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 DECEMBER 31, 2003
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Commission File Number: 0-11914
CAPRIUS, INC.
-------------
(Exact name of small business issuer as specified 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
------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (201) 592-8838
N/A
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(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 March 8, 2004
Common Stock. Par value $0.01 20,446,562 shares
CAPRIUS, INC. AND SUBSIDIARIES
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of December 31, 2003 3
Condensed Consolidated Statements of Operations for the
three months ended December 31, 2003 and 2002 4
Condensed Consolidated Statement of Stockholders' Equity
for the three months Ended December 31, 2003 5
Condensed Consolidated Statements of Cash Flows for the
three months Ended December 31, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. CONTROLS & PROCEDURES 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
2
CAPRIUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, 2003
-----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 121,618
Accounts receivable, net of reserve for bad debts of $5,163 40,380
Inventories 818,052
Other current assets 184,042
Due from Sale of Strax 198,820
-----------------
Total current assets 1,362,912
-----------------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 155,108
Equipment for lease 108,321
Leasehold improvements 18,119
-----------------
281,548
Less: accumulated depreciation 118,661
-----------------
Property and equipment, net 162,887
-----------------
OTHER ASSETS:
Deferred financing cost, net of accumulated amortization of $36,816 4,534
Goodwill 737,010
Intangible assets net of accumulated amortization of $274,083 765,917
Other 13,330
-----------------
Total other assets 1,520,791
-----------------
TOTAL ASSETS $ 3,046,590
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 960,196
Accrued expenses 432,015
Accrued compensation 91,372
-----------------
Total current liabilities 1,483,583
MINORITY INTEREST IN MCM SUBSIDIARY 20,000
-----------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - Series A, none; Series B,
convertible, 27,000 shares
Liquidation preference $2,700,000 2,700,000
Common stock, $.01 par value
Authorized - 50,000,000 shares
Issued - 20,469,062 shares 204,691
Additional paid-in capital 67,581,258
Accumulated deficit (68,940,692)
Treasury stock (22,500 common shares, at cost) (2,250)
-----------------
Total stockholders' equity 1,543,007
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,046,590
=================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
CAPRIUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended
--------------------------------------
December 31, 2003 December 31, 2002
----------------- --------------------
REVENUES:
Product sales $ 258,884 $ 126,474
Equipment rental income 18,349 8,427
Consulting fees 12,500 12,500
---------------- --------------
Total revenues 289,733 147,401
---------------- --------------
OPERATING EXPENSES:
Cost of product sales 201,126 120,739
Cost of rental income 3,593 1,997
Research and development 39,595 69,869
Selling, general and administrative 669,538 1,496,756
Provision for bad debts and collection costs 4,698 39,845
---------------- --------------
Total operating expenses 918,550 1,729,206
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Operating loss (628,817) (1,581,805)
Interest income (expense), net (434) 5,627
---------------- --------------
Loss from continuing operations (629,251) (1,576,178)
Income from operations of discontinued TDM business
segment (including gain on disposal of $3,050,350
in October 2002) - 3,123,748
Loss from operations of discontinued Strax Business (28,425) (2,751)
---------------- --------------
Income (loss) before minority interest (657,676) 1,544,819
Loss applicable to minority interest - (164,192)
---------------- --------------
Net income (loss) $ (657,676) $ 1,709,011
================ ==============
Net income (loss) per basic and diluted common share
Continuing operations $ (0.03) $ (0.07
Discontinued operations - 0.15
---------------- --------------
Net income (loss) per basic and diluted common share $ (0.03) $ 0.08
================ ==============
Weighted average number of common shares outstanding,
basic and diluted 20,446,562 20,396,562
================ ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CAPRIUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Preferred Stock Common Stock Treasury Stock
------------------- ------------------- Additional ------------------ Total
Number Number Paid-in Accumulated Number Stockholders'
of Shares Amount of Shares Amount Capital Deficit of Shares Amount Equity
------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 27,000 $2,700,000 20,469,062 $204,691 $67,581,258 $(68,283,016) 22,500 $(2,250) $2,200,683
Net loss (657,676) (657,676)
------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 27,000 $2,700,000 20,469,062 $204,691 $67,581,258 $(68,940,692) 22,500 $(2,250) $1,543,007
======================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CAPRIUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended December 31,
2003 2002
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (657,676) $ 1,709,011
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Minority interest in loss of MCM - (164,192)
Gain on sale of TDM business - (3,123,748)
Amortization of discount on bridge financing - 6,903
Depreciation and amortization 62,328 25,484
Changes in operating assets and liabilities:
Accounts receivable, net 39,280 (190,937)
Inventories 2,432 131,093
Other assets (105,408) (88,036)
Accounts payable and accrued expenses (205,461) 61,615
-------------- ---------------
Net cash used in operating activities (864,505) (1,632,807)
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of TDM business - 6,000,000
Proceeds from sale of Strax business 213,190 -
Acquisition of property and equipment (1,886) -
Acquisition of MCM, net of cash acquired (including loans to MCM) - (278,338)
-------------- ---------------
Net cash provided by investing activities 211,304 5,721,662
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt and capital lease obligations - (553,898)
-------------- ---------------
Net cash used in financing activities (553,898)
-------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (653,201) 3,534,957
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 774,819 505,282
-------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 121,618 $ 4,040,239
============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 115 $ 6,666
============== ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The condensed consolidated balance sheet as of December 31, 2003, and
the condensed consolidated statements of operations and cash flows for the three
month periods ended December 31, 2003 and 2002 and the condensed consolidated
statement of stockholders' equity for the three month period ended December 31,
2003, have been prepared by the Company without audit. In the opinion of
management, the information contained herein reflects all adjustments necessary
to make the presentation of the Company's condensed financial position, results
of operations and cash flows not misleading. All such adjustments are of a
normal recurring nature.
The accompanying condensed consolidated financial statements do not
contain all of the information and disclosures required by accounting principles
generally accepted in the United States of America and should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's annual report on Form 10-KSB for the fiscal year ended
September 30, 2003.
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"). Until fiscal year end 2003, the Company continued to own and
operate a comprehensive imaging center located in Lauderhill, Florida (see Note
6 sale of the Strax Institute).
Effective September 30, 2003, the Company completed the sale of the
Strax Institute ("Strax") to Eastern Medical Technologies, Inc. ("EMT) pursuant
to a Stock Purchase Agreement among the Company, EMT and the other parties
thereto. The sale price was $412,000 payable over a one year period based upon
collections of the accounts receivable outstanding as of the date of closing.
The sale of the business has been reflected as a discontinued operation in the
accompanying condensed 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 (July 2004) and ending 25 months (January 2005) 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.
On October 9, 2002, Opus sold the assets of the TDM Business to
Seradyn, Inc. ("Seradyn") pursuant to a Purchase and Sale Agreement among Opus,
Caprius, and Seradyn for a purchase price of $6,000,000 and entered into a
7
Royalty Agreement and a Consulting Agreement. The sale of the business has been
reflected as a discontinued operation in the accompanying condensed consolidated
financial statements.
NOTE 3 - INVENTORY
------------------
Inventories are accounted for at the lower of cost or market using the
first-in, first out ("FIFO") method. Inventories consist of the following:
December 31,
2003
---------
Raw materials $554,203
Finished goods 263,849
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$818,052
========
NOTE 4 - STOCK OPTIONS
----------------------
At December 31, 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 these plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure requirements of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation" as amended by SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure, an amendment of SFAS No. 123, issued
in December 2002. Under APB Opinion No. 25, compensation expense is based on the
difference, if any, generally on the date of grant, between the fair value of
our stock and the exercise price of the option. No stock-based employee
compensation cost is reflected within the statement of operations for the three
month period ended December 31, 2003 and 2002.
If the Company had elected to recognize compensation costs for the
Company's option plans 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 December 31,
2003 2002
-------------------------------
Net income (loss) as
reported $ (657,676) $ 1,709,011
Deduct:
Stock-based employee
compensation determined
under fair value method
for all awards, net of
related tax effects (13,687) (28,136)
-----------------------------
Pro forma net income (loss) $ (671,363) $ 1,680,875
=============================
Basic and diluted income
(loss) per share of Common Stock
As reported $ (0.03) $ 0.08
Pro forma $ (0.03) $ 0.08
8
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 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"). In September 2003, the Company resolved the State
Court Action by making an Offer of Judgment which was accepted by the plaintiff.
Under the terms of the Offer of Judgment, which was made without any admission
or finding of liability on part of the defendants, the Company made a payment of
$125,000 to the plaintiff and the action was discontinued. A motion to dismiss
the Federal Derivative Action has been filed with the Federal Court and is
currently pending.
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. The Company is
vigorously contesting the allegations in the complaint.
The independent directors have authorized the Company to advance the
legal expenses of Messrs. Aaron and Joels in these litigations with respect to
claims against them in their corporate capacities, subject to review of the
legal bills and compliance with applicable law, and Messrs. Aaron and Joels will
repay the Company 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 the Company and Mr. Aaron in the Circuit Court for the
Seventeenth Judicial Circuit, Broward County, Florida seeking an unspecified
amount of damages arising from the defendants' alleged tortious interference
with a series of agreements between the plaintiff and third party MCM pursuant
to which the plaintiff had intended to purchase MCM. See Item 1 of this report
for information regarding the Company's investment in MCM. Although the Company
believed there was no merit to the plaintiff's claim, in October 2003, the
Company and Mr. Aaron settled the action for the sum of $83,000 in order to
avoid a lengthy and expensive litigation. The purchaser of Strax is an entity
controlled by the same person who is a principal in BDC Corp. Under the
Company's Purchase Agreement with MCM, MCM, its subsidiaries and certain
pre-existing shareholders of MCM have certain obligations to indemnify the
Company with respect to damages, losses, liabilities, costs and expenses arising
out of any claim or controversy in respect to the BDC complaint. The Company has
made a claim for indemnification.
NOTE 6 - SALE OF STRAX
----------------------
Effective September 30, 2003, the Company sold its comprehensive breast
imaging business to 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. 50% of the purchase price 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, the Company is required to
provide certain specified transitional services for up to 180 days pursuant to a
Management Services Agreement.
9
The sale of the Strax business has been reflected as a discontinued
operation in the accompanying condensed consolidated financial statements.
Revenues from discontinued operations, which have been excluded from income from
continuing operations in the accompanying condensed consolidated statements of
operations for fiscal years 2003 and 2002, are shown below. The effects of the
discontinued operations on net loss and per share data are reflected within the
accompanying condensed consolidated statements of operations.
A summary of operations of the Strax business segment for the three
months ended December 31, 2002 is as follows:
December 31,
2002
--------
Revenues $419,988
Operating Expenses 422,739
--------
Loss from operations $ (2,751)
========
NOTE 7: RECENT ACCOUNTING PRONONCEMENTS
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
(as of December 31, 2003 for a calendar year). The Company does not have any
entities that require disclosure or new consolidation as a result of adopting
the provisions of FIN 46.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
As more fully described in the Form 10-KSB for fiscal year ended
September 30, 2003, the Company's continuing operation is classified as medical
infectious waste business. In the fiscal year ended September 30, 2002 the
Company's operations were classified into two business segments: imaging and
rehabilitation services ("Strax") and the therapeutic drug monitoring assay
business (the "TDM Business").
The Company disposed of its TDM business in October, 2002 and of Strax
effective September 30, 2003. Operations related to the TDM business and Strax
were reclassified to discontinued operations for the years ended September 30,
2003 and 2002.
THREE MONTHS DECEMBER 31, 2003 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2002
-------------------------------------------------------------------------------
Revenues generated from MCM product sales totaled $258,884 for the
three months ended December 31, 2003 as compared to $126,474 for the period
commencing December 17, 2002 through December 31, 2002. Revenues generated from
MCM rentals totaled $18,349 as compared to $8,427 for the comparable periods.
10
Consulting income of $12,500 which was generated for the three months ended
December 31, 2003 and 2002 is in connection with the sale of the TDM Business.
Selling, general and administrative expenses totaled $669,538 for the
three months ended December 31, 2003 versus $1,496,756 for the three months
ended December 31, 2002. This decrease is partially due to the non payment of
incentive performance compensation of $332,000 and the effects of other cost
saving initiatives implemented by management.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003 the Company's cash and cash equivalent position
approximated $122,000 versus $775,000 at September 30, 2003. This decrease is
principally due to the use of funds to support the first quarter's operating
activities.
The Company has for the past several years met its need for capital in
its various businesses through loans from officers, directors and related
parties other than the monies received from the sale of the TDM business, which
were primarily used to finance the recently acquired MCM business. Due to the
poor equity market for companies such as Caprius, there has been significant
difficulty in obtaining funds from traditional sources.
During the second quarter of 2004, the Company authorized a short-term
bridge loan for an aggregate of up to $500,000 through the issuance of loan
notes due on July 31, 2005. The funds will be utilized primarily for general
working capital. The Company has raised the $500,000, the majority of which was
provided by management of the Company. The loan notes bear interest at a rate of
11% per annum and are secured by a first lien on 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 exercise price was in excess of the market price on the day
the loans were authorized.
In light of the cash requirements needed to develop the MCM business,
the Company is actively seeking funding. The Company will continue its efforts
to seek additional funds through funding options, including banking facilities,
equipment financing, government-funded grants and private equity offerings.
There can be no assurance that such funding initiatives will be successful due
to the difficulty in raising equity from third parties given the Company's low
stock price and current revenue base, and if successful, will not be dilutive to
existing stockholders. These funds are required to permit the Company to expand
its marketing efforts and for the manufacture of its SteriMed(R) System as well
as for general working capital requirements. To date, Management and their
affiliates have been the primary resource of funding. In addition, depending
upon the outcome of the pending legal actions, additional funding for legal
expenses could also be required. Consequently, the Company's viability could be
threatened. Accordingly, the auditors' report on the Fiscal 2003 financial
statements included an explanatory paragraph expressing a substantial doubt
about the Company's ability to continue as a going concern.
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.
11
1. Revenue recognition
The medical infectious waste business recognizes revenues
from either the sale or rental of its SteriMed units.
Revenues for sales are recognized at the time that the unit
is shipped to the customer. Rental revenues are recognized
based upon either services provided for each month of
activity or evenly over the year in the event that a fixed
rental agreement is in place.
2. Goodwill and other intangibles
Goodwill and other intangibles associated with the MCM
acquisition will be subject to an annual assessment for
impairment by applying a fair-value based test. The valuation
will be based upon estimates of future income of the reporting
unit and estimates of the market value of the unit.
RECENT ACCOUNTING PRONOUNCEMENTS
In 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
(as of December 31, 2003 for a calendar year). The Company does not have any
entities that require disclosure or new consolidation as a result of adopting
the provisions of FIN 46.
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 is also subject to numerous Risk Factors relating to
12
manufacturing, regulatory, financial resources and personnel as defined in the
Company's September 30, 2003 Form 10-KSB as filed with the Securities and
Exchange Commission. 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 Rules 13a-14 (c) and 15d-14 (c) of the Securities
Exchange Act of 1934) as of December 31, 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 for the quarter ended December 31, 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 exchanged
written discovery in the State Court Action. No depositions were taken. In
January 2003, motions were made on behalf of the Company and Messrs. Aaron and
Joels to dismiss both the Federal Derivative Action and the State Court Action.
On April 25, 2003, the Court in the State Court Action denied the portion of the
motion which sought dismissal of the breach of contract claim but granted the
motion to dismiss with respect to the counts for fraud and misrepresentation and
respondeat superior against the Company based upon such fraud, but gave the
plaintiff leave to amend his complaint to replead with sufficient specificity
the counts predicated upon alleged fraud. An amended complaint was filed in the
State Court Action on May 15, 2003. The Company answered the amended complaint
and asserted affirmative defenses. The Court also ordered the parties to proceed
with mediation in an attempt to resolve the dispute. Mediation took place on
June 24, 2003, and concluded without resolution of the action. On or about
September 5, 2003, the Company resolved the State Court Action by making an
Offer of Judgment, which was accepted by the plaintiff. Under the terms of the
Offer of Judgment, which was made without any admission or finding of liability
on the part of the defendants, the Company made a payment of $125,000 to the
plaintiff and the action was discontinued. The motion to dismiss the Federal
Derivative Action is currently pending before the Federal Court. In addition,
the plaintiff has filed a cross-motion to amend his complaint to add allegations
of securities violations against George Aaron, Jonathan Joels, Shrikant Mehta
and former Director, Sanjay Mody.
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In September 2002, the Company was served with a complaint naming the
Company and its principal officers and directors in the Federal District Court
of New Jersey as a purported class action. The allegations in the complaint
cover the period between February 14, 2000 and June 20, 2002. The plaintiff is a
relative of the wife of the plaintiff in the previously disclosed direct and
derivative actions against the defendants. The allegations in the purported
class action are substantially similar to those in the other two actions. The
complaint seeks an unspecified amount of monetary damages, as well as the
removal of the defendant officers as shareholders of the Company. No answer has
yet been filed to this complaint as the parties agreed to extend the Company's
time to answer the complaint. In January, 2003, an order was entered in the
Federal District Court in New Jersey consolidating the derivative action and the
class action. The order further provides that the time for the defendants to
answer or otherwise move with respect to the complaint in the class action is
extended. The order also provides that all discovery in the consolidated actions
is stayed pending resolution of the motions to dismiss. On April 9, 2003, an
amended complaint was filed in the purported class action naming an additional
plaintiff. On September 23, 2003, the Court entered an order: (1) appointing
plaintiffs Eugene Schwartz and Dallas Williams as lead plaintiffs; and (2)
appointing the law firm of Lowenstein Sandler as lead counsel for the class. On
November 21, 2003, the defendants made a motion to dismiss the purported class
action. That motion is currently pending.
The independent directors have authorized the Company to advance the
legal expenses of Messrs. Aaron and Joels in these litigations with respect to
claims against them in their corporate capacities, subject to review of the
legal bills and compliance with applicable law, and Messrs. Aaron and Joels will
repay the Company 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 the Company and Mr. Aaron in the Circuit Court for the
Seventeenth Judicial Circuit, Broward County, Florida seeking an unspecified
amount of damages arising from the defendants' alleged tortious interference
with a series of agreements between the plaintiff and third party MCM pursuant
to which the plaintiff had intended to purchase MCM. See Item 1 of this report
for information regarding the Company's investment in MCM. Although the Company
believed there was no merit to the plaintiff's claim, in October 2003, the
Company and Mr. Aaron settled the action for the sum of $83,000 in order to
avoid a lengthy and expensive litigation. The purchaser of Strax is an entity
controlled by the same person who is a principal in BDC Corp. Under the
Company's Purchase Agreement with MCM, MCM, its subsidiaries and certain
pre-existing shareholders of MCM have certain obligations to indemnify the
Company with respect to damages, losses, liabilities, costs and expenses arising
out of any claim or controversy in respect to the BDC complaint. The Company has
made a claim for indemnification.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32 Section 1350 - Certification
(b) Reports on Form 8-K:
The Company filed a current report on Form 8-K to report that on March
15, 2004, at a special meeting of the Board of Directors and the Audit
Committee, it was resolved to appoint Marcum and Kliegman LLP, New
York, NY, as the Company's independent accountants for the fiscal year
ending September 30, 2004. BDO Seidman LLP, the previously engaged
independent accountants for the Company, has resigned.
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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: March 19, 2004 /s/George Aaron
------------------------------------
George Aaron
President & Chief Executive Officer
Date: March 19, 2004 /s/Jonathan Joels
Jonathan Joels
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Chief Financial Officer
15