2002, the Company granted a total of 961,000 options to
officers, directors, and employees under the 2002 Plan for an aggregate of
961,000 shares of Common Stock. Of these, 300,000 options each were granted to
Messrs. Aaron and Joels, 100,000 to Mr. Koppel and 100,000 to Dr. Triebwasser.
All of these options, which expire 10 years after the date of grant, were priced
at $0.15, vested one third on the grant date and the balance vests over a two
year period in equal installments. All options were granted at fair market value
or higher at time of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During Fiscal 2003 members of the Company's Compensation/Option
Committee were Sol Triebwasser, Ph.D. and Sanjay Mody, neither is an executive
officer or employee of the Company or its subsidiaries. During December 2003,
Mr. Mody resigned from the Company's Board of Directors and Compensation/Option
Committee and Audit Committee. Mr. Mody is the nephew of Mr. Mehta. At the 2004
shareholders meeting, the Company intends to propose additional independent
persons to serve as directors of the Company. If elected, those designees will
also serve as members of the Compensation/Option Committee and Audit Committee.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of December 31, 2003, certain
information regarding the beneficial ownership of Common Stock by (i) each
person who is known by the Company to own beneficially more than five percent of
the outstanding Common Stock, (ii) each director and executive officer of the
Company, and (iii) all directors and executive officers as a group:
21
Amount and Nature Percentage of
Name of Position with of Beneficial Common
Beneficial Owner Company Ownership (1) Stock
---------------------------------------------------------------------------------- -------------------
George Aaron Chairman of the Board; 3,698,589(2) 17.8%
Chief Executive Officer;
President
Jonathan Joels Director; Chief 3,610,739(3) 17.4%
Financial Officer;
Treasurer;
Secretary
Elliott Koppel VP Sales & Marketing 482,567(4) 2.3%
Shrikant Mehta Director 5,751,231(5) 26.2%
Sol Triebwasser, Ph.D. Director 107,567(6) *
All executive officers and 13,650,693(7) 58.8%
Directors as a group
(6 persons)
---------------------------
* Less than one percent (1%)
1. Includes voting and investment power, except where otherwise noted. The
number of shares beneficially owned includes shares each beneficial
owner and the group has the right to acquire within 60 days of
September 30, 2003 pursuant to stock options, warrants and convertible
securities.
2. Includes (i) 7,050 shares in retirement accounts, (ii) 17,500 shares
underlying warrants presently exercisable, (iii) 100 shares jointly
owned with his wife and (iv) 300,000 shares underlying options
presently exercisable, and excludes 100,000 shares underlying options
which are currently not exercisable.
3. Includes (i) 960,000 shares as trustee for his children, (ii) 10,000
shares underlying warrants presently exercisable, (iii) 17,500 shares
underlying warrants owned by his wife for which he disclaims beneficial
ownership, (iv) 300,000 shares underlying options presently
exercisable, and excludes 100,000 shares underlying options which are
currently not exercisable.
4. Includes (i) 30,000 shares underlying warrants and (ii) 366,666 shares
underlying options presently exercisable, and excludes 33,334 shares
underlying options which are not currently exercisable.
5. Includes (i) 700,000 shares underlying warrants presently exercisable
and (ii) 833,333 shares subject to options presently exercisable, and
excludes 166,667 shares underlying options which are not currently
exercisable.
6. Includes 106,166 shares underlying options presently exercisable and
excludes 33,334 shares underlying options which are currently not
exercisable.
7. Includes (i) 775,000 shares underlying warrants and (ii) 1,906,167 shares
underlying options presently exercisable.
22
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 2004, the Company authorized short-term bridge loans for an
aggregate of up to $500,000 through the issuance of loan notes due on July 31,
2005. As of February 17, 2004, the Company has raised $400,000. Included as part
of this short-term bridge loan were executive officers, Messrs. Aaron, Joels and
Koppel who contributed $150,000, $150,000 and $50,000, respectively. The funds
will be utilized primarily for working capital. The loan notes bear interest at
a rate of 11% per annum and are secured by a first lien on the royalties due to
Opus Diagnostics Inc. from Seradyn, Inc. in accordance with their Royalty
Agreement. For every three dollars ($3.00) loaned, the lender received two
warrants to purchase one share of Caprius Common Stock, exercisable at $0.25 per
share for a period of five years. The exercise price was in excess of the then
market price.
During Fiscal 2003, MCM purchased approximately $22,000 of components
for its SteriMed(R) System from The P.O.M Group, Inc. ("POM") located in
Michigan. MCM was introduced to POM by Mr. Mehta, a director of the Company, who
is also a principal shareholder in POM. The Company intends to have a continuing
relationship with POM. To date, POM has significantly assisted MCM in the
design, manufacture and longevity of certain key components of the MCM
SteriMed(R) System.
During September 2002, the Company entered into a short-term line of
credit arrangement with Mr. Mehta, whereby he agreed to extend a $500,000 line
of credit to the Company for up to 18 months at an interest rate of 11% per
annum. In return for the provision of the line of credit, Mr. Mehta was granted
warrants to purchase 500,000 shares of Common Stock, exercisable at $0.11 per
share for a period of five years. As Mr. Mehta and the Company were unable to
reach mutually satisfactory terms in February 2004, Mr. Mehta was relieved from
his obligation under the line of credit and he returned the warrants that had
been granted to him. Additionally, Mr. Mehta had agreed to provide consulting
services for an initial period of one year in connection with the MCM business,
specifically relating to the areas of financing and manufacturing, at an annual
fee of $100,000 commencing on the closing date of the MCM acquisition. As
additional consideration for the Company relieving Mr. Mehta of his obligations
for the line of credit, Mr. Mehta waived his rights with respect to the deferred
payments owed to him by the Company in the amount $100,000 and the Company
forgave Mr. Mehta's obligations to perform consulting services for the Company.
During September 2002, warrant holders representing 3,297,700 shares of
Common Stock took the opportunity to exercise their warrants in the Company's
warrant price reduction program. The reduced exercise price for each of the
outstanding warrants was equal to 20% of its present exercise price, but not
less than $0.11 per share. Included as part of this warrant price reduction
program were Messrs. Aaron, Joels, Koppel and Mehta, executive officers and/or
directors, who exercised 193,750, 133,750, 11,000 and 2,400,000 warrants
respectively.
During June 2002, the Company completed a short-term loan aggregating
$250,000 through loan notes due on September 30, 2003. Included as part of this
short-term loan were executive officers, Messrs. Joels and Koppel who
contributed $10,000 and $15,000 respectively, employees of the Company as well
as related family members. These funds were used principally to fund the loans
to MCM pursuant to the letter of intent. For each $1.00 principal amount loaned,
the lender received a warrant to purchase one share of the Company's Common
Stock, exercisable after 6 months at $0.09 per share for a period of five years.
On October 10, 2002, the Company repaid these loans, plus accrued interest at
the prime rate plus 3%.
During February and March 2001, the Company completed a short-term
bridge loan aggregating $300,000 through secured loan notes due on February 28,
2002. Included as part of this bridge loan, Messrs. Mehta, Aaron, Koppel and the
spouse of Mr. Joels contributed $200,000, $17,500, $15,000 and $17,500
respectively. These funds were used principally for working capital and to
purchase raw materials previously owned by Oxis, the previous manufacturer and
owner of the Opus TDM products. The loan notes bore interest at a rate of 11%
per annum and were secured by the assets of the Strax Institute. For each $1.00
principal amount loaned, the lender received a warrant to purchase one share of
Common Stock, exercisable at $0.08 per share for a period of five years. On
October 10, 2002, the Company repaid the bridge loan holders in an aggregate of
$300,000 plus accrued interest.
Separately, and in consideration of their participation in a placement
in April 2000 (the "April Placement"), the Company gave the principal investors
(including Mr. Mehta, who subsequently became a director) in the placement
23
preemptive rights for a period of three years with respect to their interest in
the Company, such that, to the extent of their current interest in the Company,
these principal investors each had the right to participate in any sale, for
cash, by the Company of Common Stock or shares of preferred stock or other
securities that were exercisable for, convertible into or exchangeable for
shares of Common Stock in a private placement transaction, subject to certain
exceptions. There were no purchases made under these preemptive rights.
Additionally, in consideration for his participation in the April
Placement, the Company separately granted Mr. Mehta options to purchase 500,000
shares of Common Stock, exercisable at $1.00 per share for a period of five
years. Mr. Mehta, in conjunction with the termination of the line of credit
arrangement previously mentioned, has additionally agreed to return the option
agreement for 500,000 options to the Company.
In October 2002, Mr. Mody, a former Director who resigned effective
December 18, 2003, was granted options outside of the Company's Stock Option
Plan to purchase 500,000 shares of Common Stock at a price of $ 0.15 per share
vesting over two years and exercisable for ten years.
The independent directors have authorized the Company to advance the
legal expenses of Messrs. Aaron and Joels in the litigations mentioned in Item 2
of this report, subject to review of the legal bills and in compliance with
applicable regulations and laws, with respect to claims made against them in
their corporate capacities. Each of them undertook to repay his advances in the
event it was determined that he was not entitled to be indemnified as to the
claim for which he received the advances. No determination of advances has been
made for fiscal year ended September 30, 2003.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits, including those incorporated by reference.
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger, dated January 20, 1997, by and
among Registrant, Medical Diagnostics, Inc. ("Strax"), Strax
Acquisition Corporation and US Diagnostic Inc. (incorporated by
reference to Exhibit 1 to Registrant's Form 8-K filed January 23,
1997).
2.2 Agreement and Plan of Merger, dated as of June 23, 1997, among
Registrant, ANMR/AMS Merger Corp. and Advanced Mammography
Systems, Inc. ("AMS") (incorporated by reference to Annex A to
the Joint Proxy Statement Prospectus that formed part of
Registrant's Registration Statement of Form S-4 filed on October
9, 1997 ("Registrant's Form S-4")).
2.3 Agreement and Plan of Merger dated as of June 28, 1999 among
Registrant, Caprius Merger Sub, Opus Diagnostics Inc. ("Opus"),
George Aaron and Jonathan Joels (incorporated by reference to
Exhibit 2.1 to Registrant's Form 8-K, filed July 1, 1999 (the
"July 1999 Form 8-K")).
3.1 Certificate of Incorporation of Registrant. (incorporated by
reference to Exhibit 3 filed with Registrant's Registration
Statement on Form S-2, and amendments thereto, declared effective
August 18, 1993 (File No. 2084785 ("Registrant's Form S-2")).
3.2 Amendment to Certificate of Incorporation of Registrant filed
November 5, 1993 (incorporated by reference to Exhibit 3.2 to
Registrant's Form S-4).
3.3 Amendment to Certificate of Incorporation of Registrant, filed
August 31, 1995, (incorporated by reference to Exhibit 3.1 to
Registrant's Form 8-K for an event of August 31, 1995 (the
"August 1995 Form 8-K")).
24
3.4 Amendment to Certificate of Incorporation of Registrant, filed
September 21, 1995 (incorporated by reference to Exhibit 3.1 to
Registrant's Annual Report on Form 10-K for the nine months ended
September 30, 1995 (the "ANMR 1995 Form 10-K")).
3.5 Certificate of Designation of Series A Preferred Stock of
Registrant (incorporated by reference to the Registrant's Form
8-K, filed on March 31, 1996.
3.6 Certificate of Designation of Series B Convertible Redeemable
Preferred Stock of Registrant (incorporated by reference to
Exhibit 3.1 to Registrant's Form 8-K, filed September 2, 1997).
3.7 Certificate of Merger, filed on June 28, 1999 with the Secretary
of State of the State of Delaware. (Incorporated by reference to
Exhibit 3.1 of Form 8-K, dated June 28, 1999).
3.8 Amended and Restated By-laws of Registrant (incorporated by
reference to Exhibit 3.4 to Registrant's Form S-4).
4.1 Form of Warrant issued to certain employees in connection with
Registrant's Bridge Financing in March 2000 (incorporated by
reference to Exhibit 4.7 to Registrant's July 2000 Form SB-2).
4.2 Form of Series A Warrant from Registrant's April 2000 private
placement of Units (the "April Private Placement") (incorporated
by reference to Exhibit 10.2 to Registrant's Form 8-K, filed
April 28, 2000 (the "April 2000 Form 8-K")).
4.3 Form of Series B Warrant from the April Private Placement
(incorporated by reference to Exhibit 10.3 to Registrant's April
2000 Form 8-K).
4.4 Form of Warrant issued to each of Sandra Kessler and Nicholas
Kessler, by and through his Guardian ad litem (incorporated by
reference to Exhibit 4.10 to Registrant's September 2000 Form
10-KSB).
4.5 Form of Common Stock Purchase Warrants for up to 300,000 shares
of Common Stock, expiring February 28, 2006 (incorporated by
Reference to Exhibit 10.3 to the Registrant's Form 10-QSB for the
fiscal quarter ended March 31, 2001).
10.1.1 1993 Employee Stock Option Plan (incorporated by reference to
Exhibit A of the Proxy Statement for Registrant's 1993 Annual
Meeting of Stockholders).
10.1.2 1993 Directors Stock Option Plan for Non-Employee Directors
(incorporated by reference to Exhibit B of the Proxy Statement
for Registrant's 1993 Annual Meeting of Stockholders).
10.2 2002 Stock Option Plan (incorporated by reference to Appendix A
of the Proxy Statement for Registrant's 2002 Annual Meeting of
Stockholders).
10.3.1 Registration Rights Agreement, dated August 18, 1997, between
Registrant and General Electric Company ("GE") (incorporated by
reference to Exhibit 10.2 to Registrant's Form 8-K, filed
September 2, 1997).
10.3.2 Stockholders Agreement, dated August 18, 1997, between
Registrant and GE (incorporated by reference to Exhibit 10.3 to
Registrant's Form 8-K, filed September 2, 1997).
10.3.3 Settlement and Release Agreement, dated August 18, 1997,
between the Registrant and GE (incorporated by reference to
Exhibit 10.4 to Registrant's Form 8-K, filed September 2, 1997).
25
10.3.4 License Agreement, dated August 18, 1997, between Registrant
and GE (incorporated by reference to Exhibit 10.4 to the
Registrant's Form 8-K, filed September 2, 1997).
10.4.1 Severance and Consulting Agreement dated as of June 28, 1999
between Registrant and Jack Nelson (incorporated by reference to
Exhibit 10.4 to Registrant's July 1999 Form 8-K).
10.4.2 Form of Secured Promissory Note, dated as of December 28, 1999,
from Registrant to Nelson (incorporated by reference to Exhibit
10.16.1 to Registrant's September 1999 Form 10-KSB).
10.4.3 Letter of Non-disparagement dated January 14, 2000 between
Registrant and Jack Nelson (incorporated by reference to Exhibit
10.4.3 to Registrant's September 2001 Form 10-KSB).
10.4.4 Letter Agreement dated April 4, 2000 between Registrant and
Nelson relating to terms and conditions of payment as outlined in
Severance and Consulting Agreement dated as of June 28, 1999
(incorporated by reference to Exhibit 10.4.4 to Registrant's
September 2001 Form 10-KSB).
10.5.1 Severance and Consulting Agreement between Registrant and
Enrique Levy, dated as of June 28, 1999 (incorporated by
reference to Exhibit 10.5 to Registrant's July 1999 Form 8-K).
10.5.2 Form of Secured Promissory Note, dated as of December 28, 1999,
from Registrant to Levy (incorporated by reference to Exhibit
10.16.2 to Registrant's September 1999 Form 10-KSB).
10.5.3 Form of Security Agreement, dated as of December 28, 1999, by
Registrant to Levy as Agent (incorporated by reference to Exhibit
10.16.3 to Registrant's September 1999 Form 10-KSB).
10.5.4 Letter of Non-disparagement dated January 14, 2000 between
Registrant and Levy (incorporated by reference to Exhibit 10.5.4
to Registrant's September 2001 Form 10-KSB).
10.5.5 Letter Agreement dated April 4, 2000 between Registrant and
Levy relating to terms and conditions of payment as outlined in
Severance and Consulting Agreement dated as of June 28,
1999(incorporated by reference to Exhibit 10.5.5 to Registrant's
September 2001 Form 10-KSB).
10.6.1 Form of Stock Purchase Agreement regarding the April Private
Placement (incorporated by reference to Exhibit 10.1 to
Registrant's April 2000 Form 8-K).
10.6.2 Letter Agreement, dated March 27, 2000, between the Company and
certain purchasers (incorporated by reference to Exhibit 10.4 to
Registrant's April 2000 Form 8-K).
10.6.3 Letter Agreement, dated March 29, 2000, between the Company and
certain purchasers (incorporated by reference to Exhibit 10.5 to
Registrant's April 2000 Form 8-K).
10.6.4 Form of Option Agreement granted to Shrikant Mehta with respect
to the April Private Placement (incorporated by reference to
Exhibit 10.17 to Registrant's 2000 Form SB-2).
10.7.1 Purchase and Sale Agreement, dated as of October 9, 2002, Among
Registrant, Opus and Seradyn, Inc. ("Seradyn") (incorporated by
reference to Exhibit 10.1 to Registrant's Form 8-K for an event
of October 9, 2002 (the "October 2002 Form 8-K")).
10.7.2 Royalty Agreement, dated as of October 9, 2002, between Opus
and Seradyn (incorporated by reference to Exhibit 10.2 to
Registrant's October 2002 Form 8-K).
10.7.3 Non-compete Agreement, dated as of October 9, 2002, between
Opus and (incorporated by reference to Exhibit 10.3 to
Registrant's October 2002 Form 8-K).
26
10.7.4 Consulting Agreement, dated as of October 9, 2002, between Opus
and Seradyn (incorporated by reference to Exhibit 10.4 to
Registrant's October 2002 Form 8K).
10.8.1 Stock Purchase Agreement, dated December 17, 2002, among
Registrant, M.C.M. Technologies, Ltd. and M.C.M. Environmental
Technologies, Inc.(incorporated by reference to Exhibit 10.1 to
Registrant's Form 8-K for an event of December 17, 2002 (the
December 2002 Form 8-K").
10.8.2 Stockholders Agreement, dated December 17, 2002, among M.C.M.
Technologies, Inc. and the holders of its outstanding capital
stock (incorporated by reference to Exhibit 10.2 to Registrant's
December 2002 Form 8K).
10.8.3 Form of Unsecured Promissory Notes, issued for the short-term
Loan (incorporated by reference to Exhibit 10.13.3 to
Registrant's September 2002 Form 10-KSB.)
10.8.4 Form of Subscription Agreement relating to the short-term Loan
(incorporated by reference to Exhibit 10.13.4 to Registrant's
September 2002 Form 10-KSB).
10.8.5 Form of Common Stock Purchase Warrant relating to the
short-term Loan (incorporated by reference to Exhibit 10.13.5 to
Registrant's September 2002 Form 10-KSB).
10.9.1 Form of Common Stock Warrant relating to Line of Credit
(incorporated by reference to Exhibit 10.14 to Registrant's
September 2002 Form 10-KSB).
10.10.1 Stock Purchase Agreement, among Registrant, Strax Institute
Inc. and Eastern Medical Technologies, Inc. dated as of September
30, 2003 (incorporated by reference to Exhibit 10.1 to
Registrant's Form 8-K for an event of October 9, 2003 (the
"October 2003 Form 8K")).
10.10.2 Non-negotiable Promissory Note of Eastern Medical
Technologies, Inc. to Registrant, dated September 30, 2003
(incorporated by reference to Exhibit 10.2 to Registrant's
October 2003 Form 8-K).
10.10.3 Security Agreement among Eastern Medical Technologies, Inc.,
Strax Institute, Inc., and Registrant Institute Inc., dated as of
September 30, 2003 (incorporated by reference to Exhibit 10.3 to
Registrant's October 2003 Form 8K).
10.10.4 Management Services Agreement between Registrant and Strax
Institute Inc., dated as of September 30, 2003 (incorporated by
reference to Exhibit 10.4 to Registrant's October 2003 Form 8-K).
10.10.5 Settlement Letter among BDC Corp. d/b/a/ BDC Consulting Corp,
Registrant and George Aaron, dated as of September 30, 2003
(incorporated by reference to Exhibit 10.5 to Registrant's
October 2003 Form 8K).
10.11.1* Form of Secured Promissory Note issued for the short-term
Bridge Loans.
10.11.2* Form of Common Stock Purchase Warrant relating to the
short-term Bridge Loans.
10.11.3* Form of Guaranty and Security Agreement relating to the
short-term Bridge Loans.
21* List of Company's subsidiaries
23.1* Consent of BDO Seidman, LLP, independent certified public
accountants
27
31.1* Rule 13a-14(a)/15d-14(a) Certification
31.2* Rule 13a-14(a)/15d-14(a) Certification
32.1* Section 1350 - Certification
32.2* Section 1350 - Certification
* Filed herewith
(b) Reports on Form 8-K: None
ITEM 14. CONTROLS & PROCEDURES
-------- ---------------------
The Company's principal executive officer and principal financial
officer, based on their evaluation of the Company's disclosure controls and
procedures (as defined in Rules 13a-14 (c) and 15d-14 (c) of the Securities
Exchange Act of 1934) as of September 30, 2003 have concluded that the
Company's disclosure controls and procedures are adequate and effective to
ensure that material information relating to the Company and its consolidated
subsidiary is recorded, processed, summarized and reported within the time
periods specified by the SEC's rules and forms, particularly during the period
in which this annual report has been prepared.
The Company's principal executive officer and principal financial
officer have concluded that there were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls for the quarter ended September 30, 2003, the date of their most
recent evaluation of such controls, and that there were no significant
deficiencies or material weaknesses in the Company's internal controls.
28
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 18th day of
February 2004
CAPRIUS, INC.
By: /s/Jonathan Joels
----------------------------
Jonathan Joels, CFO and
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/George Aaron Chairman of the Board, February 18, 2004
----------------------------- President and CEO
George Aaron
/s/Jonathan Joels Director, CFO and February 18, 2004
---------------------------- Treasurer
Jonathan Joels
---------------------------- Director February 18, 2004
Shrikant Mehta
/s/Sol Triebwasser Director February 18, 2004
---------------------------
Sol Triebwasser, Ph.D.
29
CAPRIUS, INC. AND SUBSIDIARIES
I N D E X
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 to F-20
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Caprius, Inc.
We have audited the accompanying consolidated balance sheets of
Caprius, Inc. and subsidiaries as of September 30, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Caprius,
Inc. and subsidiaries at September 30, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company and its subsidiaries will continue as a going concern.
As discussed in Note A to the consolidated financial statements, the Company and
its subsidiaries have suffered recurring losses from operations. Furthermore, as
discussed in Note H (2) the Company and its principal officers and directors are
defendants in certain legal proceedings whereby the plaintiffs are seeking
unspecified monetary damages as well as the removal of the defendant officers as
shareholders of the Company. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties. These matters raise substantial doubt about their ability to
continue as a going concern. Management's plans in regard to this matter are
described in Note A.
/s/ BDO Seidman, LLP
Boston, Massachusetts
November 14, 2003, except for Notes E and N, which are as of February 18, 2004.
F-2
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2003 September 30, 2002
------------------- -------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 774,819 $ 505,282
Accounts receivable, net of reserve for bad debts of $6,500
and $13,000 at September 30, 2003 and 2002 79,660 141,731
Inventories 820,484 -
Other current assets 78,634 6,948
Due from sale of Strax-short-term 308,037 -
Net assets of TDM business segment - 2,511,147
------------------- -------------------
Total current assets 2,061,634 3,165,108
------------------- -------------------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 153,222 193,469
Medical equipment - 314,318
Equipment for lease 108,321 -
Leasehold improvements 18,119 950
------------------- -------------------
279,662 508,737
Less: accumulated depreciation 123,902 478,136
------------------- -------------------
Net property and equipment 155,760 30,601
------------------- -------------------
OTHER ASSETS:
Due from sale of Strax-long-term 103,973 -
Note receivable - 350,000
Deferred financing cost, net of accumulated amortization of
$29,913 and $2,301 at September 30, 2003 and September 30, 2002 11,437 39,049
Deferred acquisition costs - 189,463
Goodwill 737,010 -
Intangible assets net of accumulated amortization of $213,417
at September 30, 2003 826,583 -
Other 13,330 22,794
------------------- -------------------
Total other assets 1,692,333 601,306
------------------- -------------------
TOTAL ASSETS $ 3,909,727 $ 3,797,015
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable, net of unamortized discount of $5,000 at
September 30, 2002 $ - $ 546,650
Accounts payable 1,109,080 408,841
Accrued expenses 469,024 198,087
Accrued compensation 110,940 86,018
Current maturities of long-term debt and capital lease obligations - 12,806
------------------- -------------------
Total current liabilities 1,689,044 1,252,402
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, NET OF CURRENT MATURITIES - 22,226
TOTAL LIABILITIES 1,689,044 1,274,628
------------------- -------------------
MINORITY INTEREST IN MCM SUBSIDIARY 20,000 -
------------------- -------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - Series A, none; Series B, convertible,
27,000 shares at September 30, 2003 and September 30, 2002.
Liquidation preference $2,700,000 2,700,000 2,700,000
Common stock, $.01 par value
Authorized - 50,000,000 shares
Issued - 20,469,062 shares at September 30, 2003
and 20,419,062 shares at September 30, 2002 204,691 204,191
Additional paid-in capital 67,581,258 67,579,258
Accumulated deficit (68,283,016) (67,958,812)
Treasury stock (22,500 common shares, at cost) (2,250) (2,250)
------------------- -------------------
Total stockholders' equity 2,200,683 2,522,387
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,909,727 $ 3,797,015
=================== ===================
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30,
--------------------------------------------
2003 2002
------------------- --------------------
REVENUES:
Product sales $ 501,879 $ -
Rental revenues 48,700
Consulting income 50,000 -
------------------- --------------------
Total revenues 600,579 -
------------------- --------------------
OPERATING EXPENSES:
Cost of product sales 330,373 -
Cost of rental revenue 27,335
Research and development 122,116 -
Selling, general and administrative 4,155,660 1,582,636
------------------- --------------------
Total operating expenses 4,635,484 1,582,636
------------------- --------------------
Operating loss (4,034,905) (1,582,636)
Interest expense (17,962) -
------------------- --------------------
Loss from continuing operations (4,052,867) (1,582,636)
Income from operations of discontinued TDM business
segment (including gain on disposal of $3,214,189 in October 2002) 3,287,587 1,421,633
Loss from operations of discontinued Strax business segment
(including gain on disposal of $125,658 at September 30, 2003) (18,830) (256,690)
------------------- --------------------
Loss before minority interest (784,110) (417,693)
Loss applicable to minority interest (459,906) -
------------------- --------------------
Net Loss $ (324,204) $ (417,693)
=================== ====================
Net income (loss) per basic and diluted common share
Continuing operations $ (0.18) $ (0.09)
Discontinued operations 0.16 0.07
------------------- --------------------
Net income (loss) per basic and diluted common share $ (0.02) $ (0.02)
=================== ====================
Weighted average number of common shares outstanding,
basic and diluted 20,402,315 17,171,140
=================== ====================
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock $0.01 Par Value
----------------------------- ---------------------------- Additional
Number Number Paid-in Accumulated
of Shares Amount of Shares Amount Capital Deficit
---------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2001 27,000 $ 2,700,000 17,121,362 $ 171,214 $ 67,154,517 $ (67,541,119)
Fair value of warrants issued in connection
MCM financing - - - - 6,700 -
Fair value of warrants issued in connection
with line of credit agreement - - - - 41,350 -
Exercise of warrants issued in connection
with bridge financing - - 38,500 385 7,315 -
Exercise of Series A warrants - - 2,172,800 21,728 217,280 -
Exercise of Series B warrants - - 1,086,400 10,864 152,096 -
Net loss - - - - - (417,693)
---------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2002 27,000 2,700,000 20,419,062 204,191 67,579,258 (67,958,812)
Exercise of options - - 50,000 500 2,000 -
Net loss - - - - - (324,204)
---------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 27,000 $ 2,700,000 20,469,062 $ 204,691 $ 67,581,258 $ (68,283,016)
=============================================================================================
TABLE CONTINUED
Treasury Stock $0.01 Par Value Total
------------------------------
Number Stockholders'
of Shares Amount Equity
----------------------------------------------
BALANCE, SEPTEMBER 30, 2001 22,500 $ (2,250) $ 2,482,362
Fair value of warrants issued in connection
MCM financing - - 6,700
Fair value of warrants issued in connection
with line of credit agreement - - 41,350
Exercise of warrants issued in connection
with bridge financing - - 7,700
Exercise of Series A warrants - - 239,008
Exercise of Series B warrants - - 162,960
Net loss - - (417,693)
------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2002 22,500 (2,250) 2,522,387
Exercise of options - - 2,500
Net loss - - (324,204)
------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 22,500 $ (2,250) $ 2,200,683
============================================================
The accompanying notes are an integral
part of these consolidated financial statements.
F-5
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
2003 2002
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (324,204) $ (417,693)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Minority interest in loss of MCM (459,906) -
Gain on sale of TDM business (3,214,189) -
Gain on sale of Strax business (125,658)
Amortization of discount on bridge financing 30,962 10,651
Depreciation and amortization 271,164 243,961
Impairment of Goodwill - 67,356
Changes in operating assets and liabilities:
Accounts receivable, net (272,363) 123,560
Inventories (603,012) 71,338
Other current assets (58,338) (1,624)
Accounts payable and accrued expenses (303,512) 244,388
----------------- -----------------
Net cash (used in) provided by operating activities (5,059,056) 341,937
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of TDM business 6,000,000 -
Change in Deferred Acquisition Costs - (189,463)
Acquisition of MCM, net of cash acquired (including loans to MCM) (88,875) (350,000)
----------------- -----------------
Net cash provided by (used in) investing activities 5,911,125 (539,463)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,500 409,668
Proceeds from issuance of debt and warrants - 250,000
Repayment of debt and capital lease obligations (585,032) (46,636)
----------------- -----------------
Net cash (used in) provided by financing activities (582,532) 613,032
----------------- -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 269,537 415,506
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 505,282 89,776
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 774,819 $ 505,282
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 29,270 $ 55,119
================= =================
NON CASH TRANSACTIONS:
Sale of Strax Business Segment in exchange for Note Receivable $ 412,000 $ -
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
(NOTE A) - Business and Basis of Presentation
---------------------------------------------
Caprius, Inc. ("Caprius" or the "Company") was founded in 1983 and
through June 1999 essentially operated in the business of medical imaging
systems as well as healthcare imaging and rehabilitation services. On June 28,
1999, the Company acquired Opus Diagnostics Inc. ("Opus") and began
manufacturing and selling medical diagnostic assays constituting the Therapeutic
Drug Monitoring ("TDM") Business. After the close of the 2002 fiscal year, the
Company made major changes in its business through the sale of the TDM Business
and the purchase of a majority interest in M.C.M. Environmental Technologies,
Inc. ("MCM"). Until the end of 2003 fiscal year, the Company continued to own
and operate a comprehensive imaging center located in Lauderhill, Florida. On
September 30, 2003, the Company completed the sale of the Strax Institute
("Strax") to Eastern Medical Technologies. The sale consisted of the business of
the Strax Institute comprehensive breast imaging center located in Lauderhill,
Florida.
During the fiscal year ended September 30, 2003, the Company's
operations were medical infectious waste business. In fiscal year ended
September 30, 2002 the Company's operations were two business segments: imaging
and rehabilitation services ("Strax") and the therapeutic drug monitoring assay
business (the "TDM Business").
As discussed in Notes J & L, the Company disposed of it's TDM business
in October, 2002 and Strax effective September 30, 2003. Operations related to
the TDM business and Strax have been reclassified to discontinued operations for
the years ended September 30, 2003 and 2002.
The accompanying consolidated financial statements have been prepared
assuming that the Company and its subsidiaries will continue as a going concern.
The Company and its subsidiaries have incurred substantial losses in recent
years, which raise substantial doubt about its ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. The Company and its
subsidiaries have available cash and cash equivalents of $774,819 at September
30, 2003. The Company and its subsidiaries intend to utilize the funds for
working capital purposes to continue developing the business of MCM. The Company
and its subsidiaries continue to pursue efforts to identify additional funds
through various funding options, including banking facilities and equity
offerings in order to provide capital for future expansion. In addition,
depending upon the outcome of the pending legal action, additional funds could
be required to cover legal expenses. There can be no assurance that such funding
initiatives will be successful and any equity placement could result in
substantial dilution to current stockholders.
(NOTE B) - Summary of Significant Accounting Policies
-----------------------------------------------------
[1] Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly or majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
[2] Revenue recognition
The breast imaging center (sold in fiscal 2003) recognized revenue as
services were provided to patients. Reimbursements for services provided to
patients covered by Blue Cross/Blue Shield, Medicare, Medicaid, HMOs and other
contracted insurance programs are generally less than rates charged by the
Company. Differences between gross charges and estimated third-party payments
were recorded as contractual allowances in determining net patient service
revenue during the period that the services are provided.
Revenue from the sale of a comprehensive line of assays for therapeutic
drug monitoring (sold in fiscal 2003) was recognized when the products were
shipped to the customer.
Revenues from the MCM medical waste business are recognized when
SteriMed units are sold or rented to customers. Units under rental programs are
billed on a monthly basis. Any disposables or additional services, including
training and maintenance, are billed when shipped or provided. EITF Issue No.
00-21 was effective for the Company beginning July 1, 2003, and did not have a
material effect on the Company's results of operations.
F-7
[3] Cash equivalents
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
[4] Inventories
Inventories are accounted for at the lower of cost or market using the
first-in, first-out ("FIFO") method.
[5] Equipment, furniture and leasehold improvements
Equipment, furniture and leasehold improvements are recorded at cost.
Depreciation and amortization are computed by the straight-line method over the
estimated lives of the applicable assets, or term of the lease, if applicable.
Asset Classification Useful Lives
-------------------- ------------
Medical equipment 5-8 years
Office furniture equipment 3-5 years
Leasehold Improvements Term of Lease
[6] Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the Company and its subsidiaries review the
carrying values of their long-lived assets (other than goodwill) for possible
impairment whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be recoverable. Any long-lived assets
held for disposal are reported at the lower of their carrying amounts or fair
values less costs to sell.
[7] Goodwill and other intangibles
The Company and its subsidiaries account for goodwill and other
intangibles assets in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires, among other things, the
discontinuance of goodwill amortization, and how goodwill and other intangible
assets should be accounted for after it has been initially recognized. SFAS No.
142 provides that goodwill and intangible assets that have indefinite useful
lives not be amortized but rather be tested at least annually for impairment.
Intangible assets with finite lives will continue to be amortized.
At September 30, 2003, goodwill results from the excess of cost over
the fair value of net assets acquired related to the MCM business.
Other intangible assets include technology, customer relationship and
permits and are amortized on a straight-line basis over three to five years.
Total amortization expense related to the other intangible assets for the years
ended September 30, 2003 and 2002 were $213,417 and $0, respectively.
Intangible Assets:
ACCUMULATED NET BOOK
ASSET TYPE COST AMORTIZATION VALUE
Technology $550,000 $137,500 $412,500
Permits 290,000 45,917 244, 083
Customer Relationships 200,000 30,000 170,000
---------- --------- ----------
$1,040,000 $213,417 $826,583
F-8
Expected amortization over the next 5 years:
FISCAL PERIOD AMORTIZATION
2004 $281,333
2005 281,333
2006 143,834
2007 98,000
2008 22,083
--------
$826,583
--------
During the year ended September 30, 2002, the Company and its
subsidiaries had determined that the carrying amount of certain long-lived
assets of the Strax Institute may not be recoverable. The resultant impairment
of long-lived assets necessitated a write-down of $67,356 of goodwill of the
Strax Institute for the year ended September 30, 2002. This impairment charge is
included in the accompanying consolidated statements of operations under the
heading of loss from operations of discontinued Strax business segment.
[8] Net loss per share
Net loss per share is computed in accordance with Statement of
Financial Standards No. 128, "Earning Per Share" ("SFAS No. 128"). SFAS No. 128
requires the presentation of both basic and diluted earnings per share.
Basic net loss per common share was computed using the weighted average
common shares outstanding during the period. Outstanding warrants and options
had an anti-dilutive effect and were therefore excluded from the computation of
diluted net loss per common share.
[9] Income taxes
The Company utilizes the liability method of accounting for income
taxes, as set forth in Statement of Financial Accounting Standards No. 109.
"Accounting for Income Taxes". Under this method, deferred tax liabilities and
assets are recognized for the expected tax consequences of temporary differences
between the carrying amount and the tax basis of assets and liabilities.
[10] 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[11] Financial instruments
The carrying amounts of cash and cash equivalents, notes and accounts
receivable, accounts payable and accrued expenses are reasonable estimates of
their fair values because of the short-term nature of those instruments. The
Company estimates that the carrying values of notes payable, current maturities
of long-term debt and long-term debt approximate fair value as the notes and
loans bear interest at current market rates.
[12] Foreign currency
The Company follows the provisions of SFAS No. 52, "Foreign Currency
Translation." The functional currency of the Company's foreign subsidiary is the
U.S. dollar. All foreign currency asset and liability amounts are re-measured
into U.S. dollars at end-of-period exchange rates, except for certain assets,
which are measured at historical rates. Foreign currency income and expense are
re-measured at average exchange rates in effect during the year, except for
expenses related to balance sheet amounts re-measured at historical exchange
rates. Exchange gains and losses arising from re-measurement of foreign
currency-denominated monetary assets and liabilities are included in operations
F-9
in the period in which they occur. Exchange gains and losses included in the
accompanying consolidated statements of operations are $24,267 and $0 for the
years ended September 30, 2003 and 2002.
[13] Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force (EITF) reached
consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.
Revenue arrangements with multiple deliverables include arrangements which
provide for the delivery or performance of multiple products, services and/or
rights to use assets where performance may occur at different points in time or
over different periods of time. EITF Issue No. 00-21 was effective for the
Company beginning July 1, 2003, and did not have a material effect on the
Company's results of operations.
In May 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The changes in this Statement improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly. This
Statement is effective for contracts entered into or modified after June 30,
2003. The adoption of SFAS 149 is not expected to have a material affect on our
financial position, results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS
No. 150 is the first phase of the FASB's project on liabilities and equity. SFAS
No. 150 provides guidance on how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity. Many
of these instruments were previously classified as equity. For example, if an
employer's issuance of its shares to a key employee requires the employer to
redeem the shares upon the employee's death, then those shares must be
classified as a liability, not as equity. For publicly-held companies, SFAS No.
150 is effective for financial instruments entered into or modified after May
31, 2003. SFAS No. 150 requires companies to record the cumulative effect of
financial instruments existing at the adoption date. The Company does not
believe the adoption of SFAS 150 will have a significant effect on the Company's
operations, financial position or cash flows.
[14] Stock-Based Compensation
The Company accounts for stock-based compensation under the intrinsic
value method in accordance with the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
In December 2002 the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." SFAS No. 148, which amends SFAS No. 123, requires the measurement
of the fair value of stock options or warrants to be included in the statement
of operations or disclosed in the notes to financial statements. The Company has
determined that it will account for its stock-based compensation under the
Accounting Principles Board (APB) No. 25 and elect the disclosure-only
alternative under SFAS No. 148. The Company has computed the pro forma
disclosures under SFAS No. 148 for options and warrants granted using the
Black-Scholes option-pricing model for the years ended September 30, 2003 and
2002. The assumptions used during the years ended September 30, 2003 and 2002
were as follows:
September 30,
2003 2002
------- -------
Risk free interest rate 5.00% 5.59% - 7.78%
Expected dividend yield -- --
Expected lives 10 years 10 years
Expected volatility 80% 80%
Weighted average value of grants per share $.10 $.05
Weighted average remaining contractual life of
options outstanding (years) 5.9 4.7
F-10
The pro forma effect of applying FAS No. 148 would be as follows:
Years Ended
September 30,
2003 2002
-------------------------
Net Loss, as reported $(324,204) $(417,693)
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects -- --
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related taxes (112,544) (88,224)
---------- --------
Pro forma net loss $(436,748) $(505,917)
========= ========
Earnings per share:
Basic and diluted - as reported $(0.02) $(0.02)
--------- ---------
Basic and diluted - pro forma $(0.02) $(0.03)
--------- ---------
[15] Concentration of Credit Risk and Significant Customers
Statement of Financial Accounting Standards No. 105, "Disclosure of
Information About Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," requires disclosure
of any significant off-balance-sheet and credit risk concentrations. Although
collateral is not required, the Company periodically reviews its accounts
receivable and provides estimated reserves for potential credit losses.
Financial instruments which potentially expose the Company to
concentration of credit risk are mainly comprised of trade accounts receivable.
Management believes its credit policies are prudent and reflect normal industry
terms and business risk. The Company does not anticipate non-performance by the
counter parties and, accordingly, does not require collateral. The Company
maintains reserves for potential credit losses and historically such losses, in
the aggregate, have not exceeded management's expectations. For the year ended
September 30, 2003, one customer accounted for approximately 30% of the
consolidated total revenue. Accounts receivable due from this customer as of
September 30, 2003 amounted to $47,000. There were no significant customers for
the year ended September 30, 2002.
The Company has cash on deposit with 2 banks that exceeds the federally
insured limits by approximately $584,000 as of September 30, 2003. The Company
has not experienced any losses in such accounts and management believes they are
not exposed to any significant credit risk on cash.
(NOTE C) - Accrued Expenses
---------------------------
F-11
Accrued Expenses consist of the following:
September 30, 2003 September 30,2002
Accrued professional fees $ 55,000 $ 121,087
Directors fees 60,000 15,000
Accrued taxes 160,000 -
Accrued royalties 112,299 -
Accrued exp related to Strax 55,052 -
Accrued - Other 26,673 12,000
Accrued exp related to Opus - 50,000
-------- --------
$469,024 $198,087
======== ========
(NOTE D) -Inventory
-------------------
Inventories consist of the following:
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
---- ----
Raw materials $569,100 $ -
Finished goods 251,384
-------- --------
$820,484 $ -
========= ========
(NOTE E) - Notes Payable and Line of Credit
-------------------------------------------
Bridge loan Financing
---------------------
During 2001, the Company completed a short term bridge loan of
$300,000, through the issuance of loan notes bearing interest at 11% together
with warrants to purchase common stock of the Company. Of the total proceeds,
$250,000 of loans were from officers and directors of the Company and related
parties. The $300,000 bridge loan notes were due for repayment on February 28,
2002, which was extended to October 31, 2002. On October 10, 2002, the Company
repaid the bridge loan holders the $300,000 plus accrued interest. The fair
value of warrants issued in connection with the bridge loan amounting to $12,000
was reflected as a discount to the face value of the bridge loan. The notes were
collateralized by substantially all assets of the Company.
MCM Financing
-------------
During 2002, the Company obtained a short-term loan in the principal
amount of $250,000, with interest at prime (4.25% at September 30, 2002) plus 3%
per annum and due on September 30, 2003 (the "Company Loan"). All $250,000 of
the loan proceeds were from officers and employees of the Company as well as
related family members. For each $1.00 principal amount loaned, the lender
received a warrant to purchase one share of the Company's Common Stock,
exercisable after 6 months at $0.09 per share for a period of five years. The
fair market value of the warrant on the date of grant was determined to be
$6,700, which is being amortized over the term of the related debt. The proceeds
of the Company Loan together with an additional $100,000 of working capital were
used to fund a loan to MCM totaling $350,000 as of September 30, 2002. The
$350,000 loan to MCM is at prime plus 2% per annum and was converted to equity
upon the acquisition of the interest in MCM in December 2002. The Company loan
plus accrued interest was repaid from the proceeds of the Opus sale in October
2002.
Line of Credit
--------------
During 2002, the Company entered into a $500,000 line of credit
agreement with Mr. Mehta, a board member of the Company, that was to expire on
March 2004. Borrowings under the line were to bear interest at 11% per annum. In
connection with this agreement, the Company issued warrants to purchase 500,000
shares of the Company's common stock at an exercise price of $0.11. The warrants
were exercisable immediately and were to expire in September 2007. These
warrants were determined to have a market value of $41,350 which is being
F-12
amortized over the term of the related debt agreement. In February 2004, Mr.
Mehta and the Company were unable to reach mutually satisfactory terms for the
underlying provisions of the loan, and therefore Mr. Mehta relinquished his
offer for the line of credit and returned the warrants granted to him.
(NOTE F) - Capital Lease Obligations
------------------------------------
Capital lease obligations at September 30, 2003 and 2002 consisted of
the following:
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
---- ----
Various capital leases, secured by the respective medical
equipment, interest rates ranging from 10.0% - 12.7%,
monthly payments of principal and interest ranging from
$1,720 to $3,700, maturities ranging from November 2002 to
October 2004. $ - $ 35,032
Less: current maturities - 12,806
------------ ------------
$ - $ 22,226
============ ============
As of September 30, 2003 the Company has no capital lease obligations
due to the sale of the Strax Institute. All of the obligations for the equipment
disclosed in Fiscal 2002 was transferred in the sale of the Strax Institute.
(NOTE G) - Income Taxes
-----------------------
At September 30, 2003 and 2002, the Company had a deferred tax asset
totaling approximately $17,680,000 and $17,800,000 respectively, due primarily
to net operating loss carryovers. A valuation allowance was recorded in 2003 and
2002 for the full amount of this asset due to uncertainty as to the realization
of the benefit.
The Company's Israeli subsidiary had carried forward losses for tax
purposes in the amount of approximately $6 million. A valuation allowance has
been recorded for the full amount of the deferred tax assets generated from
these loss carry forwards due to uncertainty as to the realization of the
benefit.
At September 30, 2003 the Company had available net operating loss
carryforwards for tax purposes, expiring through 2023 of approximately
$52,010,000. The Internal Revenue Code contains provisions which will limit the
net operating loss carry forward available for use in any given year if
significant changes in ownership interest of the Company occur.
(NOTE H) - Commitments and Contingencies
----------------------------------------
[1] Operating leases
The Company leases facilities under non-cancelable operating leases
expiring at various dates through fiscal 2005. Facility leases require the
Company to pay certain insurance, maintenance and real estate taxes. Lease
expense for all operating leases totaled approximately $235,250 and $215,000 for
the years ended September 30, 2003 and 2002, respectively.
Future minimum rental commitments under operating leases are as
follows:
Fiscal Year Amount
----------- ------
2004 118,700
2005 46,650
---------
Total $ 165,350
=========
F-13
2] Legal proceedings
In June 2002, Jack Nelson, a former executive officer and director of
the Company, commenced two legal proceedings against the Company and George
Aaron and Jonathan Joels, executive officers, directors and principal
stockholders of the Company. The two complaints allege that the individual
defendants made alleged misrepresentations to the plaintiff upon their
acquisition of a controlling interest in the Company in 1999 and thereafter made
other alleged misrepresentations and took other actions as to the plaintiff to
the supposed detriment of the plaintiff and the Company. One action was brought
in Superior Court of New Jersey, Bergen County ("State Court Action"), and the
other was brought as a derivative action in Federal District Court in New Jersey
("Federal Derivative Action"). The counts in the complaints are for breach of
contract, breach of fiduciary duty and misrepresentation. The complaint in the
Federal Derivative Action also alleges that certain actions by the defendants in
connection with the 1999 acquisition transaction and also as Company officers
violated the Federal Racketeer Influenced and Corrupt Organizations Act (RICO).
No amount of damages was specified in either action. The Company has answered
the complaints and has asserted affirmative defenses. The parties exchanged
written discovery in the State Court Action. No depositions were taken. In
January 2003, motions were made on behalf of the Company and Messrs. Aaron and
Joels to dismiss both the Federal Derivative Action and the State Court Action.
On April 25, 2003, the Court in the State Court Action denied the portion of the
motion which sought dismissal of the breach of contract claim but granted the
motion to dismiss with respect to the counts for fraud and misrepresentation and
respondeat superior against the Company based upon such fraud, but gave the
plaintiff leave to amend his complaint to replead with sufficient specificity
the counts predicated upon alleged fraud. An amended complaint was filed in the
State Court Action on May 15, 2003. The Company answered the amended complaint
and asserted affirmative defenses. The Court also ordered the parties to proceed
with mediation in an attempt to resolve the dispute. Mediation took place on
June 24, 2003, and concluded without resolution of the action. On or about
September 5, 2003, the Company resolved the State Court Action by making an
Offer of Judgment, which was accepted by the plaintiff. Under the terms of the
Offer of Judgment, which was made without any admission or finding of liability
on the part of the defendants, the Company made a payment of $125,000 to the
plaintiff. The motion to dismiss the Federal Derivative Action is currently
pending before the Federal Court. In addition, the plaintiff has filed a
cross-motion to amend his complaint to add allegations of securities violations
against George Aaron, Jonathan Joels, Shrikant Mehta and former director, Sanjay
Mody.
In September 2002, the Company was served with a complaint naming the
Company and its principal officers and directors in the Federal District Court
of New Jersey as a purported class action. The allegations in the complaint
cover the period between February 14, 2000 and June 20, 2002. The plaintiff is a
relative of the wife of the plaintiff in the previously disclosed direct and
derivative actions against the defendants. The allegations in the purported
class action are substantially similar to those in the other two actions. The
complaint seeks an unspecified amount of monetary damages, as well as the
removal of the defendant officers as shareholders of the Company. No answer has
yet been filed to this complaint as the parties agreed to extend the Company's
time to answer the complaint. Since January 1, 2003 an order was entered in the
Federal District Court in New Jersey consolidating the derivative action and the
class action. The order further provides that the time for the defendants to
answer or otherwise move with respect to the complaint in the class action is
extended. The order also provides that all discovery in the consolidated actions
is stayed pending resolution of the motions to dismiss. On April 9, 2003, an
amended complaint was filed in the purported class action naming an additional
plaintiff. On September 23, 2003, the Court entered an order: (1) appointing
plaintiffs Eugene Schwartz and Dallas Williams as lead plaintiffs; and (2)
appointing the law firm of Lowenstein Sandler as lead counsel for the class. On
November 21, 2003, the defendants made a motion to dismiss the purported class
action. That motion is currently pending.
In September 2002, BDC Corp., d/b/a BDC Consulting Corp., brought an
action against the Company and Mr. Aaron in the Circuit Court for the
Seventeenth Judicial Circuit, Broward County, Florida seeking an unspecified
amount of damages arising from the defendants' alleged tortious interference
with a series of agreements between the plaintiff and third party MCM pursuant
to which the plaintiff had intended to purchase MCM. See Note K of this report
for information regarding the Company's investment in MCM. Although the Company
believes there was no merit to the plaintiff's claim, the Company and Mr. Aaron
settled the action for the sum of $83,000 in order to avoid a lengthy and
expensive litigation. The purchaser of Strax is an entity controlled by the same
person who is a principal in BDC Corp. Under the Company's Purchase Agreement
with MCM, MCM, its subsidiaries and certain pre-existing shareholders of MCM
have certain obligations to indemnify the Company with respect to damages,
losses, liabilities, costs and expenses arising out of any claim or controversy
in respect to the BDC complaint. The $83,000 is included in the accompanying
consolidated balance sheet as of September 30, 2003 under the caption of Due
from sale of Strax. The Company has made a claim for indemnification.
F-14
(NOTE I) - Capital Transactions
-------------------------------
[1] Preferred Stock - Class B
-------------------------
On August 18, 1997, the Company entered into various agreements with
General Electric Company ("GE") including an agreement whereby GE purchased
27,000 shares of newly issued Series B Convertible Redeemable Preferred Stock
(the "Series B Preferred Stock") for $2,700,000.
The Series B Preferred Stock consists of 27,000 shares, ranks senior to
any other shares of preferred stock which may be created and the Common Stock.
It has a liquidation value of $100.00 per share, plus accrued and unpaid
dividends, is non-voting except if the Company proposes an amendment to its
Certificate of Incorporation which would adversely affect the rights of the
holders of the Series B Preferred Stock, and is convertible into 1,597,930
shares of Common Stock, subject to customary anti-dilution provisions. No fixed
dividends are payable on the Series B Preferred Stock, except that if a dividend
is paid on the Common Stock, dividends are paid on the shares of Series B
Preferred Stock as if they were converted into shares of Common Stock.
[2] Warrants
--------
During the fiscal year ended September 30, 2002, the Company offered to
the current warrant-holders a reduction in the exercise price of outstanding
warrants. Exercise prices were reduced by 80%, not to be below an exercise price
of $0.11 per share, during a set time period that expired on September 30, 2002.
All warrants exercised during fiscal year 2002 were exercised during the
reduction period.
In connection with various bridge financing agreements entered into
during fiscal year 2000, the Company issued warrants to purchase 368,500 shares
of common stock at exercise prices ranging from $0.20 to $1.00 (see below).
Warrants to purchase 68,750 shares at $0.20 per share were exercised in October
2000. Warrants to purchase 38,500 shares at $0.20 per share were exercised in
September 2002. As of September 30, 2003, there were warrants outstanding to
purchase 261,250 shares of common stock at an exercise price of $0.20 per share.
These warrants expire at various dates through March 2005.
In connection with the equity placement completed during fiscal year
2000, the Company issued 2,600,000 Series A warrants and 1,300,000 Series B
warrants. Series A warrants to purchase 2,172,800 shares at $0.11 per share were
exercised in September 2002. Series B warrants to purchase 1,086,400 shares at
$0.15 per share were exercised in September 2002. As of September 30, 2003,
there were Series A and B warrants outstanding to purchase 640,800 shares of
common stock at exercise prices ranging from $0.50 to $0.75, with a weighted
average exercise price of $0.58.
In connection with MCM financing entered into during 2002, the Company
issued warrants to purchase 250,000 shares of common stock at $0.09. The market
value of the warrants issued was determined to be $6,700, which is being
amortized over the life of the related debt. These warrants expire in September
2007.
In connection with bridge financing entered into during 2001, the
Company issued warrants to purchase 300,000 shares of common stock at $0.08. The
warrants were determined to have a market value of $12,000 which was amortized
over the term of the related debt. These warrants expire in February 2006.
[3] Equity Private Placement
------------------------
On April 27, 2000, the Company completed an equity private placement of
$1,950,000 through the sale of 650,000 units at $3.00 per unit. Each unit was
comprised of three shares of Common Stock, four Series A Warrants exercisable at
$0.50 per share and are callable by the Company if the Common Stock of the
Company trades above $3.00 for 15 consecutive days, two Series B Warrants
exercisable at $0.75 per share and are callable by the Company if the Common
Stock trades above $5.00 for 15 consecutive days. All of the warrants are
exercisable for a period of five years. In addition, the Company issued options
to two individuals who assisted with the financing. One individual received
options to purchase 500,000 shares of common stock at $0.75 through June 2005.
Another individual received options to purchase 500,000 shares of common stock
at $1.00 through June 2005.
F-15
[4] Stock options
-------------
The Company has an Incentive and Nonqualified Stock Option Plan which
provides for the granting of options to purchase not more than 100,000 shares of
common stock. Exercise prices for any incentive options are at prices not less
than the fair market value at the date of grant, while exercise prices for
nonqualified options may be at any price in excess of $.01. When fair market
value at the date of issuance is in excess of the option exercise price, the
excess is recorded as compensation expense. There were no options outstanding
under this plan as of September 30, 2003.
During 2002, the Company adopted a stock option plan for both employees
and non-employee directors. The employee and Directors stock option plan
provides for the granting of options to purchase not more than 1,500,000 shares
of common stock. The options issued under the plan may be incentive or
nonqualified options. The exercise price for any options will be determined by
the option committee. The plan expires May 15, 2012. As of September 30, 2003,
there were 961,000 options outstanding under the 2002 plan, exercisable at $0.15
per share. During October 2002, the Company granted a total of 961,000 options
to officers, directors, and employees under the 2002 plan. All options are
exercisable at $0.15 per share vesting one third immediately and the balance
equally over a two year period.
During 1993, the Company adopted a employee stock option plan and a
stock option plan for non-employee directors. The employee stock option plan
provides for the granting of options to purchase not more than 1,000,000 shares
of common stock. The options issued under the plan may be incentive or
nonqualified options. The exercise price for any incentive options cannot be
less than the fair market value of the stock on the date of the grant, while the
exercise price for nonqualified options will be determined by the option
committee. The Directors' stock option plan provides for the granting of options
to purchase not more than 200,000 shares of common stock. The exercise price for
shares granted under the Directors' plan cannot be less than the fair market
value of the stock on the date of the grant. Both plans expired May 25, 2003.
Stock option transactions under the 2002 plan are as follows:
Weighted Average
Number of Option Price Exercise Price
Shares Per Share Per Share
------ --------- ---------
Balance, September 30, 2002 50,000 $0.05 $0.05
Granted in 2003 961,000 $0.15 $0.15
Exercised in 2003 (50,000) $0.05 $0.05
------- ----- -----
Balance, September 30, 2003 961,000 $0.15 $0.15
======= ===== =====
Stock option transactions under the 1993 plan are as follows:
Weighted Average
Number of Option Price Exercise Price
Shares Per Share Per Share
------ --------- ---------
Balance, September 30, 2001 901,500 $0.15 - $ 5.00 $0.45
Cancelled in 2002 (157,000) $0.15 - $ 5.00 1.33
-------- -------------- -----
Balance, September 30, 2002 744,500 $0.15 - $ 5.00 $0.26
Cancelled in 2003 (15,000) $0.84 - $ 2.93 1.40
-------- -------------- -----
Balance, September 30, 2003 729,500 $0.15 - $ 5.00 $0.24
======== ============== =====
F-16
Stock option transactions not covered under the option plans in the
fiscal years 2002 and 2003 are as follows:
Weighted Average
Number of Option Price Exercise Price
Shares Per Share Per Share
------ --------- ---------
Balance, September 30, 2001 and 2002 1,053,861 $0.10 - $20.10 $0.89
Granted in 2003 1,000,000 $0.15 $0.15
Cancelled in 2003 (1,287) $16.20 $16.20
---------- -------------- ------
Balance, September 30, 2003 2,052,574 $0.10 - $20.10 $0.52
========== ============== ======
Range of Weighted
Price Per Average Price
Options exercisable at September 30, 2003 Number of Shares Share Per Share
----------------------------------------- ---------------- ------------- ------------
Plan shares 1,370,167 $0.15 -$5.00 $0.20
Non-plan shares 1,719,240 $0.10 -$20.10 $0.60
The following table summarizes information about stock options outstanding at
September 30, 2003:
Outstanding Options
---------------------------------------------------
Weighted-
Number Average Weighted-
Range of Outstanding at Remaining Average
Exercise September 30, Contractual Exercise
Prices 2003 Life (years) Price
---------------------------------------------------------------------------
$0.10 - $0.25 2,726,000 8.2 $ 0.15
0.75-1.00 1,000,000 1.7 0.88
2.93 10,000 2.4 2.93
5.00 4,500 1.5 5.00
15.80-20.10 2,574 1.0 17.95
---------------------------------------------------------------------------
$0.10 - $20.10 3,743,074 6.4 $ 0.37
===========================================================================
Exercisable Options
---------------------------------------------------
Weighted-
Number Average Weighted-
Range of Outstanding at Remaining Average
Exercise September 30, Contractual Exercise
Prices 2003 Life (years) Price
---------------------------------------------------------------------------
$0.10-$0.25 2,072,333 7.9 $ 0.16
0.75-1.00 1,000,000 1.7 0.87
2.93 10,000 2.4 2.93
F-17
5.00 4,500 1.5 5.00
15.80-20.10 2,574 1.1 17.95
---------------------------------------------------------------------------
$0.10 - $20.10 3,089,407 5.9 $ 0.42
===========================================================================
(NOTE J) - Disposal of TDM business segment
-------------------------------------------
Effective October 9, 2002, the Company completed the sale of the assets
and certain liabilities of its TDM business segment for $6,000,000. Pursuant to
a Consulting Agreement, Opus will consult with Seradyn on ongoing projects for a
$50,000 annual fee for a two-year period. The sold assets included three
diagnostic assays still in development, for which Opus will receive royalty
payments upon the commercialization of any of these assays based upon varying
percentages of net sales. Caprius, Opus and its three executive officers entered
into non-compete agreements with Seradyn restricting them for five years from
competing in the TDM business. The sale of the TDM business has been reflected
as discontinued operations in the accompanying consolidated financial
statements. Assets applicable to the TDM business segment net of liabilities
assumed were segregated in the Company's balance sheet at September 30, 2002 and
shown as net assets of the TDM business segment. Revenues from discontinued
operations, which have been excluded from income from continuing operations in
the accompanying consolidated statements of operations for fiscal years 2003 and
2002, are shown below. The effects of the discontinued operations on net loss
and per share data are reflected within the accompanying consolidated statements
of operations.
A summary of net assets of the TDM business segment at September 30,
2002 were as follows:
2002
---------------
Current assets $638,609
Property and equipment 34,923
Intangible assets 2,001,937
Liabilities 164,322
---------------
Net assets $2,511,147
===============
A summary of operations of the TDM business segment for the years ended
September 30, 2003 and 2002 is as follows:
2003 2002
---- ----
Revenues $96,698 $2,170,446
Operating Expenses 23,300 748,813
------- ----------
Income from Operations $73,398 $1,421,633
======= ==========
(NOTE K) - Acquisition of majority interest in MCM Environmental Technologies,
------------------------------------------------------------------------------
Inc.
----
On December 17, 2002, the Company completed the acquisition of 57.53%
of the capital stock of MCM Environmental Technologies ("MCM"). The Company
acquired its interest for a purchase price of $2.4 million. MCM is engaged in
the medical infectious waste business. Upon closing, Caprius designees were
elected to three of the five seats on MCM's Board of Directors, with George
Aaron, President and CEO, and Jonathan Joels, CFO, filling two seats. At the
time of the acquisition of MCM, the Company's outstanding loans to MCM
aggregated $565,000 which were paid by reducing the cash portion of the purchase
price. For a six month period commencing 19 months and ending 25 months from
December 17, 2002, pursuant to a Stockholders Agreement, the stockholders of MCM
(other than the Company) shall have the right to put all of their MCM shares to
MCM, and MCM shall have the right to call all of such shares, at a price based
upon a pre-set determination calculated at such time. At the Company's option,
F-18
the purchase price for the remaining MCM shares may be paid in cash or the
Company's common stock. The acquisition was financed through proceeds from the
sale of the TDM business. Additionally, as part of the transaction, certain debt
of MCM to its existing stockholders and to certain third parties was converted
to equity or restructured. Legal and other costs incurred in 2002 directly
related to the acquisition totaled $189,463, and are included in deferred
acquisition costs in the accompanying consolidated balance sheet as of September
30, 2002. These costs were allocated to the purchase price of MCM during the
year ended September 30, 2003. The acquisition was accounted for using the
purchase method of accounting under which the purchase price will be allocated
to the assets acquired and liabilities assumed based on their estimated fair
values.
A summary of the acquisition of MCM Environmental Technologies:
Current Assets $ 2,313,851
Net PP&E 215,558
Liabilities (1,446,513)
-----------
Net Tangible Assets $ 1,082,896
===========
Net Tangible Assets (57.53% Interest) $ 622,990
Goodwill & Intangible Assets 1,770,010
-----------
Total Acquisition Cost $ 2,400,000
===========
Pro forma combined results of operations of the Company and
the MCM business acquired in December 2002 for the periods
ended September 30, 2003 and 2002, assuming that the
transaction had occurred on October 1, 2001 and after giving
effect to certain pro forma adjustments are as follows:
2003 2002
---- -----
Revenues $ 841,471 $2,037,743
----------- -----------
Operating Expenses 4,821,892 3,351,822
----------- -----------
Interest Income(expense) (17,962) 36,676
Loss from continuing operations ($3,998,193) ($1,277,403)
=========== ===========
(NOTE L) - Sale of Strax
------------------ -----
Effective September 30, 2003, the Company sold its comprehensive breast
imaging business, to Eastern Medical Technologies, Inc., a Delaware corporation
("EMT"), pursuant to a Stock Purchase Agreement dated September 30, 2003 (the
"Purchase Agreement") among Registrant, EMT and the other parties thereto. The
purchase price was $412,000 and may be subject to adjustment based upon the
amount of accounts receivable outstanding as of the date of closing. 50% of the
purchase price, which had been held in escrow, was paid on closing and the
balance is payable in installments commencing January 1, 2004 and ending
December 31, 2004, evidenced by a note secured by the accounts receivables of
Strax Institute, Inc. In addition, Registrant is required to provide certain
specified transitional services for up to 180 days pursuant to a Management
Services Agreement.
The sale of the Strax business has been reflected as discontinued
operations in the accompanying consolidated financial statements. Revenues from
discontinued operations, which have been excluded from income from continuing
operations in the accompanying consolidated statements of operations for fiscal
years 2003 and 2002, are shown below. The effects of the discontinued operations
on net loss and per share data are reflected within the accompanying
consolidated statements of operations.
F-19
A summary of operations of the Strax business segment for the years
ended September 30, 2003 and 2002 is as follows:
2003 2002
---- -----
Revenues $1,559,669 $1,549,794
Operating Expenses 1,704,157 1,806,484
--------- ----------
Loss from operations $ (144,488) $ (256,690)
========== ==========
(NOTE M) -Geographic Information
--------------------------------
Loss from
Geographic Location Revenues Long-Lived Assets Continuing Operations
------------------- -------- ----------------- ---------------------
United States $ 98,700 $ 237,061 $(3,820,205)
Israel $501,879 1,611,032 (232,662)
-------- ---------- -----------
$600,579 $1,848,093 $(4,052,867)
(NOTE N) - Subsequent Event
---------------------------
During January and February 2004, the Company entered into a short-term
bridge loan for an aggregate of up to $500,000 through the issuance of loan
notes due on July 31, 2005. The funds will be utilized primarily for general
working capital. To date, the Company has raised $400,000, the majority of which
was provided by management of the Company. The loan notes bear interest at a
rate of 11% per annum and are secured by a first lien on the royalties due to
Opus Diagnostics Inc. from Seradyn, Inc. in accordance with the Royalty
Agreement dated October 9, 2002, by and between Seradyn, Inc. and Opus
Diagnostics Inc. For every three dollars ($3.00) loaned, the lender received two
warrants to purchase one share of Caprius Common Stock, exercisable to $0.25 per
share for a period of five years. These warrants were determined to have a
market value of $41,333 which are amortized over the term of the bridge loan.
F-20