UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[X] Quarterly Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-11914
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CAPRIUS, INC.
-------------
(Exact name of small business issuer as specified in its charter)
Delaware 22-2457487
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Parker Plaza, Fort Lee, NJ 07024
------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (201) 592-8838
--------------
N/A
-------------------------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (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
--- ---
State the number of shares outstanding of issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at July 31, 2003
Common Stock. Par value $0.01 20,396,562 shares
CAPRIUS, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets - June 30, 2003 and 3
September 30, 2002
Consolidated Statements of Operations - for the three month
and nine months ended June 30, 2003 and 2002 4
Consolidated Statement of Stockholders' Equity -for the nine 5
months ended June 30, 2003
Consolidated Statements of Cash Flows - for the nine months 6
ended June 30, 2003 and 2002
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 11
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. CONTROLS & PROCEDURES 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
2
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 2003 September 30, 2002
------------- ------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, (including $303,660
of restricted funds held in escrow at June 30, 2003) $ 1,660,502 $ 505,282
Accounts receivable, net of reserve for bad debts
of $19,000 and $13,000 at June 30, 2003 and
September 30, 2002 397,624 141,731
Inventories 532,300 -
Other current assets 122,745 6,948
Net assets of TDM business segment - 2,511,147
------------ ------------
Total current assets 2,713,171 3,165,108
------------ ------------
PROPERTY AND EQUIPMENT:
Medical equipment 314,318 314,318
Office furniture and equipment 517,641 193,469
Leasehold improvements 18,373 950
------------ ------------
850,332 508,737
Less: accumulated depreciation 634,598 478,136
------------ ------------
Net property and equipment 215,734 30,601
------------ ------------
OTHER ASSETS:
Note receivable - 350,000
Deferred financing cost, net of accumulated
amortization of $23,010 and $2,301 at June 30, 2003
and September 30, 2002 18,340 39,049
Deferred acquisition costs - 189,463
Goodwill 737,010 -
Intangible assets net of accumulated amortization
of $80,000 at June 30, 2003 960,000 -
Other 322,794 22,794
------------ ------------
Total other assets 2,038,144 601,306
------------ ------------
TOTAL ASSETS $ 4,967,049 $ 3,797,015
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable, net of unamortized discount of
$5,000 at September 30, 2002 $ - $ 546,650
Accounts payable 1,258,335 408,841
Accrued expenses 696,988 198,087
Accrued compensation 201,947 86,018
Current maturities of long-term debt and capital
lease obligations 15,156 12,806
------------ ------------
Total current liabilities 2,172,426 1,252,402
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, net of
current maturities 19,269 22,226
------------ ------------
TOTAL LIABILITIES 2,191,695 1,274,628
------------ ------------
MINORITY INTEREST IN MCM 116,435 -
------------ ------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - Series A, none;
Series B, convertible, 27,000 shares at
June 30, 2003 and September 30, 2002.
Liquidation preference $2,700,000 2,700,000 2,700,000
Common stock, $.01 par value
Authorized - 50,000,000 shares
Issued - 20,419,062 shares at June 30, 2003
and at September 30, 2002 204,191 204,191
Additional paid-in capital 67,579,258 67,579,258
Accumulated deficit (67,822,280) (67,958,812)
Treasury stock (22,500 common shares, at cost) (2,250) (2,250)
------------ ------------
Total stockholders' equity 2,658,919 2,522,387
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,967,049 $ 3,797,015
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
3
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended For the nine months ended
------------------------------ ------------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
REVENUES:
Net patient service revenues $ 357,845 $ 401,228 $ 1,162,896 $ 1,231,066
Product sales and rental revenues 107,275 - 440,018 -
Consulting income 12,500 - 37,500 -
------------ ------------ ------------ ------------
Total revenues 477,620 401,228 1,640,414 1,231,066
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of patient service revenues 176,491 188,688 643,200 621,225
Cost of product sales and rental revenue 74,204 - 381,645 -
Research and development 30,646 - 135,051 -
Selling, general and administrative 1,146,194 214,530 3,856,429 608,394
Provision for bad debt and collection costs 18,455 27,745 36,262 50,396
------------ ------------ ------------ ------------
Total operating expenses 1,445,990 430,963 5,052,587 1,280,015
------------ ------------ ------------ ------------
Operating loss (968,370) (29,735) (3,412,173) (48,949)
Interest expense (21,766) (2,362) (7,353) (8,430)
------------ ------------ ------------ ------------
Loss from continuing operations (990,136) (32,097) (3,419,526) (57,379)
Income (loss) from operations of discontinued
TDM business segment (including gain on
disposal of $3,123,748 in October 2002) - (101,914) 3,192,587 (139,684)
------------ ------------ ------------ ------------
Loss before minority interest (990,136) (134,011) (226,939) (197,063)
Loss applicable to minority interest 117,795 - 363,471 -
------------ ------------ ------------ ------------
Net income (loss) $ (872,341) $ (134,011) $ 136,532 $ (197,063)
============ ============ ============ ============
Net income (loss) per basic and diluted common share
Continuing operations $ (0.04) $ (0.00) $ (0.15) $ (0.00)
Discontinued operations - (0.01) 0.16 (0.01)
------------ ------------ ------------ ------------
Net income (loss) per basic and diluted common share $ (0.04) $ (0.01) $ 0.01 $ (0.01)
============ ============ ============ ============
Weighted average number of common shares outstanding,
basic and diluted 20,396,562 17,098,862 20,396,562 17,098,862
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
4
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Treasury Stock
Preferred Stock $0.01 Par Value $0.01 Par Value
------------------- ------------------- Additional ------------------ Total
Number Number Paid-in Accumulated Number Stockholders'
of Shares Amount of Shares Amount Capital Deficit of Shares Amount Equity
------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2002 27,000 $2,700,000 20,419,062 $204,191 $67,579,258 $(67,958,812) 22,500 $(2,250) $2,522,387
Net income - - - - - 136,532 - - 136,532
------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2003 27,000 $2,700,000 20,419,062 $204,191 $67,579,258 $(67,822,280) 22,500 $(2,250) $2,658,919
======================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
5
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended June 30,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 136,532 $ (197,063)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Minority interest in loss of MCM (363,471) -
Gain on sale of TDM business (3,123,748) -
Amortization of discount on bridge financing 24,059 5,000
Depreciation and amortization 157,311 189,727
Changes in operating assets and liabilities:
Accounts receivable, net (204,808) 104,345
Inventories (206,507) 83,057
Other assets 187,615 2,782
Accounts payable and accrued expenses (12,689) 16,944
----------- -----------
Net cash (used in) provided by operating activities (3,405,706) 204,792
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of TDM business (excluding restricted
cash held in escrow of $600,000) 5,400,000 -
Acquisition of MCM, net of cash acquired (including loans
to MCM) (278,338) (351,395)
----------- -----------
Net cash provided by (used in) investing activities 5,121,662 (351,395)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt and warrants - 250,000
Repayment of debt and capital lease obligations (560,736) (43,859)
----------- -----------
Net cash (used in) provided by financing activities (560,736) 206,141
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,155,220 59,538
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 505,282 89,776
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,660,502 $ 149,314
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 11,135 $ 39,545
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
6
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The results of operations of Caprius, Inc. ("Caprius" or the "Company") for
the interim periods shown in this report are not necessarily indicative of
results to be expected for the fiscal year. In the opinion of management, the
information contained herein reflects all adjustments necessary to make the
results of operations for the interim periods a fair statement of such
operations. All such adjustments are of a normal recurring nature.
The accompanying consolidated financial statements do not contain all of
the disclosures required by accounting principles generally accepted in the
United States of America and should be read in conjunction with the financial
statements and related notes included in the Company's annual report on
form 10-KSB for the fiscal year ended September 30, 2002.
NOTE 2 - THE COMPANY
--------------------
Caprius, Inc. ("Caprius" or the "Company") was founded in 1983 and through
June 1999 essentially operated in the business of medical imaging systems as
well as healthcare imaging and rehabilitation services. On June 28, 1999, the
Company acquired Opus Diagnostics Inc. ("Opus") and began manufacturing and
selling medical diagnostic assays constituting the Therapeutic Drug Monitoring
("TDM") Business. In the first quarter of Fiscal 2003, the Company made major
changes in its business through the sale of the TDM Business and the purchase of
a majority interest in M.C.M. Environmental Technologies, Inc. ("MCM"). The
Company also owns and operates a comprehensive imaging center located in
Lauderhill, Florida, which is currently for sale.
On October 9, 2002, Opus sold the assets of its TDM Business to Seradyn,
Inc., a Delaware corporation ("Seradyn"), pursuant to a Purchase and Sale
Agreement among Opus, Caprius, and Seradyn for a purchase price of $6,000,000,
subject to adjustment, and entered into a Royalty Agreement and a Consulting
Agreement. The sale of the TDM Business has been reflected as discontinued
operations in the Company's consolidated financial statements.
On December 17, 2002, the Company closed the acquisition of 57.53% of the
capital stock of MCM, which is engaged in the medical infectious waste disposal
business, for a purchase price of $2.4 million. Upon closing, Caprius' designees
were elected to three of the five seats on MCM's Board of Directors, with George
Aaron, President and CEO, and Jonathan Joels, CFO, filling two seats.
Additionally, as part of the transaction, certain debt of MCM to its existing
stockholders and to certain third parties was converted to equity in MCM or
restructured. Pursuant to its Letter of Intent with MCM, Caprius provided MCM
with loans totaling $565,000, which loans were repaid upon closing by a
reduction in the cash portion of the purchase price. For a six month period
commencing 19 months and ending 25 months from December 17, 2002, pursuant to a
Stockholders Agreement, the stockholders of MCM (other than the Company) shall
have the right to put all of their MCM shares to MCM, and MCM shall have the
right to call all of such shares, at a price based upon a pre-determined
methodology 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.
In July 1998, the Company acquired The Strax Institute ("Strax"), a
comprehensive breast imaging center, located in Lauderhill, Florida. Strax is a
multi-modality breast care center that performs approximately 20,000 procedures
per year comprising of x-ray mammography, ultrasound, stereotactic biopsy and
bone densitometry. In July 2003, the Company entered into a letter of intent
with an undisclosed third party to sell Strax. The prospective purchaser is an
entity controlled by the same person who is also a principal in BDC Corp. (See
Item I, Note 5 and Part II, Item 1). The proposed transaction is subject to the
parties entering into a definitive agreement and board approval.
7
NOTE 3 - STOCK OPTIONS
----------------------
At June 30, 2003, the Company had three stock based compensation plans (one
incentive and nonqualified, one employee and one non-employee director plan).
The Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. No stock-based employee compensation cost is
reflected in net income (loss), and the options granted under those plans had an
exercise price equal to, or greater than, the market value of the underlying
common stock on the date of the grant. In accordance with FASB Statement
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure,"
beginning in the quarter ended March 31, 2003, the Company adopted the
disclosure requirements of FASB No. 148.
The Company provides pro forma disclosures of compensation expense under
the fair value method of SFAS No. 123 "Accounting for Stock-Based Compensation"
and SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure".
The fair value of the Company's stock options used to compute pro forma net
loss and net loss per share disclosures is the estimated present value at grant
date using the Black-Scholes option-pricing model with the following weighted
average assumptions for 2003 and 2002: dividend yield of 0%; expected volatility
of 0.80; risk free interest rates of 5.59%-7.78%; and an expected holding period
of 10 years.
Had compensation cost for the Company's option plans been determined using
the fair value method at the grant dates, the effect on the Company's net income
(loss) and income (loss) per share for the periods shown below would have been
as follows:
Three months ended June 30, Nine months ended June 30,
2003 2002 2003 2002
-------------------------------------- --------------------------------------
Net income (loss) as
reported $(872,341) $(134,011) $ 136,532 $(197,063)
Add:
Stock-based employee
compensation expense
included in reported net income
net of related tax
effects -- -- -- --
Deduct:
Stock-based employee
compensation determined
under fair value method
for all awards, net of
related tax
effects (28,399) (21,925) (85,197) (65,775)
------- ------- ------- -------
Pro forma net income (loss) $(900,740) $(155,936) $ 51,335 $(262,838)
========= ========= ========== =========
Basic and diluted income
(loss) per share
As reported $ (0.04) $ (0.01) $ 0.01 $ (0.01)
Pro forma $ (0.04) $ (0.01) $ 0.00 $ (0.02)
8
NOTE 4- INDUSTRY SEGMENTS
-------------------------
The Company operations are classified into two business segments: imaging
and rehabilitation services and the medical waste disposal business (the "MCM
Business").
The following table shows sales, net loss and other unaudited financial
information by industry segment:
Imaging and
Rehabilitation MCM
Corporate Services Business Consolidated
----------- -------------- ---------- ------------
Three months ended June 30, 2003
--------------------------------
Revenues $12,500 $357,845 $107,275 $477,620
Loss from continuing operations before minority
interest ($436,799) ($30,300) ($523,037) ($990,136)
Three months ended June 30, 2002
--------------------------------
Revenues - $401,228 - $401,228
Loss from continuing operations before minority
interest - ($32,097) - ($32,097)
Nine months ended June 30, 2003
-------------------------------
Revenues $37,500 $1,162,896 $440,018 $1,640,414
Loss from continuing operations before minority ($2,481,750) ($81,946) ($855,830) ($3,419,526)
interest
Identifiable assets at June 30, 2003 $2,614,447 $ 321,406 $2,031,196 $4,967,049
Nine months ended June 30, 2002
-------------------------------
Revenues - $1,231,066 - $1,231,066
Loss from continuing operations before minority
interest - ($57,379) - ($57,379)
Identifiable assets at June 30, 2002 $3,168,826 $334,106 - $3,502,932
NOTE 5 - LITIGATION
-------------------
In June 2002, Jack Nelson, a former executive officer and director of the
Company, commenced two legal proceedings against the Company and George Aaron
and Jonathan Joels, executive officers, directors and principal stockholders of
the Company. The two complaints (refer to Part II, Item 1 for further
explanation) allege that the individual defendants made alleged
misrepresentations to the plaintiff upon their acquisition of a controlling
interest in the Company in 1999 and thereafter made other alleged
misrepresentations and took other actions as to the plaintiff to the supposed
detriment of the plaintiff and the Company. One action was brought in Superior
Court of New Jersey, Bergen County, and the other was brought as a derivative
action in Federal District Court in New Jersey. The counts in the complaints are
for breach of contract, breach of fiduciary duty and misrepresentation. No
amount of damages was specified in either action. The Company has answered the
complaints and has asserted affirmative defenses.
In September 2002, the Company was served with a complaint naming the
Company and its principal officers and directors in the Federal District Court
of New Jersey as a purported class action. The allegations in the complaint
cover the period between February 14, 2000 and June 20, 2002. The plaintiff is a
relative of the wife of the plaintiff in the previously disclosed direct and
derivative actions against the defendants. The allegations in the purported
class action are substantially similar to those in the other two actions. The
complaint (refer to Part II, Item 1 for further explanation) seeks an
unspecified amount of monetary damages, as well as the removal of the defendant
officers as shareholders of the Company. The Company is vigorously contesting
the allegations in the complaint.
9
In September 2002, BDC Corp., d/b/a BDC Consulting Corp., brought an action
against the Company and Mr. Aaron in the Circuit Court for the Seventeenth
Judicial Circuit, Broward County, Florida seeking an unspecified amount of
damages arising from the defendants' alleged tortious interference with a series
of agreements between the plaintiff and third party MCM pursuant to which the
plaintiff had intended to purchase MCM. See Note 6 of this report for
information regarding the Company's investment in MCM. The Company believes
there is no merit to the plaintiff's claim (see Part II, Item 1 for further
explanation).
NOTE 6 - ACQUISITION OF MCM
---------------------------
On December 17, 2002, the Company closed the acquisition of 57.53% of the
capital stock of MCM, which is engaged in the medical infectious waste disposal
business, for a purchase price of $2.4 million. The Company's consolidated
financial statements include MCM's results of operations from December 17, 2002.
In June 2002, the Company and MCM had signed a Letter of Intent to enter into an
agreement whereby the Company would have the right to acquire 51% of the
outstanding stock on a fully diluted basis of MCM. Concurrent with the signing
of the Letter of Intent, Caprius provided MCM with a loan totaling $245,000. At
the time of the acquisition of MCM, the Company's outstanding loans to MCM
aggregated $565,000 which were paid by reducing the cash portion of the purchase
price.
The Company accounted for the acquisition as a purchase using the
accounting standards established in Statements of Financial Accounting Standards
No. 141, Business Combinations and No. 142, Goodwill and Other Intangible
Assets. The accounting rules require that the goodwill arising from the purchase
method of accounting not be amortized however it must be tested for impairment
at least annually.
The purchase price has been allocated to net assets acquired based on the
preliminary estimate of their fair values. The excess of the purchase price over
net assets acquired has been allocated to goodwill and other intangibles for
approximately $1,777,010. Other intangible assets consisting of technology,
customer relationships and permits are estimated to be approximately $1,040,000
and are being amortized over periods of three to five years. Amortization
expense for the three month period ended June 30, 2003 amounted to $80,000.
Additional adjustments to the purchase price allocations may still be required.
The unaudited pro forma combined results of operations of the Company and
the MCM business acquired in December for the nine month periods ended June 30,
2003 and 2002, assuming that the transaction had occurred on October 1, 2001 and
after giving effect to certain pro forma adjustments are as follows:
Nine months ended June 30, 2003 2002
-----------------------------------------------------------------------------------
Sales $1,881,496 $1,615,870
============= ===========
Loss from continuing operations $(3,660,860) $(782,961)
============= ===========
Net loss $(81,590) $(988,178)
============= ===========
Net loss per share basic and
diluted common share $(0.00) $(0.06)
NOTE 7 - 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 as part of the sale, Opus will consult with Seradyn on
ongoing projects for a $50,000 annual fee for a two-year period. 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. 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
10
have been excluded from income from continuing operations in the accompanying
consolidated statements of operations for the nine months ended June 30, 2003
and 2002, are shown below. The effects of the discontinued operations on net
loss and per share data are reflected within the accompanying consolidated
statements of operations. The gain on disposal of $3,123,748 is net of
applicable taxes totaling $325,000.
A summary of net assets of the TDM business segment at September 30, 2002 were
as follows:
2002
-----------------
Current assets $638,609
Property and equipment 34,923
Intangible assets 2,001,937
Liabilities 164,322
-----------------
Net assets $2,511,147
=================
A summary of operations of the TDM business segment for the nine months
ended June 30, 2003 and 2002 is as follows:
2003 2002
---- ----
Revenues $96,698 $1,590,880
Operating Expenses 23,300 1,701,395
------ ---------
Income (loss) from Operations $73,398 ($110,515)
=========== ==========
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
As more fully described in the 10-KSB of September 30, 2002, the Company
completed the sale of its TDM business segment effective October 9, 2002. As a
result, the Company's consolidated statements of operations for the nine months
ended June 30, 2002 have been restated to reflect the TDM business as
discontinued operations.
THREE MONTHS JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
-----------------------------------------------------------------------
Net patient service revenue at Strax totaled $357,845 for the three months
ended June 30, 2003, versus $401,228 for the three months ended June 30, 2002.
Cost of service operations totaled $176,491 for the three months ended June 30,
2003 versus $188,688 for the three months ended June 30, 2002.
Selling, general and administrative expenses totaled $1,146,194 for the
three months ended June 30, 2003 versus $214,530 for the three months ended
June 30, 2002. The increase reflects costs related to the acquisition and
ongoing operations of MCM, as well as increased legal and insurance fees.
Additionally, the selling, general and administrative expenses related to the
TDM business totaling $346,927 for the three months ended June 30, 2002 were
reallocated to discontinued operations.
MCM product sales and rental revenues totaled $107,275 for the three months
ended June 30, 2003. There are no comparisons for prior periods as the Company
commenced this business effective December 17, 2002. The Company intends to
penetrate the U.S. market through a rental program developed for MCM's products.
11
NINE MONTHS ENDED JUNE 30, 2003 COMPARED TO NINE MONTHS ENDED JUNE 30, 2002
---------------------------------------------------------------------------
Net patient service revenue at Strax totaled $1,162,896 for the nine months
ended June 30, 2003, versus $1,231,066 for the nine months ended June 30, 2002.
Cost of service operations totaled $643,200 for the nine months ended June 30,
2003 versus $621,225 for the nine months ended June 30, 2002.
Selling, general and administrative expenses totaled $3,856,429 for the nine
months ended June 30, 2003 versus $608,394 for the nine months ended June 30,
2002. The increase reflects costs related to the acquisition and ongoing
operations of MCM, performance and salary adjustments to employees as well as
increased legal and insurance fees. Additionally, the selling, general and
administrative expenses related to the TDM business totaling $924,724 for the
nine months ended June 30, 2002 were reallocated to discontinued operations.
MCM product sales and rental revenues totaled $440,018 for the nine months
ended June 30, 2003. There are no comparisons for prior periods as the Company
commenced this business effective December 17, 2002. The Company intends to
penetrate the U.S. market through a rental program developed for MCM's products.
LIQUIDITY AND CAPITAL RESOURCES
In October 2002, the Company's subsidiary, Opus, sold the assets of its TDM
Business to Seradyn. The purchase price was $6,000,000, subject to adjustment.
The Company has received a further payment of $54,970 from Seradyn as a post
closing payment adjustment. $600,000 of the purchase price was deposited into an
escrow account to be held for indemnity claims, of which $300,000 would be
released after one year and the balance after two years. The Company used the
net cash proceeds to pay down debts and liabilities, repayment of the short-term
loan and, in December 2002, used $1,835,000 as part of the MCM purchase price.
The balance of the funds is being used for general working capital purposes.
During September 2002, warrant holders representing 3,297,700 shares of
Common Stock took the opportunity to exercise their warrants in the Company's
warrant price reduction program. The Company had offered holders of warrants to
purchase 4,319,750 shares of Common Stock, the opportunity to exercise such
warrants at a reduced exercise price for a period of 14 days during September
2002. The reduced exercise price for each of the outstanding warrants was equal
to 20% of its present exercise price, but not less than $0.11 per share. As a
result, the Company raised an aggregate of $409,668 and also substantially
reduced the number of its outstanding warrants. The Company used the proceeds
for general working capital purposes.
Also during September 2002, the Company entered into a short-term line of
credit arrangement with one of its board members, Shrikant Mehta, whereby Mr.
Mehta agreed to extend a $500,000 line of credit to the Company for up to 18
months, expiring March 2004. This line of credit can be utilized for working
capital needs as determined by the Company and agreed with by Mr. Mehta.
Interest would be paid at a rate of 11% per annum on monies drawn down. In
return for the provision of the short-term 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. The Company has not drawn down on this line of
credit.
During June 2002, the Company obtained a short-term loan from officers and
employees of the Company as well as related family members in the principal
amount of $250,000, with interest at prime plus 3% per annum and due on
September 30, 2003. The proceeds of the short-term loan were used to fund an
initial loan to MCM (the "MCM Loan") totaling $250,000. Subsequent to the
initial loan to MCM, further funds were advanced to MCM in September, October
and December 2002 in the amounts of $100,000, $200,000 and $15,000 respectively.
The MCM Loan, together with subsequent fundings, was secured by MCM's
intellectual properties, bore interest at the rate of prime plus 2% per annum,
and was to be due on June 10, 2003, subject to conversion to equity of MCM upon
the consummation of the Company's investment in MCM. Upon the acquisition of the
interest in MCM, loans totaling $565,000 were converted into equity in MCM. On
October 10, 2002, the holders of the short-term loan were repaid an aggregate of
$250,000 plus accrued interest. For each $1.00 principal amount loaned, the
lender received a warrant to purchase one share of the Company's Common Stock,
exercisable after six months at $0.09 per share for a period of five years.
12
The Company has entered into a letter of intent with an undisclosed third
party to sell Strax. The proposed transaction is subject to the parties entering
into a definitive agreement and board approval.
Net cash used in operations for the nine months ended June 30, 2003
amounted to $3,405,706. Net cash flows provided by investing activities for the
nine months ended June 30, 2003 amounted to $5,121,662.
The Company will continue its efforts to examine and seek additional funds
through funding options, including banking facilities, equity placements, and
government-funded grants in order to provide capital for future expansion.
Additionally, the Company is pursuing financing arrangements for the MCM
SteriMed(R) units placed in the United States. There can be no assurance that
such funding initiatives will be successful.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures. On an on-going basis, management
evaluates the Company's estimates and assumptions, including but not limited to
those related to revenue recognition and the impairment of long-lived assets,
goodwill and other intangible assets. Management bases its estimates on
historical experience and various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
1. Revenue recognition
The breast-imaging center recognizes revenue as services are
provided to patients. Reimbursements for services provided to
patients covered by Blue Cross/Blue Shield, Medicare, Medicaid,
HMO's and other contracted insurance programs are generally less
than rates charged by the Company. Differences between gross
charges and estimated third-party payments are recorded as
contractual allowances in determining net patient service revenue
during the period that the services are provided.
2. Goodwill and other intangibles
Goodwill and other intangibles associated with the MCM
acquisition will be subject to an annual assessment for
impairment by applying a fair-value based test. The valuation
will be based upon estimates of future income of the reporting
unit and estimates of the market value of the unit.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This statement superseded EITF No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity". Under this statement, a liability or a cost associated
with a disposal or exit activity is recognized at fair value when the liability
is incurred rather than at the date of an entity's commitment to an exit plan as
required under EITF 94-3. The provision of this statement is effective for exit
or disposal activities that are initiated after December 31, 2002, with early
adoption permitted. The Company is currently evaluating the effect that the
adoption of SFAS No. 146 will have on its consolidated financial position and
results of operations.
In November 2002, the Emerging Issues Task Force (EITF) reached consensus
on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Revenue
arrangements with multiple deliverables include arrangements which provide for
the delivery or performance of multiple products, services and/or rights to use
assets where performance may occur at different points in time or over different
periods of time. EITF Issue No. 00-21 is effective for the Company beginning
October 1, 2003. The Company has not completed the evaluation of the impact of
this EITF.
In May 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
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including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The changes in this Statement improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly. This
Statement is effective for contracts entered into or modified after June 30,
2003. The adoption of SFAS 149 is not expected to have a material affect on our
financial position, results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS
No. 150 is the first phase of the FASB's project on liabilities and equity. SFAS
No. 150 provides guidance on how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity. Many
of these instruments were previously classified as equity. For example, if an
employer's issuance of its shares to a key employee requires the employer to
redeem the shares upon the employee's death, then those shares must be
classified as a liability, not as equity. For publicly-held companies, SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003. SFAS No. 150 requires companies to record the cumulative effect of
financial instruments existing at the adoption date. The Company does not
believe the adoption of SFAS 150 will have a significant effect on the Company's
operations, financial position or cash flows.
FORWARD LOOKING STATEMENTS
The Company is including the following cautionary statement in this
quarterly report of Form 10-QSB to make applicable and take advantage of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
for any forward-looking statements made by, or on behalf of, the Company.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements which are other than statements of historical facts. Certain
statements contained herein are forward-looking statements and accordingly
involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward-looking statements. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectation, beliefs or
projections will result or be achieved or accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward-looking statements: technological
advances by the Company's competitors, changes in health care reform, including
reimbursement programs, changes to regulatory requirements relating to
environmental approvals for the treatment of infectious medical waste, capital
needs to fund any delays or extensions of development programs, delays in the
manufacture of new and existing products by the Company or third party
contractors, the loss of any key employees, the outcome of existing litigations,
delays in obtaining federal, state or local regulatory clearance for new
installations and operations, changes in governmental regulations, the location
of the MCM business in Israel, and availability of capital on terms satisfactory
to the Company. The Company disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
ITEM 3. 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 Rule 13a - 15 of the Securities Exchange Act of 1934) as of
June 30, 2003 have concluded that the Company's disclosure controls and
procedures are adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiary is recorded, processed,
summarized and reported within the time periods specified by the SEC's rules and
forms, particularly during the period in which this quarterly 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
14
subsequent to June 30, 2003 the date of their most recent evaluation of such
controls, and that there were no significant deficiencies or material weaknesses
in the Company's internal controls.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 2002, Jack Nelson, a former executive officer and director of the
Company, commenced two legal proceedings against the Company and George Aaron
and Jonathan Joels, executive officers, directors and principal stockholders of
the Company. The two complaints allege that the individual defendants made
alleged misrepresentations to the plaintiff upon their acquisition of a
controlling interest in the Company in 1999 and thereafter made other alleged
misrepresentations and took other actions as to the plaintiff to the supposed
detriment of the plaintiff and the Company. One action was brought in Superior
Court of New Jersey, Bergen County ("State Court Action"), and the other was
brought as a derivative action in Federal District Court in New Jersey ("Federal
Derivative Action"). The counts in the complaints are for breach of contract,
breach of fiduciary duty and misrepresentation. The complaint in the Federal
Derivative Action also alleges that certain actions by the defendants in
connection with the 1999 acquisition transaction and also as Company officers
violated the Federal Racketeer Influenced and Corrupt Organizations Act (RICO).
No amount of damages was specified in either action. The Company has answered
the complaints and has asserted affirmative defenses. The parties have exchanged
written discovery in the State Court Action. No depositions have been taken. In
January 2003, motions were made on behalf of the Company and Messrs. Aaron and
Joels to dismiss both the Federal Derivative Action and the State Court Action.
On April 25, 2003, the Court in the State Court Action denied the portion of the
motion which sought dismissal of the breach of contract claim but granted the
motion to dismiss with respect to the counts for fraud and misrepresentation and
respondeat superior against the Company based upon such fraud, but gave the
plaintiff leave to amend his complaint to replead with sufficient specificity
the counts predicated upon alleged fraud. An amended complaint was filed in the
State Court Action on May 15, 2003. The Company has answered the amended
complaint and asserted affirmative defenses. The Court also ordered the parties
to proceed with mediation in an attempt to resolve the dispute. Mediation took
place on June 24, 2003, and concluded without resolution of the action. The
motion to dismiss the Federal Derivative Action is currently pending before the
Federal Court. In addition, the plaintiff has filed a cross-motion to amend his
complaint to add allegations of securities violations against George Aaron,
Jonathan Joels, Shrikant Mehta and Sanjay Mody.
In September 2002, the Company was served with a complaint naming the
Company and its principal officers and directors in the Federal District Court
of New Jersey as a purported class action. The allegations in the complaint
cover the period between February 14, 2000 and June 20, 2002. The plaintiff is a
relative of the wife of the plaintiff in the previously disclosed direct and
derivative actions against the defendants. The allegations in the purported
class action are substantially similar to those in the other two actions. The
complaint seeks an unspecified amount of monetary damages, as well as the
removal of the defendant officers as shareholders of the Company. No answer has
yet been filed to this complaint as the parties agreed to extend the Company's
time to answer the complaint. Since January 1, 2003 an order was entered in the
Federal District Court in New Jersey consolidating the derivative action and the
class action. The order further provides that the time for the defendants to
answer or otherwise move with respect to the complaint in the class action is
extended. The order also provides that all discovery in the consolidated actions
is stayed pending resolution of the motions to dismiss. On April 9, 2003, an
amended complaint was filed in the purported class action naming an additional
plaintiff. A motion was made on June 9, 2003 for an order: (1) appointing
plaintiffs Eugene Schwartz and Dallas Williams as lead plaintiffs; and (2)
appointing the law firm of Lowenstein Sandler as lead counsel for the class.
That motion is currently pending.
The independent directors have authorized the Company to advance the legal
expenses of Messrs. Aaron and Joels in these litigations, subject to review of
the legal bills and compliance with applicable law.
In September 2002, BDC Corp., d/b/a BDC Consulting Corp., brought an action
against the Company and Mr. Aaron in the Circuit Court for the Seventeenth
15
Judicial Circuit, Broward County, Florida seeking an unspecified amount of
damages arising from the defendants' alleged tortious interference with a series
of agreements between the plaintiff and third party MCM pursuant to which the
plaintiff had intended to purchase MCM. See Item I of this report for
information regarding the Company's investment in MCM. The Company believes
there is no merit to the plaintiff's claim. On January 6, 2003, the Company
answered the complaint. The parties have entered into discussions in an effort
to resolve this litigation. Under the Company's Purchase Agreement with MCM,
MCM, its subsidiaries and certain pre-existing shareholders of MCM have certain
obligations to indemnify the Company with respect to damages, losses,
liabilities, costs and expenses arising out of any claim or controversy in
respect of this proceeding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification of George Aaron, President
and Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Jonathan Joels, Chief
Financial Officer
32. Certifications pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements 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.
Caprius, Inc.
-------------
(Registrant)
Date: August 14, 2003 /s/ George Aaron
-----------------------
George Aaron
President & Chief Executive Officer
Date: August 14, 2003 /s/ Jonathan Joels
-----------------------
Jonathan Joels
Chief Financial Officer
17