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 MARCH 31, 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.
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(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
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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 April 30, 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 - March 31, 2003 and
September 30, 2002 3
Consolidated Statements of Operations - for the
three months and six months ended March 31, 2003 and 2002 4
Consolidated Statement of Stockholders' Equity -
for the six months ended March 31, 2003 5
Consolidated Statements of Cash Flows - for the
six months ended March 31, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. CONTROLS & PROCEDURES 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, 2003 September 30, 2002
-------------- ------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, (including $302,380 of
restricted funds held in escrow) $ 2,730,782 $ 505,282
Accounts receivable, net of reserve for bad debts
of $19,086 and $13,000 at March 31, 2003 and
September 30, 2002 385,906 141,731
Inventories 359,101 -
Other current assets 90,916 6,948
Net assets of TDM business segment - 2,511,147
-------------- --------------
Total current assets 3,566,705 3,165,108
-------------- --------------
PROPERTY AND EQUIPMENT:
Medical equipment 314,318 314,318
Office furniture and equipment 504,274 193,469
Leasehold improvements 18,373 950
-------------- --------------
836,965 508,737
Less: accumulated depreciation 606,302 478,136
-------------- --------------
Net property and equipment 230,663 30,601
-------------- --------------
OTHER ASSETS:
Note receivable - 350,000
Deferred financing cost, net of accumulated
amortization of $16,107 and $2,301 at
March 31, 2003 and September 30, 2002 25,243 39,049
Deferred acquisition costs - 189,463
Goodwill 1,777,010 -
Other 322,794 22,794
-------------- --------------
Total other assets 2,125,047 601,306
-------------- --------------
TOTAL ASSETS $ 5,922,415 $ 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 1,221,027 408,841
Accrued expenses 730,834 198,087
Accrued compensation 177,134 86,018
Current maturities of long-term debt and capital
lease obligations 14,328 12,806
-------------- --------------
Total current liabilities 2,143,323 1,252,402
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
net of current maturities 13,602 22,226
-------------- --------------
TOTAL LIABILITIES 2,156,925 1,274,628
-------------- --------------
MINORITY INTEREST IN MCM 234,230 -
-------------- --------------
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 March 31, 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 March 31, 2003
and at September 30, 2002 204,191 204,191
Additional paid-in capital 67,579,258 67,579,258
Accumulated deficit (66,949,939) (67,958,812)
Treasury stock (22,500 common shares, at cost) (2,250) (2,250)
-------------- --------------
Total stockholders' equity 3,531,260 2,522,387
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,922,415 $ 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 six months ended
------------------------------ ------------------------------
March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2002
-------------- -------------- -------------- --------------
REVENUES:
Net patient service revenues $ 385,064 $ 387,420 $ 805,051 $ 829,838
Product sales and rental revenues 197,841 - 332,743 -
Consulting income 12,500 - 25,000 -
------------ ------------ ------------ ------------
Total revenues 595,405 387,420 1,162,794 829,838
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of patient service revenues 163,756 205,518 466,709 432,537
Cost of product sales and rental revenue 144,860 - 307,441 -
Research and development 34,536 - 104,405 -
Selling, general and administrative 1,103,991 192,778 2,710,235 393,864
Provision for bad debt and collection costs 9,440 13,102 17,807 22,651
------------ ------------ ------------ ------------
Total operating expenses 1,456,583 411,398 3,606,597 849,052
------------ ------------ ------------ ------------
Operating loss (861,178) (23,978) (2,443,803) (19,214)
Interest income (expense) 10,717 (2,740) 14,413 (6,068)
------------ ------------ ------------ ------------
Loss from continuing operations (850,461) (26,718) (2,429,390) (25,282)
Income (loss) from operations of discontinued
TDM business segment (including gain on disposal
of $3,123,748 in October 2002) 68,839 28,857 3,192,587 (37,770)
------------ ------------ ------------ ------------
Net income (loss) before minority interest (781,622) 2,139 763,197 (63,052)
Loss applicable to minority interest (81,484) - (245,676) -
------------ ------------ ------------ ------------
Net income (loss) $ (700,138) $ 2,139 $ 1,008,873 $ (63,052)
============ ============ ============ ============
Net income (loss) per basic and diluted common share:
Continuing operations $ (0.04) $ (0.00) $ (0.11) $ (0.00)
Discontinued operations 0.01 0.00 0.16 (0.00)
------------ ------------ ------------ ------------
Net income (loss) per basic and diluted common share $ (0.03) $ 0.00 $ 0.05 $ (0.00)
============ ============ ============ ============
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 - - - - - 1,008,873 - - 1,008,873
-------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2003 27,000 $2,700,000 20,419,062 $204,191 $67,579,258 $(66,949,939) 22,500 $(2,250) $3,531,260
=======================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
5
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended March 31,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,008,873 $ (63,052)
Adjustments to reconcile net loss to net cash used
in operating activities:
Minority interest in loss of MCM (245,676) -
Gain on sale of TDM business (3,123,748) -
Amortization of discount on bridge financing 17,156 5,000
Depreciation and amortization 49,015 130,621
Changes in operating assets and liabilities:
Accounts receivable, net (193,090) (61,846)
Inventories (33,308) 68,951
Other assets 222,682 3,701
Accounts payable and accrued expenses (40,964) (92,901)
----------- -----------
Net cash used in operating activities (2,339,060) (9,526)
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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) -
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Net cash provided by investing activities 5,121,662 -
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt and capital lease obligations (557,102) (34,081)
----------- -----------
Net cash used in financing activities (557,102) (34,081)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,225,500 (43,607)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 505,282 89,776
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,730,782 $ 46,169
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 8,857 $ 27,751
=========== ===========
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. The Company continues to own and operate a comprehensive
imaging center located in Lauderhill, Florida. 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").
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 24,000 procedures
per year comprising of x-ray mammography, ultrasound, stereotactic biopsy and
bone densitometry. The Company continues in its efforts to secure the sale of
Strax and is in active discussions with a third party.
7
NOTE 3 - STOCK OPTIONS
----------------------
At March 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 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 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 ending 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 loss
and loss per share for the periods shown below would have been as follows:
Three months ended March 31, Six months ended March 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income (loss) as
reported $ (700,138) $ 2,139 $ 1,008,873 $ (63,052)
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 (27,846) (21,996) (55,691) (43,992)
------------ ------------ ------------ ------------
Pro forma net income (loss) $ (727,984) $ (19,857) $ 953,182 $ (107,044)
============ ============ ============ ============
Basic and diluted income
(loss) per share
As reported $ (0.03) $ (0.00) $ 0.05 $ 0.00
Pro forma $ (0.04) $ (0.00) $ 0.05 $ (0.01)
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
Corporate Rehabilitation MCM Consolidated
Services Business
------------ -------------- ----------- ------------
Three months ended March 31, 2003
---------------------------------
Revenues $12,500 $385,064 $197,841 $595,405
Loss from continuing operations ($691,187) ($48,895) ($110,379) ($850,461)
Three months ended March 31, 2002
---------------------------------
Revenues - $387,420 - $387,420
Loss from continuing operations - ($26,718) - ($26,718)
Six months ended March 31, 2003
-------------------------------
Revenues $25,000 $805,051 $332,743 $1,162,794
Loss from continuing operations ($2,044,951) ($51,646) ($332,793) ($2,429,390)
Identifiable assets at March 31, 2003 $2,152,700 $286,698 $3,483,017 $5,922,415
Six months ended March 31, 2002
-------------------------------
Revenues - $829,838 - $ 829,838
Loss from continuing operations - ($25,282) - ($25,282)
Identifiable assets at March 31, 2002 $2,940,319 $346,557 - $3,286,876
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.
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
9
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. 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 six month periods ended March 31,
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:
Six months ended March 31, 2003 2002
-------------------------------------------------------------------------
Sales $ 1,403,876 $ 1,206,100
============ ============
Loss from operations $(2,535,104) $ (565,746)
============ ============
Net income (loss) $ 948,056 $ (621,231)
============ ============
Net income (loss) per share basic and
diluted common share $ 0.05 $ (0.04)
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
have been excluded from income from continuing operations in the accompanying
consolidated statements of operations for the six months ended March 31, 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
10
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 six month
period ended March 31, 2003 and 2002 is as follows:
2003 2002
---- ----
Revenues $96,698 $1,077,444
Operating Expenses 23,300 1,115,214
------- ----------
Income (loss) from Operations $73,398 ($37,770)
======= ==========
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 balance sheet as of the six months ended
March 31, 2003 and consolidated statements of operations for the six months
ended March 31, 2002 have been restated to reflect the TDM business as
discontinued operations.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
-------------------------------------------------------------------------------
Net patient service revenue at Strax totaled $385,064 for the three months
ended March 31, 2003, versus $387,420 for the three months ended March 31, 2002.
Cost of service operations totaled $163,756 for the three months ended March 31,
2003 versus $205,518 for the three months ended March 31, 2002. The decrease
reflects lower consulting expenses for the period.
Selling, general and administrative expenses totaled $1,103,991 for the
three months ended March 31, 2003 versus $192,778 for the three months ended
March 31, 2002. The increase reflects costs related to the acquisition of MCM
and the operation of MCM, as well as increased legal and insurance fees.
MCM product sales and rental revenues totaled $197,841 for the three months
ended March 31, 2003. There are no comparisons for prior periods as the Company
commenced this business effective December 17, 2002.
SIX MONTHS ENDED MARCH 31, 2003 COMPARED TO SIX MONTHS ENDED MARCH 31, 2002
---------------------------------------------------------------------------
Net patient service revenue at Strax totaled $805,051 for the six months
ended March 31, 2003, versus $829,838 for the six months ended March 31,2002.
Cost of service operations totaled $466,709 for the six months ended March 31,
2003 versus $432,537 for the six months ended March 31, 2002. The increase
reflects higher contractual allowances due to a decrease in reimbursement rates
from healthcare providers.
11
Selling, general and administrative expenses totaled $2,710,235 for the six
months ended March 31, 2003 versus $393,864 for the six months ended March 31,
2002. The increase reflects costs related to the acquisition of MCM and the
operation of MCM, performance and salary adjustments to employees as well as
increased legal and insurance fees.
MCM product sales and rental revenues totaled $332,743 for the six months
ended March 31, 2003. There are no comparisons for prior periods as the Company
commenced this business effective December 17, 2002.
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.
The Company continues in its efforts to secure the sale of the Strax
Institute and is in active discussions with a third party.
Net cash used in operations for the six months ended March 31, 2003
amounted to $2,339,060. Net cash flows provided by investing activities for the
six months ended March 31, 2003 amounted to $5,121,662.
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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 (EITD) 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.
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
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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 Rules 13a-14 (c) and 15d-14 (c) of the Securities Exchange Act of
1934) as of March 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
subsequent to March 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 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. The Court has also ordered the parties
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to proceed with mediation in an attempt to resolve the dispute. 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.
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
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
99.1 Certification of George Aaron, President and Executive Officer
99.2 Certification of Jonathan Joels, Chief Financial Officer
(b) Reports on Form 8-K
1) On March 3, 2003, the Company filed a current report on Form 8-K/A to
provide the required financial information in response to parts (a)
and (b) of Item 7 of the Company's Form 8-K filed on January 3, 2003,
to report it completed its acquisition of 33,191 shares of Series A
Preferred Stock of MCM Environmental Technologies, Inc., a Delaware
Corporation ("MCM"), representing 57.53% of the voting stock of MCM.
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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: May 14, 2003 /s/ George Aaron
----------------------------
George Aaron
President & Chief Executive Officer
Date: May 14, 2003 /s/ Jonathan Joels
----------------------------
Jonathan Joels
Chief Financial Officer
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