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, 2004
_____ Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Commission File Number: 0-11914
CAPRIUS, INC.
(Name of Small Business Issuer in its charter)
Delaware 22-2457487
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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
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(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 X No
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, 2004: $885,461
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 February 1, 2005:
$1,612,796.
The number of shares outstanding of Registrant's Common Stock, $ .01 par
value, outstanding on February 1, 2005: 20,446,562 shares
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Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: Yes __ No X
INDEX
Page No.
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PART I
Item 1. Description of Business 3
Item 2. Description of Property 12
Item 3. Legal Proceedings 12
Item 4 Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 13
Item 6. Management's Discussion and Analysis or Plan of Operations 14
Item 7. Financial Statements 22
Item 8. Changes In and Disagreements with Accountants on Accounting and 22
Financial Disclosure
Item 8A. Controls and Procedures 23
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; 23
Compliance with Section 16 (a) of the Exchange Act.
Item 10. Executive Compensation 25
Item 11. Security Ownership of Certain Beneficial Owners and Management 27
and Related Stockholder Matters
Item 12. Certain Relationships and Related Transactions 29
Item 13. Exhibits and Reports on Form 8-K 30
Item 14. Principal Accountant Fees and Services 34
SIGNATURES 35
2
PART I
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Caprius, Inc. ("Caprius", the "Company", "we", "us" and "our") is engaged
in the infectious medical waste disposal business. In the first quarter of
Fiscal 2003, we acquired a majority interest in M.C.M. Environmental
Technologies, Inc. ("MCM") which developed, markets and sells the SteriMed and
SteriMed Junior compact systems that simultaneously shred and disinfect
Regulated Medical Waste. The SteriMed Systems are sold and leased in both the
domestic and international markets.
In December 2002, the Company closed the acquisition of our initial
investment of 57.53% of the capital stock of MCM for a purchase price of $2.4
million. MCM wholly-owns MCM Environmental Technologies Ltd., an Israeli
corporation, which initially developed the SteriMed Systems. Upon closing, our
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 in
MCM or restructured. Pursuant to its Letter of Intent with MCM, Caprius had
provided MCM with loans totaling $565,000, which loans were repaid upon closing
by a reduction in the cash portion of the purchase price. As part of the
Stockholders Agreement dated December 17, 2002, there were certain provisions
relating to performance adjustments for the twenty four month period post
closing. As a consequence, the Company's ownership interest increased by 5% in
the fiscal year 2004. For the six month period that commenced on July 17, 2004
and ends on January 17, 2005, pursuant to a Stockholders Agreement, the
stockholders of MCM (other than the Company) have the right to put all of their
MCM shares to MCM, and MCM has the right to call all of such shares not
currently owned by us. In accordance with the Stockholders Agreement dated
December 17, 2002, the party who first exercises its put or call rights is
required to accompany its notice of put or call with its proposal for the price
of the stock interest in MCM to be sold or purchased, as applicable. The
recipient is then required to give notice to the exercising party of its
proposed price for such interest. The parties shall then negotiate and agree
upon an agreed price. At our option, we may pay the purchase price for the
remaining MCM shares in cash or in shares of our common stock. Neither party
gave notice of its put or call.
During the first quarter of fiscal year 2005, an agreement was reached
between the Company and the 20% minority ownership of an MCM subsidiary which
has been dormant since inception. The minority shareholders shall be repaid
their initial investment, by way of a credit towards the site installation
expense of SteriMed units that they are purchasing for their dialysis centers.
Thereafter the subsidiary will be dissolved.
Caprius, Inc. was founded in 1983 and through June 1999 essentially
operated in the business of developing specialized medical imaging systems, as
well as operating the Strax Institute, a comprehensive breast imaging center. In
June 1999, we acquired Opus and began manufacturing and selling medical
diagnostic assays constituting the TDM Business. In October 2002, we sold the
TDM business to Seradyn, Inc. The Strax Institute was sold in September 2003.
DESCRIPTION OF MCM ENVIRONMENTAL TECHNOLOGIES INC. 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
3
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 reimbursement payments 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 tracking 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 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.
THE MCM STERIMED(R) SYSTEM
The SteriMed System is a patented, environmentally friendly, on-site
disinfecting, shredding and disposal system 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 Ster-Cid(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
4
technology.
The SteriMed System is comprised of two different sized units, and the
required Ster-Cid(R) disinfectant solution which can be utilized with both
units. The larger SteriMed can treat up to 19 gallons (70 liters) of medical
waste per cycle. The smaller version, SteriMed Junior, can treat 4 gallons (15
liters) per cycle.
We have the worldwide exclusive rights for the manufacture, use and sale of
the Ster-Cid(R) proprietary disinfectant used in the SteriMed System. The
Ster-Cid(R) is currently manufactured solely for us by the licensor. In the
event that the licensor is unable to manufacture the Ster-Cid(R), we have the
right to have Ster-Cid(R) manufactured by an alternative manufacturer.
Ster-Cid(R) is approximately 90% biodegradable. Ster-Cid(R) is considered a
pesticide by the U.S. EPA and, in compliance with Federal Insecticide,
Fungicide, Rodenticide Act of 1972 ("FIFRA"), it is registered with the U.S.
EPA. The process of registering a pesticide under FIFRA involves submission of
an application package to the U.S. EPA. The EPA's review of this application
includes assessment of the hazards to human health and the environment that may
be posed by the pesticide. This process can take up to a year or more to
complete. MCM had assigned an agent experienced with the FIFRA registration
process to carry out this process for Ster-Cid(R). This process was completed in
September 1999 at which time the Ster-Cid(R) was assigned a FIFRA Registration
number. On an annual basis, MCM is required to report to the U.S. EPA the
quantities of Ster-Cid(R) sold and projections for the upcoming year.
During the SteriMed disinfecting cycle, the concentration of Ster-Cid(R) is
approximately one half of one percent of the total volume of liquids. The
Ster-Cid(R) disinfectant has been tested in independent laboratories and shown
to meet U.S. EPA guidelines for disinfection. Furthermore, the SteriMed effluent
is allowed by Publicly Owned Treatment Works ("POTW"), for discharge into the
sewer system.
Both SteriMed Systems are safe and easy to operate, involving 1/2 day of
training provided by our technical support staff to operators as designated by
the end-user. The operator is trained to handle the daily and weekly
responsibilities for the routine preparation, maintenance, and minor
troubleshooting of the SteriMed System.
Both SteriMed and the SteriMed Junior 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.
REGULATIONS AND REGULATORY COMPLIANCE FOR ALTERNATIVE MEDICAL WASTE TREATMENT
TECHNOLOGIES IN THE UNITED STATES
Our use of the Ster-Cid(R) disinfectant in the SteriMed System is
registered by the U.S. EPA under FIFRA. The SterCid(R) disinfectant is
considered a pesticide, and is registered under FIFRA Number 71814. FIFRA gives
the federal government control over the distribution, sale and use of
pesticides. All pesticides used in the U.S. must be registered (licensed) by the
U.S. EPA under FIFRA. Registration of pesticides is to seek assurance that they
will be properly labeled, and if used in accordance with label specifications,
will not cause unreasonable harm to the environment.
The MCM SteriMed 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 inactivate the 4Log10 concentration of
Bacillus atrophaeus (formerly Bacillus subtilis) spores. This meets or exceeds
most state regulatory requirements.
The SteriMed Senior has been cleared for marketing in 45 states and the
SteriMed Junior in 39 states. The Ster-Cid(R) disinfectant has been registered
5
in 49 states. It is our objective to obtain approvals from the remaining states.
Local and county level authorities generally require that discharge permits
be obtained from POTW by all facilities that discharge a substantial amount of
liquids or specifically regulated substances to the sewer system. The SteriMed
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 SteriMed System effluent to be discharged to a
municipal sewer and the treated disinfected solid waste to be disposed of in a
municipal landfill.
The SteriMed 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 a requirement for equipment sold in the European
Union ("EU"). The SteriMed Systems are CE Mark compliant. In order to meet the
specific regulatory requirements of the individual members of the EU, MCM will
undertake further efficacy testing where necessary in order to demonstrate that
the SteriMed conforms to all the standards in the specific EU member country.
Outside of the EU, we are required to review and meet whatever the specific
standards a country may impose. In countries where we have distributors, they
are required to obtain the necessary regulatory approvals on our behalf at their
expense.
COMPETITION
RMW has routinely been treated and disposed of by means 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
6
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.
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 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, we are positioning our products as viable
alternatives to the traditional medical waste disposal methods. The SteriMed
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 System are:
Safety
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a) No need to pack containers with medical waste
b) No need to ship infectious medical waste on public roads
c) 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
d) Noise level during cycle is approx. 70.1dB(A), regarded below
levels of noise safety concerns of the Occupational and Safety
Administration ("OSHA").
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) Ease of use
d) Employee can continue to perform their regular functions while
the SteriMed treatment cycle is operational
Convenience
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a) Easily installed requiring only electricity, water and sewage
outlet. No special ventilation or lighting required.
b) Can fit through regular doorway.
c) Limited training required for operators.
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)
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Cost Saving
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a) Less labor time
b) No transportation costs to incineration site
c) Our preferred business model is to lease the SteriMed Systems to
U.S. facilities generating the infectious clinical waste. This
model obviates the need for capital investment by users, and
should also reduce previous operating expenses in disposing of
medical waste.
Compliant with Federal and States regulations
---------------------------------------------
Enable infectious medical waste generating facilities to replace
existing systems while meeting federal, state and local
environmental and health regulations.
These features are intended to make the SteriMed 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
We have designed and are 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 to us. 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 us
to maximize resources and quickly obtain market penetration. We are presently
working with a number of these customers in the implementation of this strategy
and in fiscal year 2005, the Company received its first significant order in the
US for the SteriMed Junior(R) Systems from a major dialysis company.
We do not have the depth of marketing or financial capacity that many of
our competitors have and thus are reliant upon generating interest in our
products by virtue of our technical advantages. This aspect is emphasized in our
limited budget allocated for marketing.
Our business marketing models in the U.S. are either lease or purchase of
the SteriMed System. The basic lease terms are a single monthly fee which will
include the cost of the SteriMed, disposables and service for the life of the
lease. Lease terms are usually five years. In the rest of the world, only the
purchase option is available. Leasing is not available outside of the US because
of the potential difficulty in monitoring and collecting monthly leasing fees.
Our distributors, however, are free to sell or lease the SteriMed System in
their respective markets. Regulatory approvals are required prior to marketing
in any country, whether the business is conducted by us or our distributors.
To maximize and augment our sales efforts in the U.S., we have been
actively recruiting distributors. Ideally, we are seeking local and regional
distributors who will have the exclusive right to sell the SteriMed products
with their prescribed geographical area. In order to gain exclusivity, the
distributor must commit to minimum annual purchases. The distributor is
obligated to work within the guidelines and regulatory approvals set up and
maintained by us.
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Internationally, we have distribution agreements in the following
countries: Argentina, Australia, Brazil, Columbia, Costa Rica, Cyprus, Greece,
Japan, Mexico, Paraguay, Poland, Scandinavia (Norway, Sweden, Finland and
Iceland), Singapore, Taiwan, Tunisia and Uruguay. In each of the countries, it
is the distributors' responsibility to obtain, at their own expense, all
regulatory approvals which will be registered in the name of MCM.
MANUFACTURING
The Company recognizes that to be successful, we need to manufacture units
that are:
1) Robust
2) Reliable
3) Reproducible in their activity
Presently, we manufacture the SteriMed at our facility in Moshav Moledet,
Israel. Our current inventory of the SteriMed Junior was manufactured by a third
party manufacturer in Israel. We are actively seeking alternative locations for
the manufacture of our units, including within the U.S. This includes
sub-assembly manufacturers which will enable us to complete the final assembly
at our own facilities if this proves to be the most cost effective solution. We
anticipate that we would be able to complete the final assembly of the SteriMed
Junior in our own facilities in the U.S. By the time we will need larger scale
manufacturing capacity, we believe we will have located and qualified an
alternative manufacturing location to fulfill these requirements and at costs
acceptable to us.
Approximately half of the SteriMed components are commercially available
from third party suppliers. The remaining components are either generic with
modification or customized specifically for the SteriMed. We presently have
depots for parts and supplies located in Ridgefield, NJ and Moledet, Israel.
MAINTENANCE AND CUSTOMER SERVICE MODEL
Critical to the successful use of the SteriMed System is the proper
training of the personnel carrying out the installation, operation and service
of the equipment. The Company provides our customers with a warranty covering
parts and labor for one year. Thereafter, we offer an extended warranty program.
Our technical service staff assists clients in the installation of units and the
training of their 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. Our 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.
Our Customer Service staff is available to help with any questions or issues our
customers might have.
PROPRIETARY RIGHTS
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 acquired and/or applied for trademarks and patents for our SteriMed and
Ster-Cid(R) products as indicated in the following tables. The validation for
patents is extended to fifteen years, provided an annual fee (on renewal dates)
is paid in the respective country.
SteriMed System has an International Class 10 Trademark for Israel, United
States, Canada, Japan, Australia, Mexico, Russia, Hungary, Poland, and for
Community Trademark ("CTM" - European).
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MCM STERIMED - INTERNATIONAL CLASS 10 TRADEMARK:
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FILE NO. COUNTRY APPLICATION NO. APPLICATION DATE TRADEMARK NO. RENEWAL DATE
------------------------------------------------------------------------------------------------------------
99200 Israel 113,697 7/20/1997 113,697 07/20/2007
------------------------------------------------------------------------------------------------------------
99207 U.S.A 75/904,419 01/28/2000 2,724,738 10/20/2013
------------------------------------------------------------------------------------------------------------
99208 Canada 1035659 11/12/1999 TMA 596,538 12/04/2018
------------------------------------------------------------------------------------------------------------
99209 CTM(European) 1380146 11/11/1999 1380146 11/11/2009
------------------------------------------------------------------------------------------------------------
99210 Japan 11-103145 11/12/1999 4462258 03/23/2011
------------------------------------------------------------------------------------------------------------
99211 Australia 813208 11/09/1999 813208 11/09/2009
------------------------------------------------------------------------------------------------------------
99212 Mexico 472508 02/23/2001 701862 02/23/2011
------------------------------------------------------------------------------------------------------------
99214 Russia 99719243 11/18/1999 209618 11/18/2009
------------------------------------------------------------------------------------------------------------
99216 Hungary m-9905278 11/10/1999 165158 11/10/2009
------------------------------------------------------------------------------------------------------------
99218 Poland Z-209695 11/10/1999 148086 11/10/2009
------------------------------------------------------------------------------------------------------------
The Ster-Cid(R) disinfectant has an International Class 5 Trademark for
Israel, United States, Canada, Japan, Australia, Mexico, Russia, Hungary,
Poland, and CTM.
MCM STER-CID(R) INTERNATIONAL CLASS 5 TRADEMARK:
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------------------------------------------------------------------------------------------------------------
FILE NO. COUNTRY APPLICATION NO. APPLICATION DATE TRADEMARK NO. RENEWAL DATE
------------------------------------------------------------------------------------------------------------
99200 Israel 131893 11/01/1999 131893 11/01/2006
------------------------------------------------------------------------------------------------------------
99201 U.S.A 75/904,150 01/29/2000 2,713,884 05/06/2013
------------------------------------------------------------------------------------------------------------
99202 Canada 1035658 11/12/1999 TMA 596,329 12/03/2018
------------------------------------------------------------------------------------------------------------
99203 CTM(European) 1380195 11/11/1999 1380195 11/11/2009
------------------------------------------------------------------------------------------------------------
99204 Japan 11-103144 11/12/1999 4562185 04/19/2007
------------------------------------------------------------------------------------------------------------
99205 Australia 813207 11/09/1999 813207 11/09/2009
------------------------------------------------------------------------------------------------------------
99206 Mexico 412940 02/23/2001 656603 02/25/2010
------------------------------------------------------------------------------------------------------------
99213 Russia 99719294 11/18/1999 200276 11/17/2009
------------------------------------------------------------------------------------------------------------
99215 Hungary M-9905279 11/10/1999 164682 11/10/2009
------------------------------------------------------------------------------------------------------------
99217 Poland Z-209696 11/10/1999 145760 11/10/2009
------------------------------------------------------------------------------------------------------------
The SteriMed has patents in Australia, Japan, United States, Canada, Europe
and South Africa. Additionally, there are patent applications pending in the
United States (provisional), Australia, Brazil, Mexico, Russia, Canada, China,
India, and Patent Corporation Treaty ("PCT").
MCM STERIMED PATENTS:
---------------------
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FILE NO. COUNTRY APPLICATION NO. APPLICATION PATENT NO. PATENT DATE VALID UNTIL
DATE
------------------------------------------------------------------------------------------------------------------
9346 Israel 108,311 01/10/1994 108,311 12/23/1999 01/10/2014
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9452 Australia 10096/95 01/09/1995 684,323 04/2/1998 01/09/2015
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9453 Japan 7-011844 01/23/1995 3058401 04/21/2000 01/27/2015
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9454 U.S.A 08/369,533 01/05/1995 5,620,654 04/15/1997 04/15/2014
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9456 Canada 2,139,689 01/06/1995 2,139,689 10/5/1999 01/06/2015
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9455 Europe 95630001.6 01/05/1995 EP0662346 03/28/2001 01/05/2015
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10
MCM STERIMED PCT INTERNATIONAL PHASE PATENTS:
---------------------------------------------
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FILE NO. COUNTRY APPLICATION NO. APPLICATION PATENT NO. PATENT DATE VALID UNTIL
DATE
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PCT PCT/IL02/00093 02/04/2002 WO2002/062479 A1 08/15/2002 09/05/2005
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2337 Australia 2002230065 02/04/2002 Pending* Pending 02/04/2022
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2338 Brazil 200300398 07/31/2003 Pending* Pending 02/04/2022
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2339 Mexico PA/a/2003/006946 08/04/2003 Pending* Pending 02/04/2022
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2340 Russia 2003127023 09/04/2003 Pending* Pending 02/04/2022
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2341 So. Africa 2003/5602 07/21/2003 2003/5602 09/23/2003 02/04/2022
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2342 Canada 2437219 08/01/2003 Pending* Pending 02/04/2022
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2343 China 02806986.2 09/22/2003 Pending* Pending 02/04/2022
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2344 India 01389/chenp/03 09/02/2003 Pending* Pending 02/04/2022
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2373 USA 09/824,685 04/04/2001 6494391 12/17/2002 04/04/2021
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2313/354 Europe 02711185.5 09/05/2003 P210477PCT/EP Pending 02/04/2022
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*Applied for as a temporary patent until the PCT takes effect.
We maintain, in-house, a system that tracks all expiration dates for our
trademarks and patents. This internal tracking system alerts us when renewal
submissions are required.
STRAX INSTITUTE BUSINESS
For several years prior to September 30, 2003, we 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. As of September 30, 2003, we sold Strax for $412,000. 50% of
the purchase price was paid on closing and the balance is payable in
installments evidenced by a note secured by the accounts receivables of Strax
Institute, Inc. During the first quarter of fiscal year 2005, the parties agreed
to settle the net outstanding balance in a lump sum payment of $66,000 which was
paid in two equal installments in December 2004 and January 2005. Additionally,
two of our 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
From June to October 9, 2002, our subsidiary 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 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. We have been
informed that one of the assays under development for a new drug for
anti-rejection in transplantation has been completed. The drug has already
received approval in certain countries where the assay test kit to monitor the
drug is already being sold. 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
11
As of February 1, 2005, we employed six full time employees, including
three senior managers, at our New Jersey corporate headquarters.
MCM employed three full time employees in the U.S. and 10 full time
employees and 1 part time employee at its facility in Israel.
None of our employees is represented by any labor organization and we are
not aware of any activities seeking such organization. We consider our relations
with employees to be good.
As the level of our activities grow, additional personnel may be required.
ITEM 2. DESCRIPTION OF PROPERTY
We lease 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.
We also lease approximately 1,500 square feet of space in Ridgefield, NJ
for warehousing and assembly at a monthly cost of $1,850. This lease expires on
April 30, 2005 and is subject to a 5% increment yearly. In Israel, we lease
2,300 square feet of industrial space at a monthly cost of approximately $865
and the lease expires on March 31, 2005.
We believe the premises leased are adequate for our current and near term
requirements.
ITEM 3. LEGAL PROCEEDINGS
In June 2002, Jack Nelson, a former Caprius executive officer and director,
commenced two legal proceedings against us and George Aaron and Jonathan Joels,
executive officers, directors and principal stockholders. The two complaints
alleged that the individual defendants made misrepresentations to the plaintiff
upon their acquisition of a controlling interest in the Company in 1999 and
thereafter made other alleged misrepresentations and engaged in mismanagement
and other misconduct and took other actions as to the plaintiff to the supposed
detriment of the plaintiff and Caprius. 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"). In September 2003, we 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 part of the defendants, we paid $125,000 to the plaintiff and the
action was discontinued. The cost associated with the Offer of Judgment was
recorded in the selling, general and administrative expenses within the
consolidated statement of operations for the year ended September 30, 2003.
On May 3, 2004, the Court in the Federal Derivative Action granted the
motion made by us and Messrs. Aaron and Joels for judgment on the pleadings
based upon the pre-suit demand requirement and dismissed the plaintiff's
complaint without prejudice, but denied defendants' motion for judgment on the
pleadings based upon the Private Securities Litigation Reform Act. The Court
also granted the plaintiff's cross-motion to file an amended complaint to add
allegations of insider trading.
In September 2002, we were served with a complaint naming us and our
principal officers and directors in the Federal District Court of New Jersey as
a purported class action (the "Class Action"). The allegations in the complaint
cover the period between February 14, 2000 and June 20, 2002. The initial
plaintiff is a relative of the wife of the plaintiff in the State Court Action
and Federal Derivative Action. The allegations in the purported Class Action
were substantially similar to those in the other two Actions. The complaint
sought an unspecified amount of monetary damages, as well as the removal of the
12
defendant officers as shareholders.
On May 3, 2004, in a decision separate from the decision in the Federal
Derivative Action, the Court granted the defendants' motion and dismissed the
Class Action. The federal securities claims asserted by the plaintiffs were
dismissed with prejudice, and having dismissed all federal law claims, the Court
declined to exercise jurisdiction over the remaining state law claims and
dismissed those claims without prejudice. On May 14, 2004, the plaintiffs filed
a motion for reconsideration, which defendants opposed and subsequently this
motion for reargument was denied. The plaintiff did not file a notice of appeal
during the statutory time period.
On September 30, 2004, our Board received a letter written from Mr.
Nelson's attorney making a demand that we institute a derivative action
substantially similar to the allegations presented in the Federal Derivative
Action. A draft complaint was included with the letter. An Independent Committee
of the Board responded to the letter within the stipulated 90 day period that
Mr. Nelson had requested, stating that the Independent Committee determined that
there was no basis for the Company to institute the derivative action as
demanded. There has been no further communication from Mr. Nelson's attorney.
The independent directors have authorized us 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, and Messrs. Aaron and Joels will repay us in the
event it was determined that they were not entitled to be indemnified as to the
claim for which the advance was made.
In September 2002, BDC Corp., d/b/a BDC Consulting Corp., brought an action
against us 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. Although we believed there was no merit
to the plaintiff's claim, in October 2003, in order to avoid a lengthy and
expensive litigation, we and Mr. Aaron settled the action for the sum of $83,000
which is recorded in selling, general and administrative expenses within the
consolidated statement of operations for the year ended September 30, 2003. The
purchaser of Strax is an entity controlled by the same person who is a principal
in BDC Corp. Under our Purchase Agreement for the purchase of the majority
interest in MCM, MCM, its subsidiaries and certain pre-existing shareholders of
MCM have certain obligations to indemnify us with respect to damages, losses,
liabilities, costs and expenses arising out of any claim or controversy in
respect to the BDC complaint. This indemnification has been satisfied by the
indemnifying shareholders either through the required payment of monies or by
additional shares being allocated to the Company.
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) The Common Stock has traded on the OTC Bulletin Board under the symbol
CAPR since June 8, 1999, upon the delisting of the Company's Common Stock from
the NASDAQ Small Cap Market. As of September 30, 2004, 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.
13
Common Stock High Low
---- ---
2004 (year ended September 30, 2004)
Fourth Quarter $ 0.25 0.11
Third Quarter 0.22 0.05
Second Quarter 0.25 0.05
First Quarter 0.25 0.11
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
(a) 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, 2004, there were approximately 1,200 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, 2004 and 2003.
RESULTS OF OPERATIONS
As more fully described in Note K to the consolidated financial statements,
the Company completed the sale of its comprehensive breast imaging business
(Strax) effective September 30, 2003. As a result, the Company's consolidated
statements of operations for the fiscal years ended 2004 and 2003 have been
restated to reflect the Strax business as discontinued operations.
As more fully described in Note I 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 2004 and 2003 reflect the TDM business as a discontinued operation. The
Company's consolidated statements of operations for the fiscal years ended 2004
and 2003 were restated to reflect the TDM business as discontinued operations.
Fiscal Year Ended September 30, 2004 Compared to Fiscal Year Ended September 30,
2003
Revenues generated for fiscal 2004 were primarily generated by MCM product
sales and rental revenues which totaled $835,461 for fiscal year ended 2004 as
compared with $550,579 for the fiscal year ended 2003. For the year ended
September 30, 2004, two customers accounted for approximately 72% of the
consolidated total revenue. Accounts receivable due from these customers as of
September 30, 2004 amounted to $45,267. For the year ended September 30, 2003,
14
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. Consulting income in connection with the sale of the TDM business
generated $50,000 each of the fiscal year end September 30, 2004 and September
30, 2003. Sales for fiscal year 2004 increased over fiscal year 2003 with the
delivery of the SteriMed Junior as well as the SteriMed in international
markets.
Selling, general and administrative expenses totaled $3,020,212 for Fiscal
2004 versus $4,155,660 for Fiscal 2003. This reflects substantial decreases in
certain professional and insurance fees as well as performance based
compensation to employees (none in 2004).
The operating loss from operations totaled $3,249,963 for Fiscal 2004
versus $4,052,867 for Fiscal 2003. This decrease primarily reflects the cost
savings benefits derived under managements' initiatives to control expenses, an
increase in revenues, and the elimination of certain one time costs in
connection with the acquisition of the MCM Business in Fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company has had recurring operating losses and has a working capital
deficiency as of September 30, 2004 of approximately $2.3 million.
We have for the past several years met our need for capital in our 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 acquired MCM business. Due to the poor equity market for
companies such as us, there has been significant difficulty in obtaining funds
from traditional sources.
During the second quarter of fiscal 2004, we raised $500,000 through a
short-term bridge loan, issuing notes due on July 31, 2005, and granting
warrants to purchase 333,333 shares of our common stock exercisable at $0.25 per
share for a period of five years. The funds were utilized primarily for general
working capital. The majority of these funds were provided by our management.
The notes bear interest at a rate of 11% per annum and are secured by a first
lien on any royalties received by Opus Diagnostics Inc. from Seradyn, Inc. in
accordance with their Royalty Agreement. For every three dollars ($3.00) loaned,
the lender received two warrants, each to purchase one share of common stock,
exercisable at $0.25 per share for a period of five years. The estimated fair
value of the warrants approximated $27,400 using the Black Scholes Model and
such amount shall be treated as a discount to debt and a corresponding increase
to paid in capital. The discount will be amortized over the life of the loan.
During the third quarter of fiscal year 2004 we raised $1.5 million, prior
to fees and expenses, through the issuance of 8% Senior Secured Convertible
Promissory Notes, repayable, together with interest, from April 27, 2005 to June
10, 2005, subject to prepayment or conversion by the investors into shares of
our common stock at a conversion price of $.15 per share. As part of the
conversion right privilege, the Company, recognized a discount on debt of
approximately $200,000 and a corresponding increase to paid in capital. The
discount will be amortized over the life of the loan. The proceeds from the sale
of the convertible promissory notes were utilized for the expansion of the
infectious medical waste disposal business and for general working capital
needs.
During the second quarter of fiscal year 2005, the Company raised $100,000
through the issuance of 8% Senior Secured Convertible Promissory Note,
repayable, together with interest to April 3, 2005, subject to prepayment in the
event of an equity financing in excess of $2 Million, or conversion by the
investors into shares of our common stock at a conversion price of $0.15 per
share. The lenders also received warrants to purchase 100,000 shares of our
common stock exercisable at $0.28 per share for a period of five years. In the
event that the loan is not repaid as of the due date, then the lender shall
receive a further 25,000 warrants per month, up to an aggregate, including the
initial 100,000 warrants, of 300,000 warrants. Additionally, during the first
two quarters of fiscal year 2005, the Company was advanced the principal amount
of approximately $146,000 through short term loans until additional equity
funding is secured. The terms of the loans are identical to the terms of the
15
$100,000 8% Senior Secured Convertible Promissory Note outlined above. These
funds are being utilized for general working capital purposes (see Note M to the
consolidated Financial Statements herein).
Net cash used in operations for Fiscal 2004 amounted to $2,842,363. Net
cash provided by investing activities for Fiscal 2004 amounted to $220,127. Net
cash flows used for financing activities for Fiscal 2004 amounted to $1,875,000
which primarily results from the $1.5 million less fees through the issuance of
8% Senior Secured Convertible Promissory Notes in the third quarter of fiscal
year 2004 and the $500,000 short term bridge loan in the second quarter of
fiscal year 2004.
In light of the continuing cash requirements needed to develop the MCM
business, we were actively seeking additional funding. On February 15, 2005, the
Company closed on a $4.5 million preferred stock equity financing before
financing related fees and expenses of approximately 10%. As part of this
financing, the Company agreed to 30% warrant coverage for the purchase of common
stock at an exercise price of $0.28 per share for a period of five years. The
Company also agreed to a second warrant with 10% coverage for the purchase of
common stock at $0.145 per share for a period of five years exercisable after 9
months. Simultaneously, the Company converted the short-term secured debt
outstanding in the aggregate of $2 million together with $72,962 into the same
class of preferred stock as the new equity investors. As part of the condition
for raising the equity financing, holders of a majority of the outstanding
shares irrevocably undertook to effect a 1:20 reverse stock split of any
outstanding shares of common stock. At the time that the reverse split becomes
effective, all of the preferred stock issued to the new equity investors and the
debt holders who converted their debt will automatically convert into common
shares. The Company also agreed to increase the number of independent directors
by one additional director and obtain a listing on the Nasdaq Small Cap Market.
The net cash proceeds from the equity financing will provide the funds necessary
to expand our business as well as meeting our needs to satisfy specific
outstanding obligations and accrued expenses. Specifically, the funds will be
used to increase our marketing effort both in the US and overseas markets. The
availability of this working capital will also permit us to build inventory to
fulfill both current and future needs arising from our increased marketing
efforts. In addition, as we start to build a meaningful penetration in the US
market, we will need to expand our customer service and technical support
capabilities to meet the needs of our clients. Similarly, in overseas markets,
resources will be required to obtain regulatory approvals in markets where we
believe there exists great opportunities for its business. We may also use our
resources to develop further versions of our SteriMed System if it is determined
that there is a market for such a product.
Notwithstanding, we will continue to evaluate additional funding options
including equipment financing, banking facilities, government-funded grants and
private equity offerings. We may also require funds for future acquisitions that
would complement our existing business.
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 our 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.
16
1. Revenue recognition
The infectious medical waste business recognizes revenues from either the
sale or rental of our SteriMed Systems. 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 January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after December 15, 2003. In December 2003, the FASB issued
Interpretation No. 46(R) ("FIN 46R") which revised certain provisions of FIN 46.
Publicly reporting entities that are small business issuers must apply FIN 46R
to all entities subject to FIN 46R no later than the end of the first reporting
period that ends after December 15, 2004 (as of December 31, 2004, for a
calendar year enterprise) The effective date includes those entities to which
FIN 46 had previously been applied. However, prior to the application of FIN
46R, a public entity that is a small business issuer shall apply FIN 46 or FIN
46R to those entities that are considered special-purpose entities no later than
as of the end of the first reporting period that ends after December 15, 2003.
The Company does not have any entities that require disclosure or new
consolidation as a result of adopting the provisions of FIN 46(R).
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 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.
17
In December 2003, a revision of SFAS 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits" was issued, revising disclosures
about pension loans and other post retirements benefits plans and requiring
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. The Company expects that the adoption of the new statement
will not have a significant impact on its financial statements.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an
amendment of ARB No. 43, Chapter 4. The amendments made by Statement 151 clarify
that abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) should be recognized as current-period charges and
require the allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal
years beginning after November 23, 2004. The Company is in the process of
evaluating whether the adoption of SFAS 151 will have a significant impact on
the Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions." The amendments made by Statement 153 are based on the principle
that exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the narrow exception
for nonmonetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Previously, Opinion 29 required that the accounting for an
exchange of a productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded
amount of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The Board believes that exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the Board believes
this Statement produces financial reporting that more faithfully represents the
economics of the transactions. The Statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. The Company has evaluated the impact of the
adoption of SFAS 153, and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment" Statement 123(R) will provide investors and other users of financial
statements with more complete financial information by requiring that the
compensation cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. Statement 123(R) covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. Statement 123, as originally issued in 1995,
established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
that are small business issuers will be required to apply Statement 123(R) as of
the first interim or annual reporting period that begins after December 15,
2005. The Company has evaluated the impact of the adoption of SFAS 123(R), and
does not believe the impact will be significant to the Company's overall results
of operations or financial position.
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
18
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
-------------
At present, the SteriMed unit is manufactured at our own facility in
Israel. The SteriMed Junior had been manufactured by a third party manufacturer
in Israel. We expect our manufacturing and marketing development work for our
business to continue in Israel, however due to the limited capacity as well as
the high costs of transportation from Israel, we continue to seek alternative
manufacturing capacity with manufacturers outside of Israel located in North
America, Russia or China. As we receive interest from these manufacturers, we
will then undertake a detailed analysis to ensure that they are sufficiently
qualified to manufacture our unit and their costs are acceptable to us. If we
fail to effectively manufacture or cause the manufacture or fail to develop a
market for our SteriMed systems, we will likely be unable to recover the losses
we will have incurred in attempting to produce and market these products and
technologies and may be unable to make sales or become profitable.
The Company is dependent on third party suppliers for the components of our
SteriMed and SteriMed Junior Systems and also for the Ster-Cid(R) disinfectant.
At present there are no supply contracts in place and our requirements are
fulfilled against purchase orders. There can be no assurances that we will have
adequate supplies of materials. Although we believe that the required components
are readily available and can be provided by other suppliers, delays may be
incurred in establishing relationships or in waiting for quality control
assurance with other manufacturers for substitute components.
REGULATORY
----------
The medical waste management industry is subject to extensive U.S. EPA,
state and local laws and regulations relating to the collection, packaging,
labeling, handling, documentation, reporting, treatment and disposal of
regulated medical waste. The use of the Ster-Cid(R) disinfectant in the SteriMed
System is registered with the U.S. EPA under FIFRA, however, the SteriMed System
is not subject to U.S. EPA registration. Our business requires us to comply with
19
these extensive laws and regulations and also to obtain permits, authorizations,
approvals, certificates or other types of governmental permission from all
states and some local jurisdictions where we sell or lease the SteriMed System.
The SteriMed Senior has been cleared for marketing in 45 states and the SteriMed
Junior in 39 states. It is our objective to obtain approvals from the remaining
states. The Ster-Cid(R) has been registered in 49 states. Our ability to obtain
such approvals in the remaining states and the timing and cost to do so, if
successful, cannot be easily determined nor can the receipt of ultimate approval
be assumed.
In markets outside the U.S., our ability to market the SteriMed System is
governed by the regulations of the specific country. In foreign countries we
market through distributors, on which we rely to obtain the necessary regulatory
approvals to permit the SteriMed System to be marketed in that country. We are
therefore dependent on the distributor to process these applications where
required. In many of these countries we have no direct control or involvement in
the approval process, and therefore we cannot estimate when our product will be
available in that market.
We believe that we currently comply in all material respects with all
applicable laws, regulations and permitting requirements. State and local
regulations change often, however, and new regulations are frequently adopted.
Changes in the applicable regulations could require us to obtain new approvals
or permits, to change the way in which we operate or to make changes to our
SteriMed System. We might be unable to obtain the new approvals or permits that
we require, and the cost of compliance with new or changed regulations could be
significant. In the event we are not in compliance, we can be subject to fines
and administrative, civil or criminal sanctions or suspension of our business.
The approvals or permits that we require in foreign countries may be
difficult and time-consuming to obtain. They may also contain conditions or
restrictions that limit our ability to operate efficiently, and they may not be
issued as quickly as we need (or at all). If we cannot obtain the approval or
permits that we need when we need them, or if they contain unfavorable
conditions, it could substantially impair our ability to sell the SteriMed
System in certain jurisdictions.
INTELLECTUAL PROPERTY
---------------------
We regard certain aspects of our products, processes, services and
technology as proprietary, and we have trademarks and patents for certain
aspects of the SteriMed System. Our ability to compete successfully will depend
in part on our ability to protect our proprietary rights and to operate without
infringing on the proprietary right of others, both in the United States and
abroad. Our proprietary rights to Ster-Cid(R) relate to an exclusive worldwide
license that we had obtained from a third party manufacturer in Europe to
purchase the Ster-Cid(R) disinfectant. The patent positions of medical waste
technology companies generally involve complex legal and factual questions.
While patents are important to our business, the regulatory approvals are more
critical in permitting us to market our products. We may also apply in the
future for patent protection for uses, processes, products and systems that we
develop. There can be no assurance that any future patent that we apply for will
be issued, or that any existing patents issued will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
any competitive advantage, or that third parties will not infringe or
misappropriate our proprietary rights or that third parties will not
independently develop similar products, services and technology. We may incur
substantial costs in defending any patent or license infringement suits or in
asserting any patent or license rights, including those granted by third
parties, the expenditure of which we might not be able to afford. An adverse
determination could subject us to significant liabilities to third parties,
require us to seek licenses from or pay royalties to third parties or require us
to develop appropriate alternative technology. There can be no assurance that
any such licenses would be available on acceptable terms or at all, or that we
could develop alternate technology at an acceptable price or at all. Any of
these events could have a material adverse effect on our business and
profitability.
We may have to resort to litigation to enforce our intellectual property
rights, protect our trade secrets, determine the validity and scope of the
proprietary rights of others, or defend ourselves from claims of infringement,
20
invalidity or unenforceability. Litigation may be expensive and divert resources
even if we win. This could adversely affect our business, financial condition
and operating results such that it could cause us to reduce or cease operations.
Developing products based upon new technologies can result in litigation
based on allegations of patent and other intellectual property infringement.
While no infringement claims have been made or threatened against us, we cannot
assure you that third parties will not assert infringement claims against us in
the future, that assertions by such parties will not result in costly
litigation, or that they will not prevail in any such litigation. In addition,
we cannot assure you that we will be able to license any valid and infringed
patents from third parties on commercially reasonable terms or, alternatively,
be able to redesign products on a cost-effective basis to avoid infringement.
MARKETING
---------
Our future growth and profitability depend in part on our ability to
respond to technological changes and successfully develop and market new
products that achieve significant market acceptance. This industry has been
historically marked by very rapid technological change and the frequent
introductions of new products. There is no assurance that we will be able to
develop new products that will realize broad market acceptance.
Competition
-----------
There are numerous methods of handling and disposing of RMW, of which our
technology is one of the available systems. We are not aware of any competitive
product that is similar to the SteriMed Systems with respect to its design and
compactness. We believe that our SteriMed Systems, due to its ability to be used
on site, the cost basis and ease of use, offers a significant advantage over RMW
systems offered by our competitors. We realize, however, there can be no
assurance that a different or new technology may not supplant us in the market.
Further, we cannot guarantee that in the event that we are successful in the
deployment of our systems in the marketplace, the predominant companies in the
field, which have substantially greater resources and market visibility than us,
will not try to develop similar systems.
FINANCIAL
---------
The malfunction or misuse of our SteriMed Systems may result in damage to
property or persons, as well as violation of various health and safety
regulations, thereby subjecting us to possible liability. Although our insurance
coverage is in amounts and deductibles customary in the industry, there can be
no assurance that such insurance will be sufficient to cover any potential
liability. The Company currently retains a claims made worldwide product
liability insurance policy. Further, in the event of either adverse claim
experience or insurance industry trends, we may in the future have difficulty in
obtaining product liability insurance or be forced to pay very high premiums,
and there can be no assurance that insurance coverage will continue to be
available on commercially reasonable terms or at all. In addition, there can be
no assurance that insurance will adequately cover any product liability claim
against us. A successful product liability, environmental or other claim with
respect to uninsured liabilities or in excess of insured liabilities could have
a material adverse effect on our business, financial condition and operations.
To date, no claims have been made against us. We believe that our insurance
coverage is adequate to cover any claims made, and we review our insurance
requirement with our insurance broker on an annual basis.
Although the Company raised gross proceeds of $1,500,000 in a placement of
convertible secured notes in the third quarter of fiscal 2004, we required
additional working capital in order to develop and grow the business.
Specifically, these funds were required to support our marketing efforts, build
inventory and increase our manufacturing capabilities, as well as obtaining
additional regulatory approvals both domestically and overseas. On February 15,
2005, the Company secured $4.5 million in equity financing before financing fees
and expenses. Notwithstanding, we will continue to evaluate additional funding
options including equipment financing, banking facilities, government-funded
grants and private equity offerings. We may also require funds for future
21
acquisitions that would complement our existing business.
We can expect to incur losses for the immediate foreseeable future.
Additionally, the Company is exposed to currency fluctuations on international
sales and manufacturing which could have an impact on the business. There can be
no assurance that we will ever achieve the level of revenues needed to be
profitable in the future or, if profitability is achieved, that it will be
sustained.
PERSONNEL
---------
Our success is highly dependent on the continued efforts of a small
management team. Should operations expand, we will need to hire persons with a
variety of skills. Competition for these skilled individuals could be intense,
and there can be no assurance that we will be successful in attracting and
retaining key personnel in the future. Our failure to do so could adversely
affect our business and financial condition. We do not have employment
agreements with or carry any "key-man" insurance on the lives of any of our
officers or employees.
ITEM 7. FINANCIAL STATEMENTS
PAGE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS NUMBER
------------------------------------------ ------
Report of Independent Registered Public Accounting Firm F-2
Report of Independent Registered Public Accounting Firm F-3
Consolidated Balance Sheet as of September 30, 2004 F-4
Consolidated Statements of Operations for the years ended
September 30, 2004 and 2003 F-5
Consolidated Statements of Stockholders' Equity (Deficiency)
for the years ended September 30, 2004 and 2003 F-6
Consolidated Statements of Cash Flows for the years ended
September 30, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-8 to F-23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 15, 2004, the Board of Directors and the Audit Committee of
Caprius, Inc. (the "Company"), at special meetings, unanimously resolved to
appoint Marcum & Kliegman LLP ("Marcum"), New York, New York, as the Company's
independent certifying accountants for the fiscal year ending September 30,
2004. Earlier in the day on March 15, 2004, BDO Seidman, LLP ("BDO"), the
independent accountants which had audited the financial statements of the
Company for the year ended September 30, 2003 and prior years thereto, advised
the Company that BDO was resigning as the Company's accountants.
In connection with the audit for the year ended September 30, 2003, and
through March 15, 2004, there were no disagreements with BDO on any matter of
the Company's accounting principles or practices, financial statement disclosure
or auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of BDO, would have caused them to make reference thereto in their
report on the consolidated financial statements for such years.
22
ITEM 8A. 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, 2004 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 subsidiaries are
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 year ended September 30, 2004, 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.
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 February 1, 2005, the directors and executive officers of the Company
were:
Name Age Position
---- --- --------
George Aaron 52 Chairman of the Board,
President and Chief Executive Officer
Jonathan Joels 48 Chief Financial Officer, Treasurer,
Secretary and Director
Elliott Koppel 60 VP Sales and Marketing
Sol Triebwasser, Ph.D. (1)(2) 83 Director
Jeffrey L. Hymes, M.D. (1)(2) 52 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
23
follows:
GEORGE AARON. Mr. Aaron has been Chairman of the Board, President and CEO
of the Company since June 1999. He also served as a Director on the Board of the
Company from 1992 until 1996. From 1992 to 1998, Mr. Aaron was the co-Founder
and CEO of Portman Pharmaceuticals, Inc. and in 1994 co-founded CBD
Technologies, Inc. of which he remains a Director. Mr. Aaron also serves on the
Board of Directors of DeveloGen AG, who recently merged with Peptor Ltd. (the
company that had acquired Portman Pharmaceuticals). From 1983 to 1988, Mr. Aaron
was the Founder and CEO of Technogenetics Inc. (a diagnostic company). Prior to
1983, Mr. Aaron was Founder and Partner in the Portman Group, Inc. and headed
international business development at Schering Plough. 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. and in 1994 co-founded CBD Technologies, Inc.
Mr. Joels' previous experience included serving as a principal in Portman Group,
Inc., CFO of London & Leeds Corp. and Chartered Accountant positions with both
Ernst & Young and Hacker Young between 1977 and 1981. Mr. Joels qualified and
was admitted as a Chartered Accountant to the Institute of Chartered Accountants
in England and Wales in 1981 and holds a BA Honors Degree in Accountancy (1977)
from the City of London.
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 has BS in Commerce from Rider
University.
JEFFREY L. HYMES, M.D. Dr. Hymes has been a Director of the Company since
May, 2004. In 1998, Dr. Hymes co-founded National Nephrology Associates (NNA), a
privately held dialysis company, until its acquisition by Renal Care Group in
April 2004, having served as NNA's President and Chief Medical Officer from 1998
to 2004. Prior to that time, Dr. Hymes was a co-founder of REN Corporation, a
publicly traded dialysis company that was sold to GAMBRO in 1995. Dr. Hymes is
currently the President of Nephrology Associates, P.C., Nashville, TN, a
19-physician nephrology practice. Dr. Hymes is a graduate of Yale College and
received his MD degree from the Albert Einstein College of Medicine of Yeshiva
University.
SOL TRIEBWASSER, PH.D. Dr. Triebwasser has been a Director of the Company's
since 1984. Until 1996, Dr. Triebwasser was Director of Technical Journals and
Professional Relations for the IBM Corporation in Yorktown Heights New York and
currently a Research Staff member emeritus. Since receiving his Ph.D. in physics
from Columbia 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 either in person or telephonically 6 times in
fiscal 2004. 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
24
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. The Audit Committee was involved in the selection of new auditors for
Fiscal 2004. The Audit Committee met 5 times during Fiscal 2004.
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
Directors who are employees of the Company are not paid any fees or
additional compensation for services as members of the Company's Board of
Directors or any committee thereof. In October 2002, 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. Additionally,
the board approved that effective October 2002, the non- employee director's fee
would be $20,000 per annum. In May 2004, the Board resolved that any new
non-employee Board members would be entitled to an annual fee of $5,000 and
75,000 options under the Company's 2002 Stock Option plan. Upon his appointment
to the Board, Dr. Jeffrey Hymes received the non-employees director fee of
$5,000, payable annually, and was granted options to purchase 75,000 shares of
common stock exercisable at $0.20 per share, vesting one third on the grant date
and the balance vesting over a two year period in equal installments.
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, 2004, 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 $100,000 for services performed during
the year ended September 30, 2004.
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
Awards Payouts
------ -------
Securities
Other Restricted Underlying
Name and Annual Stock Options LTIP All Other
Principal Salary Bonus Compensation Award(s) SARs Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) ($)
----------------------------------------------------------------------------------------------------------------------
George Aaron 2004 240,000 -0- -0- -0- -0- -0- -0-
President/CEO 2003 240,000 160,000 -0- -0- 300,000 -0- -0-
2002 160,000 -0- -0- -0- -0- -0- -0-
2001 160,000 -0- -0- -0- -0-
----------------------------------------------------------------------------------------------------------------------
25
----------------------------------------------------------------------------------------------------------------------
Jonathan Joels 2004 176,000 -0- -0- -0- -0- -0- -0-
CFO 2003 176,000 112,000 -0- -0- 300,000 -0- -0-
2002 112,000 -0- -0- -0- -0- -0- -0-
2001 112,000 -0- -0- -0- -0- -0- -0-
----------------------------------------------------------------------------------------------------------------------
Elliott Koppel 2004 92,000 -0- -0- -0- -0- -0- -0-
2003 92,000 28,000 -0- -0- 100,000 -0- -0-
----------------------------------------------------------------------------------------------------------------------
As of September 30, 2004, 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 $700 per month for
automobile expenses plus normal automobile expenses excluding insurance. Messrs.
Aaron, Joels and Koppel are reimbursed for other expenses incurred by them on
behalf of the Company in accordance with Company policies,
The Company does not have any annuity, retirement, pension or deferred
compensation plan or other arrangements under which any executive officers are
entitled to participate without similar participation by other employees. As of
September 30, 2004, under the Company's 401 (k) plan there was no matching
contribution by the Company.
Individual
Grants
(a) (b) (c) (d) (e)
% of
Number of Total
Securities Options/
Name Underlying SARS Exercise
Options/ Granted to on Base Expiration
SARs Employee(s) Price Date
Granted (#) in Fiscal ($/Sh)
Year
--------------------------------------------------------------------------------
George Aaron -0- -0- -0- -0-
Jonathan Joels -0- -0- -0- -0-
Elliott Koppel -0- -0- -0- -0-
--------------------------------------------------------------------------------
FISCAL YEAR END OPTION VALUE
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT SEPT. 30, 2004 AT SEPT. 30, 2004
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE ($)
---- ------------------------- ---------------
George Aaron 300,000/100,000 $-0-
Jonathan Joels 300,000/100,000 $-0-
Elliott Koppel 366,667/33,333 $-0-
26
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 our Board of Directors
adopted the 2002 Stock Option Plan ("2002 Plan") which was ratified at our
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, we granted a total of 961,000 options to our 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 were priced at $0.15 per share, vested one third on the grant date and
the balance vests over a two year period in equal installments. During May 2004,
75,000 options priced at $0.20 were granted to Dr. Jeffrey Hymes. These options
vested one third on the grant date with the balance vesting over a two year
period in equal installments. All of these options expire 10 years after the
date of grant and were granted at fair market value or higher at time of grant.
During 1993, we adopted an 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During Fiscal 2004 members of the Company's Compensation/Option Committee
were Sol Triebwasser, Ph.D. and Jeffrey Hymes, M.D., neither is an executive
officer or employee of the Company or its subsidiaries.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of February 1, 2005, 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:
Amount and Nature Amount and Nature
of Beneficial of Beneficial Percentage of
Name of Position with Ownership(1) Ownership(1) Securities
Beneficial Owner* Company of Common Stock of Preferred Stock ***
----------------------------------------------------------------------------------------------------------------------
Shrikant Mehta None 4,917,898 - 23.26%
Combine International
354 Indusco Court
Troy, Michigan 48083
27
George Aaron Chairman of the Board; 3,898,589(2) - 18.6%
Chief Executive Officer;
President
Jonathan Joels Director; Chief 3,810,739(3) - 18.17%
Financial Officer;
Treasurer; Secretary
General Electric Company None 1,159,793(4) 27,000 5.37%
Medical Services Division (100%)
3000 No. Grandview Blvd.
Waukesha, WI 53188
Elliott Koppel VP Sales & Marketing 549,234(5) - 2.63%
Sol Triebwasser, Ph.D. Director 113,400(6) - **
Jeffrey L. Hymes, M.D. Director 25,000(7) - **
All executive officers and 8,396,962(8) 31.81%
Directors as a group
(5 persons)
---------------------------
* Address of all holders except Mr. Mehta and General Electric Company is c/o
Caprius Inc., One Parker Plaza, Fort Lee, NJ 07024
** Less Than one percent (1%)
*** Does not include the Series B Preferred Stock, as it is non-voting except
on matters directly related to such series.
(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, 2004
pursuant to stock options, warrants and convertible securities.
(2) Includes (i) 7,050 shares in retirement accounts, (ii) 117,500 shares
underlying warrants presently exercisable, (iii) 100 shares jointly owned
with his wife and (iv) 400,000 shares underlying options presently
exercisable.
(3) Includes (i) 960,000 shares as trustee for his children, (ii) 110,000
shares underlying warrants presently exercisable, (iii) 17,500 shares
underlying warrants owned by his wife for which he disclaims beneficial
ownership, (iv) 400,000 shares underlying options presently exercisable.
(4) Includes 1,159,793 shares underlying 27,000 shares of Series B Preferred
Stock.
(5) Includes (i) 73,334 shares underlying warrants and (ii) 400,000 shares
underlying options presently exercisable.
(6) Includes 112,000 shares underlying options presently exercisable.
(7) Includes 25,000 shares underlying options presently exercisable and
excludes 50,000 shares underlying options which are currently not
exercisable.
(8) Includes (i) 300,834 shares underlying warrants and (ii) 1,337,000 shares
underlying options presently exercisable.
28
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the first two quarters of fiscal year 2005, the Company was advanced
the principal amount of approximately $146,000 through short term loans until
additional equity funding is secured. The terms of the loans are identical to
the terms of the $100,000 8% Senior Secured Convertible Promissory Note. These
short-term loans were provided by executive officers, Messrs. Aaron, Joels, and
Koppel who advanced approximately $64,000 $62,500, and $19,500 respectively.
These funds are being utilized for general working capital purposes (see Note M
to the consolidated Financial Statements herein).
During the second quarter of fiscal 2004, the Company authorized short-term
bridge loans for an aggregate of $500,000 through the issuance of loan notes due
on July 31, 2005. The funds were utilized primarily for working capital. The
majority of the funds were 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 from Seradyn, in accordance with their Royalty Agreement.
For every three dollars ($3.00) loaned, the lender received two warrants, each
to purchase one share of our 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 conducted business with The P.O.M. Group, Inc.
("POM") located in Michigan. MCM was introduced to POM by Shirkant Mehta, who
was a Caprius director from April 2000 to February 2004 and who beneficially
owns approximately 23.3% of our common stock. Mr. Mehta is also a principal
shareholder in POM. POM has significantly assisted MCM in the design,
manufacture and longevity of certain key components of the MCM SteriMed System.
To date, we have paid POM $36,845 for design work, purchased components and
disposables.
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 us 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 we were unable to reach mutually satisfactory terms
with Mr. Mehta as to the terms of the line of credit, in February 2004, Mr.
Mehta was relieved from his obligation under the line of credit and the warrants
that had been granted to him were cancelled. Additionally, Mr. Mehta had
previously 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 us
relieving Mr. Mehta of his obligations for the line of credit, Mr. Mehta waived
his rights with respect to the deferred payments we may have owed to him 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 our 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.
The independent directors have authorized the Company to advance the legal
expenses of Messrs. Aaron and Joels in the litigations described in
"Business-Litigation," subject to review of the legal bills and in compliance
29
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, 2004.
We believe that each of the above referenced transactions was made on terms
no less favorable to us than could have been obtained from an unaffiliated third
party. Furthermore, any future transactions or loans between us and our
officers, directors, principal stockholders or affiliates will be on terms no
less favorable to us than could be obtained from an unaffiliated third party,
and will be approved by a majority of disinterested directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
All references to Registrant's Forms 8-K, 10-K, 10-QSB and 10-KSB include
reference to File No. 0-11914.
2.1 Agreement and Plan of Merger, dated January 20, 1997, by and among
Registrant, Medial 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 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. 033-40201) ("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, filed October 9, 1997(File No. 333-37481)).
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")).
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 the
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).
30
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, filed July 26, 2000
(File No. 333-42222)).
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 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 the 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 the
Registrant's Form 8-K, filed September 2, 1997).
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
31
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).
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 8-K).
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 8-K).
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
32
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 8-K")).
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, dated as of September 30, 2003
(incorporated by reference to Exhibit 10.3 to Registrant's October 2003
Form 8-K).
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 8-K).
10.11.1 Securities Purchase Agreement, among Registrant and investors dated as
of April 26, 2004 (incorporated by reference to Exhibit 10.1 to
Registrant's Form 8-K for an event of April 27, 2004 (the "April 2004
Form 8-K")).
10.11.2 Form of 8% Senior Secured Convertible Promissory Note (incorporated by
reference to Exhibit 10.2 to Registrant's April 2004 Form 8-K).
10.11.3 Security and Pledge Agreement by the Registrant in favor of CAP Agent
Associates, LLC, dated April 26, 2004 (incorporated by reference to
Exhibit 10.3 to Registrant's April 2004 Form 8-K).
10.11.4 Registration Rights Agreement, dated April 26, 2004, between Registrant
and the purchasers of the Notes, and Sands Brothers International Ltd.
("SBIL") (incorporated by reference to Exhibit 10.4 to Registrant's
April 2004 Form 8-K).
10.11.5 Dealer Agreement, dated April 12, 2004, between Registrant and SBIL
(incorporated by reference to Exhibit 10.5 to Registrant's April 2004
Form 8-K).
10.11.6 Common Stock Purchase Warrant Agreement, dated April 26, 2004, between
Registrant and SBIL (incorporated by reference to Exhibit 10.6 to
Registrant's April 2004 Form 8-K).
10.12.1 Form of Secured Promissory Note issued for the short-term Bridge Loans
(incorporated by reference to Exhibit 10.11.1 Registrant's Form 10-KSB
for fiscal year ended September 30, 2003 (the "2003 Form 10-KSB")).
33
10.12.2 Form of Common Stock Purchase Warrant relating to the short-term Bridge
Loans (incorporated by reference to Exhibit 10.11.2 to Registrant's
2003 Form 10-KSB).
10.12.3 Form of Guaranty and Security Agreement relating to the short-term
Bridge Loans (incorporated by reference to Exhibit 10.11.3 to
Registrant's 2003 Form 10-KSB).
10.13 Letter on change in certifying accountant from BDO Seidman, LLP,
addressed to the Securities and Exchange Commission, dated March 19,
2004 (incorporated by reference to Exhibit 16.1 to Registrant's Form
8-K filed March 19, 2004).
21* List of Company's subsidiaries
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. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-----------------------------------------------------------
September 30,
-----------------------------------------------------------
2004 2003
-----------------------------------------------------------
AUDIT FEES $ 104,000 $ -0-
-----------------------------------------------------------
TAX FEES $ -0- $ -0-
-----------------------------------------------------------
AUDIT RELATED FEES $ 12,518 $ -0-
--------- ------
-----------------------------------------------------------
TOTAL FEES $ 116,518 $ -0-
========= ======
-----------------------------------------------------------
During the current fiscal year, the Company changed accountants. The Audit
Fees as stated above represent professional services rendered in regards to the
Company's 10-KSBs and 10-QSBs filings. Audit Related Fees as stated above
represent fees paid by the Company for products and services provided other than
those reported above, including the SB-2/SB-2A.
34
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 15th day of
February 2005.
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 15, 2005
---------------------- President and CEO
George Aaron
/s/Jonathan Joels Director, CFO and Treasurer February 15, 2005
----------------------
Jonathan Joels
/s/Jeffrey L. Hymes Director February 15, 2005
----------------------
Jeffrey L. Hymes, M.D.
/s/Sol Triebwasser Director February 15, 2005
----------------------
Sol Triebwasser, Ph.D.
35
Exhibit 31.1
CERTIFICATION
I, George Aaron, President & CEO, certify that:
1. I have reviewed this annual report on Form 10-KSB of Caprius, Inc.
(the "Registrant").
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this
report.
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
Registrant and have:
a) Designed such disclosure controls and procedures, or caused
such controls and procedures to be designed under our
supervision, to ensure that material information relating to
the Registrant, including its consolidated subsidiaries, are
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the Registrant's
internal control over financial reporting that occurred during
the Registrant's most recent fiscal quarter (the Registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over the financial
reporting.
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors:
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
Registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: February 15, 2005 /s/ George Aaron
----------------
George Aaron
President & CEO
36
Exhibit 31.2
CERTIFICATION
I, Jonathan Joels, Chief Financial Officer, certify that:
1. I have reviewed this annual on Form 10-KSB of Caprius, Inc. (the
"Registrant").
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this
report.
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
Registrant and have:
a) Designed such disclosure controls and procedures, or caused
such controls and procedures to be designed under our
supervision, to ensure that material information relating to
the Registrant, including its consolidated subsidiaries, are
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the Registrant's
internal control over financial reporting that occurred during
the Registrant's most recent fiscal quarter (the Registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over the financial
reporting.
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors:
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
Registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: February 15, 2005 /s/Jonathan Joels
-----------------
Jonathan Joels
Treasurer and Chief Financial Officer
37
Exhibit 21
LIST OF REGISTRANT'S ACTIVE SUBSIDIARIES
M.C.M. ENVIRONMENTAL TECHNOLOGIES, INC.
Delaware Corporation
62.53% owned
M.C.M. ENVIRONMENTAL TECHNOLOGIES, LTD.
Israeli Corporation
100% owned by M.C.M. Environmental Technologies, Inc.
38
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Caprius, Inc. (the "Company") on Form
10-KSB for the period ending September 30, 2004 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, George Aaron,
President and Chief Executive Officer, certify, pursuant to 18 U.S.C. ss.1350,
as adopted pursuant to ss.906 of the Sarbanes-Oxley Act, that:
(1) The report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/George Aaron
-------------------------------------
George Aaron
President and Chief Executive Officer
February 15, 2005
39
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Caprius, Inc. (the "Company") on Form
10-KSB for the period ending September 30, 2004 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Jonathan Joels,
Treasurer and Chief Financial Officer, certify, pursuant to 18 U.S.C. ss.1350,
as adopted pursuant to ss.906 of the Sarbanes-Oxley Act, that:
(1) The report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/Jonathan Joels
-----------------
Jonathan Joels
Treasurer and CFO
February 15, 2005
40
CAPRIUS, INC. AND SUBSIDIARIES
I N D E X
----------------------------------------------------------------- --------------
PAGE
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Report of Independent Registered Public Accounting Firm F-2
----------------------------------------------------------------- --------------
----------------------------------------------------------------- --------------
Report of Independent Registered Public Accounting Firm F-3
----------------------------------------------------------------- --------------
----------------------------------------------------------------- --------------
Consolidated Balance Sheet as of September 30, 2004. F-4
----------------------------------------------------------------- --------------
----------------------------------------------------------------- --------------
Consolidated Statements of Operations for the years ended F-5
September 30, 2004 and 2003.
----------------------------------------------------------------- --------------
----------------------------------------------------------------- --------------
Consolidated Statements of Stockholders' Equity (Deficiency) F-6
for the years ended September 30, 2004 and 2003.
----------------------------------------------------------------- --------------
----------------------------------------------------------------- --------------
Consolidated Statements of Cash Flows for the years ended F-7
September 30, 2004 and 2003.
----------------------------------------------------------------- --------------
----------------------------------------------------------------- --------------
Notes to the Consolidated Financial Statements. F-8 - F-23
----------------------------------------------------------------- --------------
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
The Board of Directors and Stockholders
Caprius, Inc.
We have audited the accompanying consolidated balance sheet of Caprius, Inc. and
Subsidiaries (the "Company") as of September 30, 2004, and the related
consolidated statements of operations, stockholders' deficiency, and cash flows
for the year 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 the Company as of
September 30, 2004, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
Marcum & Kliegman LLP
New York, New York
November 16, 2004, except for Note M(1)
which is as of December 1, 2004, Note M(2)
which is as of February 2, 2005, and Note M(4)
and Note M(5) which are as of February 15, 2005
F-2
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Caprius, Inc.
We have audited the accompanying consolidated statement of operations,
stockholders' equity, and cash flows of Caprius, Inc. and subsidiaries for the
year ended September 30, 2003. 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 audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations of Caprius,
Inc. and subsidiaries and their cash flows for the year ended September 30, 2003
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 G (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
F-3
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 27,583
Accounts receivable, net of reserve for bad debts of $5,163 73,483
Inventories, net 710,518
Due from sale of Strax 66,000
Deferred financing cost, net of accumulated amortization of $63,958 89,542
Other current assets 15,222
-------------
Total current assets 982,348
-------------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 166,019
Equipment for lease 142,843
Leasehold improvements 19,302
-------------
328,164
Less: accumulated depreciation 192,750
-------------
Property and equipment, net 135,414
-------------
OTHER ASSETS:
Goodwill 737,010
Intangible assets,net 545,250
Other 13,330
-------------
Total other assets 1,295,590
-------------
TOTAL ASSETS $ 2,413,352
=============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Secured convertible notes, net of unamortized
discount of $150,000 $ 1,350,000
Notes payable - related party, net of unamortized
discount of $15,220 484,780
Accounts payable 915,116
Accrued expenses 376,650
Accrued compensation 185,992
-------------
Total current liabilities 3,312,538
-------------
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - Series A, none; Series B,
convertible,
27,000 shares. Liquidation preference $2,700,000 2,700,000
Common stock, $.01 par value
Authorized - 50,000,000 shares, issued 20,469,062 shares
and outstanding 20,446,562 shares 204,691
Additional paid-in capital 67,837,158
Accumulated deficit (71,638,785)
Treasury stock (22,500 common shares, at cost) (2,250)
-------------
Total stockholders' deficiency (899,186)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,413,352
=============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended
---------------------------------------------
September 30, 2004 September 30, 2003
------------------ ------------------
REVENUES:
Product sales $ 766,119 $ 501,879
Equipment rental income 69,342 48,700
Consulting fees 50,000 50,000
------------ ------------
Total revenues 885,461 600,579
------------ ------------
OPERATING EXPENSES:
Cost of product sales and equipment rental income 618,944 357,708
Research and development 283,697 122,116
Selling, general and administrative 3,020,212 4,155,660
------------ ------------
Total operating expenses 3,922,853 4,635,484
------------ ------------
Operating loss (3,037,392) (4,034,905)
Interest expense, net (212,571) (17,962)
------------ -------------
Loss from continuing operations (3,249,963) (4,052,867)
Income from operations of discontinued TDM business
segment(including gain on disposal of $3,214,189
in October 2002) - 3,287,587
Loss from operations of discontinued Strax Business
(including gain on disposal of $125,658
at September 30, 2003) (105,806) (18,830)
---------------------------------------
Loss before minority interest (3,355,769) (784,110)
Loss applicable to minority interest - 459,906
------------ ------------
Net loss $ (3,355,769) (324,204)
============ ============
Net loss per basic and diluted common share
Continuing operations $ (0.16) $ (0.18)
Discontinued operations - 0.16
------------ ------------
Net loss per basic and diluted common share $ (0.16) $ (0.02)
============ ============
Weighted average number of common shares outstanding,
basic and diluted 20,446,562 20,402,315
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Series B Convertible
Preferred Stock Common Stock
-----------------------------------------------------------------
Number Number
of Shares Amount of Shares Amount
-----------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2002 27,000 $ 2,700,000 20,419,062 $ 204,191
Exercise of options - - 50,000 500
Net loss - - - -
-----------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 27,000 2,700,000 20,469,062 204,691
Fair value of warrants issued in connection
with bridge financing - related parties
Fair value of warrants issued in connection
with secured convertible notes
Benefical conversion feature in
connection with secured convertible notes
NET LOSS
-----------------------------------------------------------------
BALANCE, SEPT 30, 2004 27,000 $ 2,700,000 20,469,062 204,691
=================================================================
TABLE CONTINUED
Treasury Stock
---------------------------------------------------------------------------------------
Additional Total
Paid-in Accumulated Number Stockholders'
Capital Deficit of Shares Amount Equity (Deficiency)
---------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2002 $67,579,258 $(67,958,812) 22,500 $(2,250) $2,522,387
Exercise of options 2,000 - - - 2,500
Net loss - (324,204) - - (324,204)
---------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 67,581,258 (68,283,016) 22,500 (2,250) 2,200,683
Fair value of warrants issued in connection 27,400 27,400
with bridge financing - related parties
Fair value of warrants issued in connection 28,500 28,500
with secured convertible notes
Benefical conversion feature in 200,000 200,000
connection with secured convertible notes
NET LOSS (3,355,769) (3,355,769)
---------------------------------------------------------------------------------------
BALANCE, SEPT 30, 2004 $67,837,158 $(71,638,785) 22,500 $(2,250) $(899,186)
=======================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
2004 2003
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(3,355,769) $ (324,204)
Adjustments to reconcile net loss to net cash used
in 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)
Bad debt expense 77,381 -
Amortization of debt discount 73,617 30,962
Amortization of deferred financing cost 63,958 -
Depreciation and amortization 350,181 271,164
Write-off of other receivable 101,992 -
Changes in operating assets and liabilities:
Accounts receivable, net 6,177 (272,363)
Inventories 109,966 (603,012)
Other assets (38,580) (58,338)
Accounts payable and accrued expenses (231,286) (303,512)
----------- ----------
Net cash used in operating activities (2,842,363) (5,059,056)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of TDM business - 6,000,000
Proceeds from sale of Strax business 268,629 -
Acquisition of property and equipment (48,502) -
Acquisition of MCM, net of cash acquired
(including loans to MCM) - (88,875)
----------- ----------
Net cash provided by investing activities 220,127 5,911,125
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 2,500
Proceeds from issuance of notes payable 500,000 -
Proceeds from issuance of secured convertible notes 1,500,000 -
Financing fees in connection with secured
convertible notes (125,000) -
Repayment of debt and capital lease obligations - (585,032)
------------ ----------
Net cash provided by (used in) financing activities 1,875,000 (582,532)
----------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (747,236) 269,537
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 774,819 505,282
----------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 27,583 774,819
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 25,697 29,270
=========== ==========
NON CASH TRANSACTIONS:
Sale of Strax Business in exchange for note receivable $ - 412,000
=========== ==========
Issuance of warrants attached with debt issuance $ 55,900 -
=========== ==========
Beneficial conversion feature in connection
with debt issuance $ 200,000 $ -
======================================
The accompanying notes are an integral part of these consolidated financial statements.
F-7
(NOTE A) - Business and Basis of Presentation
---------------------------------------------
Caprius, Inc. and Subsidiaries ("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.
The Company has business operations located in Israel. Although the region
is considered to be economically stable, it is always possible that
unanticipated events in foreign countries could disrupt the Company's
operations.
During the fiscal year ended September 30, 2004, and September 30, 2003 the
Company's operations were the medical waste business. As discussed in Notes I &
K, 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, 2004 and 2003.
(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
Accounting for Revenue Arrangements with Multiple Deliverables" was effective
for the Company beginning July 1, 2003, and did not have a material effect on
the Company's results of operations.
F-8
[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] Allowance for Doubtful Accounts:
The Company recognizes an allowance for doubtful accounts to ensure that
accounts receivable are not overstated due to uncollectibility. Bad debt
reserves are maintained for all customers based on a variety of factors,
including the length of time the receivables are past due, significant one-time
events and historical experience. An additional reserve for individual accounts
is recorded when the Company becomes aware of a customer's inability to meet its
financial obligation, such as in the case of bankruptcy filings or deterioration
in the customer's operating results or financial position. If the circumstances
related to customers change, estimates of the recoverability of receivables
would be further adjusted.
[5] Product Warranties
The estimated future warranty obligations related to the product sales are
provided by charges to operations in the period in which the related revenue is
recognized. The basic warranty covers parts and labor for one year, thereafter
extended warranties are available. These charges were deemed to be immaterial in
each of the years ended September 30, 2004 and 2003.
[6] Shipping and Handling Costs
The Company includes shipping and handling costs in the statement of
operations as part of cost of sales. These costs were deemed immaterial for the
years ended September 30, 2004 and 2003.
[7] Inventories
Inventories are accounted for at the lower of cost or market using the
first-in, first-out ("FIFO") method. The Company's policy is to reserve or write
-off surplus or obsolete inventory. Inventory is comprised of materials, labor
and manufacturing overhead costs.
[8] 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.
Expenditures for maintenance and repairs that do not improve or extend the life
of the expected assets are expensed to operations, while expenditures for major
upgrades to existing inventory are capitalized.
Asset Classification Useful Lives
-------------------- ------------
Office furniture and equipment 3-5 years
Leasehold improvements Term of Lease
Equipment for lease 5 years
[9] Impairment of 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.
[10] Goodwill and Other Intangibles
The Company has adopted the provisions of SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS
No. 141 is effective as to any business combination occurring after June 30,
2001 and certain transition provisions that affect accounting for business
combinations prior to June 30, 2001 are effective as of the date SFAS No. 142 is
applied in its entirety. Goodwill relating to acquisitions completed subsequent
F-9
to June 30, 2001 is not amortized and is subject to impairment testing. In
addition, effective January 1, 2002, the Company will no longer be required to
amortize goodwill and certain other intangibles assets relating to acquisitions
completed prior to July 1, 2001.
SFAS No. 142 provides, among other things, that goodwill and intangible
assets with indeterminate lives shall not be amortized. Goodwill shall be
assigned to a reporting unit and annually tested for impairment. Intangible
assets with determinate lives shall be amortized over their estimated useful
lives, with the useful lives reassessed continuously, and shall be assessed for
impairment under the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Goodwill is
also assessed for impairment on an interim basis when events and circumstances
warrant. The Company assesses whether an impairment loss should be recognized
and measured by comparing the fair value of the "reporting unit" to the carrying
value, including goodwill. If the carrying value exceeds fair value, then the
Company will compare the implied fair value of the goodwill (as defined in SFAS
No. 142) to the carrying amount of the goodwill. If the carrying amount of the
goodwill exceeds the implied fair value, then the goodwill will be adjusted to
the implied fair value. At September 30, 2004, goodwill results from the excess
of cost over the fair value of net assets acquired related to the MCM business.
[11] 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. Diluted loss per share reflects the
potential dilution that could occur through the effect of common shares issuable
upon the exercise of stock options, warrants and convertible securities. For the
year ended September 30, 2004, potential common shares amount to 17,184,465
shares, as compared to 6,854,917 for the year ended September 30, 2003 and have
not been included in the computation of diluted loss per share since the effect
would be antidilutive.
[12] Income Taxes
The Company provides for federal and state income taxes currently payable,
as well as for those deferred because of timing differences between reporting
income and expenses for financial statement purposes versus tax purposes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recoverable or settled. The effect of a
change in tax rates is recognized as income or expense in the period of the
change. A valuation allowance is established, when necessary, to reduce deferred
income tax assets to the amount that is more likely than not to be realized.
[13] Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, 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.
[14] Fair Value of 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 debt approximate fair value as the
notes bear interest at current market rates.
F-10
[15] Reclassifications
Certain reclassifications have been made to prior period amounts to conform
to the current year presentation.
[16] 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
in the period in which they occur. Exchange gains and losses included in the
accompanying consolidated statements of operations are $280 and $24,267 for the
years ended September 30, 2004 and 2003.
[17] Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after December 15, 2003. In December 2003, the FASB issued
Interpretation No. 46(R) ("FIN 46R") which revised certain provisions of FIN 46.
Publicly reporting entities that are small business issuers must apply FIN 46R
to all entities subject to FIN 46R no later than the end of the first reporting
period that ends after December 15, 2004 (as of December 31, 2004, for a
calendar year enterprise) The effective date includes those entities to which
FIN 46 had previously been applied. However, prior to the application of FIN
46R, a public entity that is a small business issuer shall apply FIN 46 or FIN
46R to those entities that are considered special-purpose entities no later than
as of the end of the first reporting period that ends after December 15, 2003.
The Company does not have any entities that require disclosure or new
consolidation as a result of adopting the provisions of FIN 46(R).
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 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.
In December 2003, a revision of SFAS 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits" was issued, revising disclosures
about pension loans and other post retirements benefits plans and requiring
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. The Company expects that the adoption of the new statement
will not have a significant impact on its financial statements.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an
amendment of ARB No. 43, Chapter 4. The amendments made by Statement 151 clarify
that abnormal amounts of idle facility expense, freight, handling costs, and
F-11
wasted materials (spoilage) should be recognized as current-period charges and
require the allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal
years beginning after November 23, 2004. The Company is in the process of
evaluating whether the adoption of SFAS 151 will have a significant impact on
the Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions." The amendments made by Statement 153 are based on the principle
that exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the narrow exception
for nonmonetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Previously, Opinion 29 required that the accounting for an
exchange of a productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded
amount of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The Board believes that exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the Board believes
this Statement produces financial reporting that more faithfully represents the
economics of the transactions. The Statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. The Company has evaluated the impact of the
adoption of SFAS 153, and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment" Statement 123(R) will provide investors and other users of financial
statements with more complete financial information by requiring that the
compensation cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. Statement 123(R) covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. Statement 123, as originally issued in 1995,
established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
that are small business issuers will be required to apply Statement 123(R) as of
the first interim or annual reporting period that begins after December 15,
2005. The Company has evaluated the impact of the adoption of SFAS 123(R), and
does not believe the impact will be significant to the Company's overall results
of operations or financial position.
[18] 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, 2004 and
2003. The assumptions used during the years ended September 30, 2004 and 2003
were as follows:
F-12
---------------------------------------------- -------------------------------
SEPTEMBER 30,
---------------------------------------------- -------------------------------
2004 2003
---- ----
---------------------------------------------- ---------------- --------------
Risk free interest rate 4.00 - 5.00% 5.00%
---------------------------------------------- ---------------- --------------
Expected dividend yield -- --
---------------------------------------------- ---------------- --------------
Expected lives 10 years 10 years
---------------------------------------------- ---------------- --------------
Expected volatility 29 - 80% 80%
---------------------------------------------- ---------------- --------------
Weighted average value of grants per share $0.09 $0.10
---------------------------------------------- ---------------- --------------
Weighted average remaining contractual life 7.3 5.9
of options outstanding (years)
---------------------------------------------- ---------------- --------------
The pro forma effect of applying FAS No. 148 would be as follows:
---------------------------------------------- -------------------------------
FOR THE YEARS ENDED
---------------------------------------------- -------------------------------
SEPTEMBER 30,
---------------------------------------------- ---------------- --------------
2004 2003
---------------------------------------------- ---------------- --------------
Net Loss, as reported $(3,355,769) $(324,204)
---------------------------------------------- ---------------- --------------
Add: Stock based employee compensation
expense, included in reported loss. -- --
---------------------------------------------- ---------------- --------------
Less: Stock-based employee compensation as
determined under fair value based method
for all awards. (56,371) (112,544)
--------------- -- ---------
---------------------------------------------- ---------------- --------------
Pro forma net loss $(3,412,140) $(436,748)
============ ==========
---------------------------------------------- ---------------- --------------
---------------------------------------------- ---------------- --------------
Net Loss per share:
---------------------------------------------- ---------------- --------------
Basic and diluted - as reported $ (0.16) $ (0.02)
---------------------------------------------- ---------------- --------------
Basic and diluted - pro forma $ (0.17) $ (0.02)
---------------------------------------------- ---------------- --------------
[19] 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. The Company purchases a
substantial amount of its inventory products from one principal supplier. If in
the future the supplier were to cease to supply these inventory products,
management believes there are alternative vendors available to meet its
inventory requirements. For the year ended September 30, 2004, two customers
accounted for approximately 56% and 16% of the consolidated total revenue,
respectively. Accounts receivable due from these customers as of September 30,
2004 was $45,267 and $0. For the year ended September 30, 2003, one customer
accounted for approximately 30% of the consolidated total revenue.
The Company maintains cash deposits with financial institutions, which from
time to time may exceed federally insured limits. The Company has not
experienced any losses and believes it is not exposed to any significant credit
risk from cash. At September 30, 2004, the Company did not have cash balances on
deposit that exceeded the federally insured limits.
[20] Intangible Assets
Intangible assets consisted of technology, customer relationships and
permits, and are amortized on a straight-line basis over their estimated useful
lives of three to five years. The carrying value of intangible assets will be
reviewed annually by the Company to ensure that impairments are recognized when
the future operating cash flows expected to be derived from such intangible
assets are less than carrying value. Total amortization expense related to the
F-13
other intangible assets for each of the years ended September 30, 2004 and 2003
were approximately $281,300 and $213,417, respectively.
-------------------------- ------------- ------------------- ------------------
ACCUMULATED SEPT 30,2004
-------------------------- ------------- ------------------- ------------------
ASSET TYPE COST AMORTIZATION NET BOOK VALUE
---------- ---- ------------ --------------
-------------------------- ------------- ------------------- ------------------
Technology $550,000 $320,833 $229,167
-------------------------- ------------- ------------------- ------------------
Patents 290,000 103,917 186,083
-------------------------- ------------- ------------------- ------------------
Customer Relationships 200,000 70,000 130,000
------- ------ -------
-------------------------- ------------- ------------------- ------------------
$1,040,000 $494,750 $545,250
========== ======== ========
-------------------------- ------------- ------------------- ------------------
-------------------------- ------------- ------------------- ------------------
Expected amortization over the next four years is as follows:
FISCAL PERIOD AMORTIZATION
2005 281,333
2006 143,834
2007 98,000
2008 22,083
--------
$545,250
--------
(NOTE C) -Inventories
---------------------
Inventories consist of the following:, net of reserves of approximately
$34,200 for the year ended September 30, 2004:
Raw materials $273,942
Finished goods 436,576
--------
$710,518
(NOTE D) - Notes Payable and Line of Credit
-------------------------------------------
During the third quarter of fiscal 2004, the Company raised an aggregate of
$1.5 million through the issuance of 8% Senior Secured Convertible Promissory
Notes ("the Notes"), prior to underwriting fees and expenses. The proceeds were
used for general working capital. The Company granted a security interest in
substantially all of the assets of the Company. The Notes mature in one year and
can be converted into shares of common stock at the election of the investor at
any time using a conversion price of $0.20 per share. If certain conditions are
not met as of September 30, 2004, then the conversion price shall be reduced to
$0.15 per share. The beneficial conversion feature of the Notes, amounted to
$200,000 and as such the amount shall be treated as a discount to debt and a
corresponding increase to paid in capital. This amount shall be amortized over
the life of the loan. Amortization for the year ended September 30, 2004
amounted to $50,000, and that amount is included in interest expense, net in the
consolidated statement of operations. The financing was arranged through Sands
Brothers International Ltd. ("Sands") which has been retained by the Company to
act as selected dealer for the sale and issuance of the Notes. Based upon the
funds raised, Sands received a six percent fee and an expense allowance of one
percent of the gross proceeds and warrants were valued at $28,500 using the
Black Scholes Model to purchase 1,425,000 shares of the Company's common stock
at an exercise price of $0.28 per share for a period of five years. The total
fees for the offering were $125,000. The debt issuance costs are being amortized
over the term of the loan. Amortization for the year ended September 30, 2004
amounted to $63,958, and that amount is included in interest expense, net in the
consolidated statement of operations.
Notes Payable - Related Party
During the second quarter of fiscal 2004, the Company authorized a
short-term bridge loan for an aggregate of $500,000 through the issuance of loan
notes due on July 31, 2005. The funds were utilized primarily for general
working capital. The majority of the funds were provided by management of the
Company. The loan notes bear interest at a rate of 11% per annum and are secured
F-14
by a first lien on any royalties received by 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 Common Stock,
exercisable at $0.25 per share for a period of five years. The warrants were
valued at $27,400 using the Black Scholes Model and such amount was treated as a
discount to debt and a corresponding increase to paid in capital. The discount
is being amortized over the life of the loan. For the year ended September 30,
2004, the Company recorded an additional interest expense related to this
discount of approximately $12,200, and that amount is included in interest
expense, net in the consolidated statement of operations.
Line of Credit - Related Party
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 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 the warrants granted to him were cancelled.
(NOTE E) - Employee Benefits
----------------------------
The Company sponsors a Qualified Retirement Plan under section 401(k) of
the Internal Revenue Code. Caprius employees become eligible for participation
after completing 3 months of service and attaining the age of twenty-one. For
the years ended September 30, 2004 and 2003 the Company has not adopted a
matching option to the plan.
(NOTE F) - Income Taxes
-----------------------
At September 30, 2004, the Company had a deferred tax asset totaling
approximately $13,560,000, due primarily to net operating loss carryovers. A
valuation allowance was recorded in 2004 for the full amount of this asset due
to uncertainty as to the realization of the benefit. The change in the valuation
allowance in 2004 increased by approximately $970,000.
The Company files its tax return on a consolidated basis, US tax rules
prohibit the consolidation of its foreign subsidiary. The Company's Israeli
subsidiary had carried forward losses for tax purposes in the amount of
approximately $7,000,000. The Company recorded a full valuation allowance for
the carryforward loses.
At September 30, 2004 the Company had available net operating loss
carryforwards for tax purposes, expiring from 2008 through 2024 of approximately
$40.6 million. 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 G) - 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 $122,843 and $105,300 for
the years ended September 30, 2004 and 2003, respectively, and was recorded as
part of selling, general and administrative expenses within the consolidated
statement of operations.
Future minimum rental commitments under operating leases are as follows:
F-15
Fiscal Year Amount
----------- ------
2005 46,650
--------
Total $ 46,650
========
[2] Legal proceedings
In June 2002, Jack Nelson, a former Caprius executive officer and director,
commenced two legal proceedings against us and George Aaron and Jonathan Joels,
executive officers, directors and principal stockholders. The two complaints
alleged that the individual defendants made misrepresentations to the plaintiff
upon their acquisition of a controlling interest in the Company in 1999 and
thereafter made other alleged misrepresentations and engaged in mismanagement
and other misconduct and took other actions as to the plaintiff to the supposed
detriment of the plaintiff and Caprius. 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"). In September 2003, we 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 part of the defendants, we paid $125,000 to the plaintiff and the
action was discontinued. The cost associated with the Offer of Judgment was
recorded in selling, general and administrative expenses within the consolidated
statement of operations for the year ended September 30, 2003.
On May 3, 2004, the Court in the Federal Derivative Action granted the
motion made by us and Messrs. Aaron and Joels for judgment on the pleadings
based upon the pre-suit demand requirement and dismissed the plaintiff's
complaint without prejudice, but denied defendants' motion for judgment on the
pleadings based upon the Private Securities Litigation Reform Act. The Court
also granted the plaintiff's cross-motion to file an amended complaint to add
allegations of insider trading.
In September 2002, we were served with a complaint naming us and our
principal officers and directors in the Federal District Court of New Jersey as
a purported class action (the "Class Action"). The allegations in the complaint
cover the period between February 14, 2000 and June 20, 2002. The initial
plaintiff is a relative of the wife of the plaintiff in the State Court Action
and Federal Derivative Action. The allegations in the purported Class Action
were substantially similar to those in the other two Actions. The complaint
sought an unspecified amount of monetary damages, as well as the removal of the
defendant officers as shareholders.
On May 3, 2004, in a decision separate from the decision in the Federal
Derivative Action, the Court granted the defendants' motion and dismissed the
Class Action. The federal securities claims asserted by the plaintiffs were
dismissed with prejudice, and having dismissed all federal law claims, the Court
declined to exercise jurisdiction over the remaining state law claims and
dismissed those claims without prejudice. On May 14, 2004, the plaintiffs filed
a motion for reconsideration, which defendants opposed and subsequently this
motion for reargument was denied. The plaintiff did not file a notice of appeal
during the statutory time period.
On September 30, 2004, our Board received a letter written from Mr.
Nelson's attorney making a demand that we institute a derivative action
substantially similar to the allegations presented in the Federal Derivative
Action. A draft complaint was included with the letter. An Independent Committee
of the Board responded to the letter within the stipulated 90 day period that
Mr. Nelson had requested, stating that the Independent Committee determined that
there was no basis for the Company to institute the derivative action as
demanded. There has been no further communication from Mr. Nelson's attorney.
The independent directors have authorized us 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, and Messrs. Aaron and Joels will repay us in the
event it was determined that they were not entitled to be indemnified as to the
claim for which the advance was made.
In September 2002, BDC Corp., d/b/a BDC Consulting Corp., brought an action
against us 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. Although we believed there was no merit
F-16
to the plaintiff's claim, in October 2003, in order to avoid a lengthy and
expensive litigation, we and Mr. Aaron settled the action for the sum of $83,000
recorded in selling, general and administrative expenses within the consolidated
statement of operations for the year ended September 30, 2003. The purchaser of
Strax is an entity controlled by the same person who is a principal in BDC Corp.
Under our Purchase Agreement for the purchase of the majority interest in MCM,
MCM, its subsidiaries and certain pre-existing shareholders of MCM have certain
obligations to indemnify us with respect to damages, losses, liabilities, costs
and expenses arising out of any claim or controversy in respect to the BDC
complaint. This indemnification has been satisfied by the indemnifying
shareholders either through the required payment of monies or by additional
shares being allocated to the Company.
(NOTE H) - 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 1,159,793 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 third quarter of Fiscal 2004, the Company raised an aggregate of
$1.5 million through the issuance of 8% Senior Secured Convertible Promissory
Notes. The financing was arranged through Sands Brothers International Ltd. who
was retained by the Company to act as selected dealer for the sale and issuance
of the Notes. Based upon the funds raised, Sands received warrants valued at
$28,500 using the Black Scholes Model to purchase 1,425,000 shares of the
Company's common stock at an exercise price of $0.28 per share for a period of
five years. These warrants expire at various dates through June 2009.
During the second quarter of Fiscal 2004, the Company authorized a short
term bridge loan for an aggregate of $500,000 through the issuance of related
party notes due on July 31, 2005. For every three dollars ($3.00) loaned, the
lender received 2 warrants to purchase one share of Common Stock, exercisable at
$0.15 per share for a period of five years. These warrants expire in January
2009. The fair value allocated to these warrants based upon the Black Scholes
Model was approximately $27,400. This loan discount shall be amortized over the
life of the short term bridge loan.
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. As of September 30,
2004, 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.
As of September 30, 2004, 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 valued at $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 market
value of the warrants issued was valued at $12,000 which was amortized over the
term of the related debt. These warrants expire in February 2006.
F-17
[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.
[4] Stock options
-------------
During 2002, the Company adopted a stock option plan for both employees and
non-employee directors. The employee and non-employee 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. 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. As of
September 30, 2004, there were 1,036,000 options outstanding under the 2002
plan, exercisable at prices from $0.15 to $0.20 per share.
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.
During May 2004, 75,000 options priced at $0.20 were granted to a director
of the Company, under the 2002 plan. These options vested one third on the grant
date with the balance vesting over a two year period in equal installments. All
of these options expire 10 years after the date of grant and were granted at
fair market value or higher at time of grant.
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
Granted in 2004 75,000 $0.20 $0.20
-------- ------ -----
Balance, September 30, 2004 1,036,000 $0.15 - $0.20 $0.15
=========================== ========== ============= =========
F-18
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, 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
Cancelled in 2004 (2,500) $2.93 - $5.00 $4.17
-------- -------------- -----
Balance, September 30, 2004 727,000 $0.15 - $5.00 $0.23
=========================== ======== ============= =====
Stock option transactions not covered under the years 2002 and 1993 option
plans in the fiscal years 2003 and 2004 are as follows:
Weighted Average
Number of Option Price Exercise Price
Shares Per Share Per Share
--------- ------------ ----------------
Balance, September 30, 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
Cancelled in 2004 (1,001,287) $.75 - $15.80 $.90
----------- ------------- ------
Balance, September 30, 2004 1,051,287 $.10 - $20.10 $.17
=========================== =========== ============== ======
The following table summarizes information about stock options outstanding at
September 30, 2004:
Outstanding Options
---------------------------------------------------
Weighted-
Number Average Weighted-
Range of Outstanding at Remaining Average
Exercise September 30, Contractual Exercise
Prices 2004 Life (years) Price
---------------------------------------------------------------------------
$0.10 - $0.25 2,801,000 7.33 .16
2.93 9,000 1.67 2.93
5.00 3,000 1.00 5.00
20.10 1,287 .60 20.10
---------------------------------------------------------------------------
$0.10 - $20.10 2,814,287 7.3 .18
=========================================================================
F-19
Exercisable Options
---------------------------------------------------
Weighted-
Number Average Weighted-
Range of Outstanding at Remaining Average
Exercise September 30, Contractual Exercise
Prices 2004 Life (years) Price
---------------------------------------------------------------------------
$0.10-$0.25 2,097,334 7.00 .16
2.93 9,000 1.67 2.93
5.00 3,000 1.00 5.00
20.10 1,287 .60 20.10
---------------------------------------------------------------------------
$0.10 - $20.10 2,110,621 6.95 .19
===========================================================================
Range of Weighted
Total stock options vested Exercise Average Exercise
and exercisable at Number of Price Per Price
September 30, 2004 Shares Share Per Share
-------------------------- --------- -------------- -----------------
Plan shares 1,392,667 $0.15 - $5.00 $0.19
Non-plan shares 717,954 $0.10 - $20.10 $0.18
--------- -------------- -----
2,110,621 $0.10 - $20.10 $0.19
========= ============== =====
(NOTE I) - 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. Revenues from discontinued operations, which have been excluded from
income from continuing operations in the accompanying consolidated statements of
operations for fiscal year 2003, is 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 operations of the TDM business segment for the year ended
September 30, 2003 is as follows:
Revenues $96,698
Operating Expenses 23,300
------
Income from Operations $73,398
=======
(NOTE J) - 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
F-20
aggregated $565,000 which were paid by reducing the cash portion of the purchase
price. As part of Stockholders Agreement dated December 17, 2002, there were
certain provisions relating to performance adjustments for the twenty four month
period post closing. As a consequence, the Company's ownership interest
increased by 5% in the fiscal year 2004. 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, the purchase price for the remaining MCM shares
may be paid in cash or the Company's common stock. Neither party gave notice of
its put or call. 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. 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 1,777,010
---------
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, assuming that the transaction had
occurred on October 1, 2002 and after giving effect to certain
pro forma adjustments are as follows:
2003
----
Revenues $ 841,471
----------
Operating Expenses 4,821,892
----------
Interest expense (17,962)
------------
Loss from continuing operations ($3,998,193)
============
(NOTE K) - 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. During the first quarter of fiscal year 2005, the parties
agreed to settle the net outstanding balance in a lump sum payment of $66,000
which was paid in two equal installments in December 2004 and January 2005.
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
year 2003 as 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 operations of the Strax business segment for the years ended
September 30, 2004 and 2003 are as follows:
F-21
2004 2003
---- ----
Revenues - $1,559,669
Operating Expenses 28,425 1,704,157
Other Expense 77,381 -
-------- ---------
Loss from operations $(105,806) $(144,488)
========== ==========
(NOTE L) -Geographic Information
--------------------------------
The Company does not have reportable operating Segments as defined in the
Statements of Financial Accounting No.131 "Disclosures about Segments of an
Enterprise and related information" The method for attributing revenues to
individual customers is based as to the destination to which finished goods are
shipped.
The Company operates facilities in the United States of America and Israel.
The following is a summary of information by area for the years ended September
30, 2004 and 2003.
----------------------------------------------- -------------- ----------------
FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003
---- ----
----------------------------------------------- -------------- ----------------
Net Revenues:
----------------------------------------------- -------------- ----------------
Israel $766,119 $501,879
----------------------------------------------- -------------- ----------------
United States 119,342 98,700
------- ------
----------------------------------------------- -------------- ----------------
Revenues as reported in the accompanying $885,461 $600,579
financial statements ======== =======
----------------------------------------------- -------------- ----------------
----------------------------------------------- -------------- ----------------
Loss from continuing operations:
----------------------------------------------- -------------- ----------------
Israel $(414,890) $(232,662)
----------------------------------------------- -------------- ----------------
United States (2,835,073) (3,820,205)
----------------------------------------------- -------------- ----------------
Loss from continuing operations as reported $(3,249,963) $(4,052,867)
in the accompanying financial statements ============ ============
----------------------------------------------- -------------- ----------------
----------------------------------------------- -------------- ----------------
September 30, 2004
----------------------------------------------- -------------------------------
Identifiable Assets:
----------------------------------------------- -------------------------------
Israel $ 561,151
----------------------------------------------- -------------------------------
United States 1,852,201
----------------------------------------------- -------------------------------
Total Assets as reported in the $2,413,352
accompanying financial statements ==========
----------------------------------------------- -------------------------------
(NOTE M)-SUBSEQUENT EVENTS
--------------------------
(1) On December 1, 2004 an agreement was reached between the Company and
the minority ownership of an MCM. subsidiary. The minority is being repaid their
initial investment of $20,000, by way of a credit towards the site installation
expense of Sterimed units, they are purchasing for their dialysis centers.
Thereafter the subsidiary is being dissolved. The minority interest is now
reflected in accrued expenses within the consolidated balance sheet.
(2) On February 2, 2005, the Company raised $100,000 through the issuance
of 8% Senior Secured Convertible Promissory Notes, repayable, together with
interest to April 3, 2005, subject to prepayment in the event of an equity
financing in excess of $2 Million, or conversion by the investors into shares of
our common stock at a conversion price of $0.15 per share. The lenders also
received warrants to purchase 100,000 shares of our common stock exercisable at
$0.28 per share for a period of five years. In the event that the loan is not
repaid as of the due date, then the lender shall receive a further 25,000
warrants per month, up to an aggregate, including the initial 100,000 warrants,
of 300,000 warrants. The funds are being utilized for general working capital.
F-22
(3) During the period from October 1, 2004 thorough November 16, 2004, the
Company was advanced the principal amount of approximately $46,500 through short
term loans until additional equity funding is secured. The terms of the loans
are identical to the terms of the $100,000 8% Senior Secured Convertible
Promissory Note outlined above. These short-term loans were provided by
executive officers, Messrs. Aaron, and Joels, who advanced approximately $32,000
and $14,500, respectively. These funds are being utilized for general working
capital purposes.
(4) During the period from November 17, 2004 thorough February 15, 2004,
the Company was advanced the principal amount of approximately $99,500 through
short term loans until additional equity funding is secured. The terms of the
loans are identical to the terms of the $100,000 8% Senior Secured Convertible
Promissory Note outlined above. These short-term loans were provided by
executive officers, Messrs. Aaron, Joels, and Koppel who advanced approximately
$32,000 $48,000, and $19,500 respectively. These funds are being utilized for
general working capital purposes.
(5) On February 15, 2005, the Company closed on a $4.5million preferred
stock equity financing before financing related fees and expenses of
approximately $450,000. The Company issued 45,000 shares of Series C Mandatory
Convertible Preferred Stock at a stated value of $100 per share. The Company
also issued Series A Warrants to purchase an aggregate of 9,310,344 shares of
common stock at an exercise price of $0.28 per share for a period of five years.
The Company also agreed to a second issuance of Series B Warrants to purchase an
aggregate of 3,103,448 shares of common stock at an exercise price of $0.145 per
share for a period of five years exercisable after nine months. Simultaneously,
the Company converted the short-term secured debt outstanding in the aggregate
of $2 million together with $72,962 into the same class of preferred stock as
the new equity investors. As part of the condition for raising the equity
financing, holders of a majority of the outstanding shares irrevocably undertook
to effect a 1:20 reverse stock split of any outstanding shares of common stock.
At the time that the reverse split becomes effective, all of the preferred stock
issued to the new equity investors and the debt holders who converted their debt
will automatically convert into common shares. The Company also agreed to
increase the number of independent directors by one additional director and
obtain a listing on the Nasdaq Small Cap Market. The net cash proceeds from the
equity financing will provide the funds necessary to expand our business as well
as meeting our needs to satisfy specific outstanding obligations and accrued
expenses due in fiscal 2005.
F-23