AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 2004
Registration No. 333-118869
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2/A-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CAPRIUS, INC.
(Name of Small Business Issuer in Its Charter)
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DELAWARE 3845 22-2457487
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
----------------
ONE PARKER PLAZA
FORT LEE, NEW JERSEY 07024
(201) 592-8838
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
----------------
GEORGE AARON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ONE PARKER PLAZA
FORT LEE, NEW JERSEY 07024
(201) 592-8838
(Name, Address and Telephone Number of Agent For Service)
----------------
Copies to:
BRUCE A. RICH, ESQ.
THELEN REID & PRIEST LLP
875 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 603-2000
----------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: from time to time after the
effective date of this Registration Statement as determined by market conditions
and other factors.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |X|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. | |
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. | |
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. | |
CALCULATION OF REGISTRATION FEE
========================================================================================================================
TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED BE REGISTERED SHARE (1) PRICE(1) REGISTRATION FEE
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Common Stock, $.01 par value 11,373,026 shs. $.16 $1,819,684 $230.55
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Common Stock, $.01 par value(2)(3) 10,000,000 shs. $.15 $1,500,000 $190.05
------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value(2)(4) 1,425,000 shs. $.28 $ 399,000 $ 50.55
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Common Stock, $.01 par value(2)(5) 500,000 shs. $.15 $ 75,000 $ 9.50
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Common Stock, $.01 par value(2)(6) 1,785,385 shs. $.31 $ 555,884 $ 70.43
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Total 25,083,411 shs. - - $550.58
========================================================================================================================
(1) Estimated solely for the purpose of computing amount of the registration
fee pursuant to Rule 457(c) promulgated under the Securities Act of 1933,
as amended, based on the average of the bid and asked prices on the OTC
Bulletin Board on September 1, 2004.
(2) In accordance with Rule 457(g), the registration fee for these shares is
calculated upon a price which represents the highest of (i) the price at
which the warrants or options may be exercised; (ii) the offering price of
securities of the same class included in this registration statement; or
(iii) the price of securities of the same class, as determined pursuant to
Rule 457(c).
(3) Represents shares of Common Stock underlying the 8% Senior Secured
Convertible Promissory Notes. These notes are convertible at $.15 per
share.
(4) Represents shares of Common Stock underlying the Dealer's Warrants. The
exercise price is $.28 per share. (5) Represents shares of Common Stock
underlying options exercisable at $ 0.15 (6) Represents shares of Common
Stock underlying warrants granted to certain individuals.
The registrant shall amend this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file an amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
PROSPECTUS
Subject to Completion, Dated November 5, 2004
25,083,411 shares of Common Stock
CAPRIUS, INC.
This prospectus relates to the resale by the selling stockholders listed
elsewhere in this prospectus of up to 25,083,411 shares of our common stock. The
selling stockholders may sell their shares from time to time at the prevailing
market price or in negotiated transactions. Of the shares offered:
- 11,373,026 shares are presently outstanding,
- 10,000,000 shares are issuable upon conversion of convertible
promissory notes, and
- 3,710,385 shares are issuable upon exercise of warrants and
options.
We will receive no proceeds from the sale of the shares by the selling
stockholders, or a result of the conversion of the convertible promissory notes,
although our liabilities will be reduced by the $1,500,000 principal amount of
the notes converted. However, we will receive proceeds in the amount of
$1,029,884 assuming the exercise of all of the warrants and options held by the
selling stockholders, subject to certain of the warrants being exercised under a
"cashless exercise" right.
Our common stock is traded on the over-the-counter electronic bulletin
board. Our trading symbol is CAPR. On November 2, 2004, the last bid price as
reported was $0.13.
The selling stockholders, and any participating broker-dealers may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933,
and any commissions or discounts given to any such broker-dealer may be regarded
as underwriting commissions or discounts under the Securities Act. The selling
stockholders have informed us that they do not have any agreement or
understanding, directly or indirectly, with any person to distribute their
common stock.
Brokers or dealers effecting transaction in the shares should confirm the
registration of these securities under the securities laws of the states in
which transactions occur or the existence of our exemption from registration.
AN INVESTMENT IN SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
WE URGE YOU TO CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
November __, 2004
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all the information that you should
consider before investing in the common stock. You should carefully read the
entire prospectus, including "Risk Factors" and the Consolidated Financial
Statements, before making an investment decision.
THE COMPANY
BACKGROUND
Caprius, Inc. is engaged in the infectious medical waste disposal business.
In the first quarter of Fiscal 2003, we acquired a majority interest in M.C.M.
Environmental Technologies, Inc. ("MCM"), which develops, markets and sells the
SteriMed and SteriMed Junior compact systems that simultaneously shred and
disinfect Regulated Medical Waste. The SteriMed Systems are sold and leased in
both the domestic and international markets.
Our principal business office is located at One Parker Plaza, Fort Lee, New
Jersey 07024, and our telephone number at that address is (201) 592-8838.
In this prospectus, "Caprius," the "Company," "we," "us" and "our" refer to
Caprius, Inc. and, unless the context otherwise indicates, our subsidiary MCM.
HISTORY
In June 1999, we acquired Opus Diagnostics Inc. ("Opus") and began
manufacturing and selling medical diagnostic assays constituting the Therapeutic
Drug Monitoring Business ("TDM"). In October 2002, we sold the assets of the TDM
business to Seradyn, Inc., an unrelated company. We were founded in 1983 and
through June 1999 essentially operated in the business of seeking to develop
specialized medical imaging systems, as well as operating the Strax Institute
("Strax"), a comprehensive breast imaging center. The Strax Institute was sold
in September 2003 to an unrelated company.
ACQUISITION OF M.C.M. ENVIRONMENTAL TECHNOLOGIES, INC.
On December 17, 2002, we initially acquired 57.53% of the outstanding
capital stock of MCM for $2.4 million and currently MCM is majority owned by us.
MCM wholly owns MCM Environmental Technologies Ltd., an Israeli corporation,
which initially developed the SteriMed Systems. Upon closing, our designees were
elected to three of the five seats on MCM's Board of Directors, with George
Aaron, President and CEO, and Jonathan Joels, CFO, filling two seats.
Additionally, as part of the transaction, certain indebtedness 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, we had provided
MCM with loans totaling $565,000, which loans were repaid upon closing by a
reduction in the cash portion of the purchase price. For the six month period
that commenced on July 17, 2004 and ends on January 17, 2005, pursuant to a
Stockholders Agreement, the stockholders of MCM (other than Caprius) have the
right to put all of their MCM shares to MCM, and MCM has the right to call all
of such shares. The party who first exercises its put or call rights is required
to accompany its notice of put or call with its proposal for the price of the
stock interest in MCM to be sold or purchased, as applicable. The recipient is
then required to give notice to the exercising party of its proposed price for
such interest. The parties shall then negotiate and agree upon an agreed price.
At our option, we may pay the purchase price for the remaining MCM shares in
cash or in shares of our common stock. Neither party has given notice of its put
or call.
STERIMED SYSTEMS
We developed and market worldwide the SteriMed and SteriMed Junior compact
systems that simultaneously shred and disinfect Regulated Medical Waste ("RMW"),
reducing its volume up to 90%, and rendering it harmless for disposal as
ordinary waste. The SteriMed Systems are patented, environmentally-friendly,
on-site disinfecting and disposal units that can process regulated clinical
waste, including sharps, dialysis filters, pads, bandages, plastic tubing and
even glass, in a 12 minute cycle. The units, comparable in size to a
washer-dryer, simultaneously shred, grind, mix and disinfect the waste with the
proprietary Ster-Cid(R) solution. After treatment, the material may be discarded
as conventional solid waste, in accordance with appropriate regulatory
requirements.
The SteriMed enables generators of RMW, such as clinics and hospitals, to
significantly reduce cost for treatment and disposal of RMW, eliminate the
potential liability associated with the regulated "cradle to grave" tracking
system involved in the transport of RMW, and treat in-house RMW on-site in an
effective, safe and easy manner. As the technology for disinfection is chemical
based, within the definitions used in the industry, it is considered as an
alternative treatment technology.
The SteriMed Systems are comprised of two different sized units, and the
required Ster-Cid(R) disinfectant solution that can be utilized with both units.
The larger SteriMed can treat up to 18.5 gallons (70 liters) of medical waste
per cycle. The smaller version, SteriMed Junior, can treat 4 gallons (15 liters)
per cycle.
Ster-Cid(R) is our proprietary disinfectant solution used in the SteriMed
System. Ster-Cid(R) is approximately 90% biodegradable and is registered with
the U.S. Environmental Protection Agency ("U.S. EPA") in accordance with the
Federal Insecticide, Fungicide, Rodenticide Act of 1972 ("FIFRA"). During the
SteriMed disinfecting cycle, the concentration of Ster-Cid(R) is approximately
0.5% of the total volume of liquids. The Ster-Cid(R) disinfectant in conjunction
with the SteriMed System has been tested in independent laboratories. Results
show that disinfection levels specified in the U.S. EPA guidance document,
"Report on State and Territorial Association on Alternate Treatment
Technologies", are met. Furthermore, it is accepted by Publicly Owned Treatment
Works ("POTW") allowing for its discharge into the sewer system.
Both SteriMed units are safe and easy to operate requiring only a half day
of training. Once the cycle commences, the system is locked, water and
Ster-Cid(R) are automatically released into the treatment chamber. The
shredding, grinding and mixing of the waste is then initiated exposing all
surfaces of the medical waste to the chemical solution during the 12 minute
processing cycle. At the end of each cycle, the disinfected waste is ready for
disposal as regular solid waste.
In the United States, the initial focus of marketing the SteriMed Systems
has been to the medium-term to larger chains of dialysis clinics on a lease or
sales basis. In addition, we are also pursuing other potential users, including
laboratories, blood banks, surgical centers and hospitals.
Internationally, we continue to market our SteriMed Systems both directly
and indirectly through distributors. Our distributors are trained by us to
enable them to take on the responsibility for the installation and maintenance
that are required for the SteriMed Systems.
RECENT DEVELOPMENTS
CONVERTIBLE NOTE PRIVATE PLACEMENT
During the third quarter of fiscal 2004, we sold an aggregate of $1.5
million principal amount of 8% Senior Secured Convertible Promissory Notes,
excluding fees and expenses. These convertible promissory notes are repayable,
together with interest at 8% per annum, from April 27, 2005 to June 10, 2005,
subject to prepayment or conversion into shares of our common stock. The
conversion price initially was $.20 per share, but was subject to reduction to
$.15 per share unless by September 30, 2004 we had consummated a business
acquisition and the market price of our common stock was at least $.50 per
share. As these conditions were not met, on October 1, 2004, the conversion
price was reduced to $.15 per share. The convertible promissory notes are
secured by all of our assets, including the capital stock of MCM owned by us,
but excluding any royalty payments to be received pursuant to a Royalty
Agreement, dated as of October 9, 2002, between Seradyn Inc. and Opus, which are
the security for some prior indebtedness. The proceeds from the sale of the
convertible promissory notes were utilized for the expansion of MCM's infectious
medical waste disposal business and for our general working capital purposes.
SALE OF STRAX INSTITUTE
Effective September 30, 2003, we completed the sale of the Strax Institute
for a purchase price of $412,000. Half of the purchase price was paid on closing
and the balance is payable in installments evidenced by a note secured by the
accounts receivables of Strax Institute, Inc.
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THE OFFERING
SECURITIES OFFERED BY
SELLING STOCKHOLDERS.................. 25,083,411 shares, includes 13,710,385
shares subject to options, warrants and
convertible notes.
COMMON STOCK TO BE
OUTSTANDING AFTER THE OFFERING........ 34,156,947 shares, assuming the selling
stockholders exercise all their options
and warrants and convert all their
convertible notes.
USE OF PROCEEDS....................... We will receive no proceeds from the
sale of common stock by the selling
stockholders. However, we will receive
$1,029,884 if all of the warrants and
options for underlying shares included
in this prospectus are exercised. We
will use these proceeds for general
corporate purposes.
OTC ELECTRONIC BULLETIN BOARD SYMBOL.. "CAPR"
RISK FACTORS
See "RISK FACTORS" for a discussion of certain factors that should be
considered in evaluating an investment in the common stock.
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following selected financial information is derived from the
Consolidated Financial Statements appearing elsewhere in this Prospectus and
should be read in conjunction with the Consolidated Financial Statements,
including the notes thereto, appearing elsewhere in this Prospectus.
YEAR ENDED SEPTEMBER 30 NINE MONTHS ENDED JUNE, 30
Summary of Operations 2003 2002 2004 2003
--------------------- ---- ---- ---- ----
Total revenues $ 600,579 $ - $ 761,979 $ 477,518
Loss from continuing operations before
provision for income taxes (4,052,867) (1,582,636) (2,308,184) (3,337,580)
Income from operations of discontinued TDM
business segment (including gain on disposal
of $3,214,189 per 2002) 3,287,587 1,421,633 - 3,192,587
Loss from operations of discontinued Strax
Business (including gain on disposal of
$125,658 at September 30, 2003) (18,830) (256,690) (28,425) (81,946)
Loss applicable to minority interest 459,906 - - 363,471
Net (loss) income (324,204) (417,693) (2,336,609) 136,532
Loss from continuing operations per share (0.18) (0.09) (0.11) (0.16)
Income on disposal of discontinued
operation per share 0.16 0.07 - 0.15
Net loss per common share (basic and
diluted) (0.02) (0.02) (0.11) (0.01)
Weighted average common shares outstanding,
basic and diluted 20,402,315 17,171,140 20,446,562 20,396,562
AS OF AS OF
Statement of Financial Position JUNE 30, 2004 SEPTEMBER 30, 2003
Cash and cash equivalents $ 337,575 $ 774,819
Total assets 3,178,865 3,909,727
Working capital (deficit) (1,054,818) 372,590
Long-term debt 480,212 -
Stockholders' equity(deficiency) (80,026) 2,200,683
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RISK FACTORS
The shares of our common stock being offered for resale by the selling
stockholders are highly speculative in nature, involve a high degree of risk and
should be purchased only by persons who can afford to lose the entire amount
invested in the common stock. Before purchasing any of the shares of common
stock, you should carefully consider the following factors relating to our
business and prospects. If any of the following risks actually occurs, our
business, financial condition or operating results could be materially adversely
affected. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
BUSINESS RISKS
WE HAVE A HISTORY OF LOSSES
To date, we have been unable to generate revenue sufficient to be
profitable. We had a net loss of $324,204, or $(0.02) per share, for the fiscal
year ended September 30, 2003, compared to a net loss of $417,693, or $(0.02)
per share, for the fiscal year ended September 30, 2002, and a net loss of
$2,336,609, or $(0.11) per share, for the nine month period ended June 30, 2004.
We can expect to incur losses for the immediate foreseeable future. There can be
no assurance that we will ever achieve the level of revenues needed to be
profitable in the future or, if profitability is achieved, that it will be
sustained. Due to these losses, we have a continuing need for additional
capital.
RISK OF NEED FOR ADDITIONAL FINANCING
Although we raised gross proceeds of $1,500,000 in a placement of
convertible secured notes in the third quarter of fiscal 2004, we expect to
require additional working capital or other funds in the near future. These
funds are required to support our marketing efforts, obtaining additional
regulatory approvals both domestically and overseas as well as for manufacturing
purposes. In the event we are unable to achieve any market penetration in the
near term, secure regulatory approvals or build inventory available for
immediate delivery, our ability to secure additional funding could be severely
jeopardized and there is no assurance that we will be successful in obtaining
additional funds, whether publicly or privately or through equity or debt.
Another potential capital source is through a financing taking place
simultaneously with the possible acquisition of a private operating company. Any
such financing or acquisition could be highly dilutive to stockholders. The
failure to obtain additional financing or sales in the very near term could
result in curtailment of our operations. In light of our current low cash
position, we are presently utilizing current receivables, inventories and short
term advances to fund our current and immediate payables.
OUR ACCOUNTANT'S REPORT RAISES DOUBT AS TO OUR ABILITY TO CONTINUE AS A
"GOING CONCERN"
The report of our predecessor independent accountants on our September 30,
2003 Consolidated Financial Statements contains an explanatory paragraph
describing conditions that raise substantial doubt about our ability to continue
as a going concern. The independent accountants cited our history of substantial
losses in recent years and the pendency of certain litigation, which raised
substantial doubt as to our ability to continue as a going concern. As shown in
the financial statements, we incurred net losses of $2,336,609 for the nine
month period ended June 30, 2004. One consequence of receiving a "going concern"
opinion is that it may make it even more difficult to obtain additional funding.
If we are unable to continue as a "going concern" your entire investment in us
could be lost.
OUR LACK OF OPERATING HISTORY MAKES EVALUATION OF OUR BUSINESS DIFFICULT.
The MCM business, our primary business, is at an early stage of development
and there is no meaningful historical financial or other information available
upon which you can base your evaluation of this business and its prospects. We
acquired the MCM business in December 2002 and have generated insignificant
revenues to date from it.
In addition, our early stage of development means that we have less insight
into how market and technology trends may affect our business. This includes our
ability to attract and convince customers to switch from their current method of
dealing with the disposal of their medical waste to a new technology and to
adjust their current in-house system to adapt to our SteriMed System. As a
consequence, the revenue and income potential of our business is unproven.
4
Further, we cannot estimate the expenses for operating the business. If we are
incorrect in our estimates, it could be detrimental to our business.
WE EXPECT OUR MANUFACTURING AND MARKETING DEVELOPMENT WORK FOR OUR MCM BUSINESS
TO CONTINUE FOR SOMETIME, AND OUR MANUFACTURING AND MARKETING MAY NOT SUCCEED OR
MAY BE SIGNIFICANTLY DELAYED.
At present, the SteriMed unit is manufactured at our own facility in
Israel. The SteriMed Junior had been manufactured by a third party manufacturer
in Israel. We expect our manufacturing and marketing development work for our
business to continue in Israel, however due to the limited capacity as well as
the high costs of transportation from Israel, we continue to seek alternative
manufacturing capacity with manufacturers outside of Israel located in North
America, Russia or China. As we receive interest from these manufacturers, we
will then undertake a detailed analysis to ensure that they are sufficiently
qualified to manufacture our unit and their costs are acceptable to us. If we
fail to effectively manufacture or cause the manufacture or fail to develop a
market for our SteriMed systems, we will likely be unable to recover the losses
we will have incurred in attempting to produce and market these products and
technologies and may be unable to make sales or become profitable. As a result,
the market price of our securities may decline, causing you to lose some or all
of your investment.
DEPENDENCE ON OUR THIRD PARTY COMPONENT SUPPLIERS
We are dependent on third party suppliers for the components of our
SteriMed and SteriMed Junior Systems and also for the Ster-Cid(R) disinfectant.
At present there are no supply contracts in place and our requirements are
fulfilled against purchase orders. There can be no assurances that we will have
adequate supplies of materials. Although we believe that the required components
are readily available and can be provided by other suppliers, delays may be
incurred in establishing relationships or in awaiting for quality control
assurance with other manufacturers for substitute components.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION WITH WHICH IT IS FREQUENTLY
DIFFICULT, EXPENSIVE AND TIME-CONSUMING TO COMPLY.
The medical waste management industry is subject to extensive U.S. EPA,
state and local laws and regulations relating to the collection, packaging,
labeling, handling, documentation, reporting, treatment and disposal of
regulated medical waste. The use of the Ster-Cid(R) disinfectant in the SteriMed
System is registered with the U.S. EPA under FIFRA, however, the SteriMed System
is not subject to U.S. EPA registration. Our business requires us to comply with
these extensive laws and regulations and also to obtain permits, authorizations,
approvals, certificates or other types of governmental permission from all
states and some local jurisdictions where we sell or lease the SteriMed System.
The SteriMed Senior has been cleared for marketing in 45 states and the SteriMed
Junior in 39 states. It is our objective to obtain approvals from the remaining
states in 2004. The Ster-Cid(R) has been registered in 49 states. Our ability to
obtain such approvals in the remaining states and the timing and cost to do so,
if successful, cannot be easily determined nor can the receipt of ultimate
approval be assumed.
In markets outside the U.S., our ability to market the SteriMed System is
governed by the regulations of the specific country. In foreign countries we
market through distributors, on which we rely to obtain the necessary regulatory
approvals to permit the SteriMed System to be marketed in that country. We are
therefore dependent on the distributor to process these applications where
required. In many of these countries we have no direct control or involvement in
the approval process, and therefore we cannot estimate when our product will be
available in that market.
We believe that we currently comply in all material respects with all
applicable laws, regulations and permitting requirements. State and local
regulations change often, however, and new regulations are frequently adopted.
Changes in the applicable regulations could require us to obtain new approvals
or permits, to change the way in which we operate or to make changes to our
SteriMed System. We might be unable to obtain the new approvals or permits that
we require, and the cost of compliance with new or changed regulations could be
significant. In the event we are not in compliance, we can be subject to fines
and administrative, civil or criminal sanctions or suspension of our business.
The approvals or permits that we require in foreign countries may be
difficult and time-consuming to obtain. They may also contain conditions or
restrictions that limit our ability to operate efficiently, and they may not be
5
issued as quickly as we need (or at all). If we cannot obtain the approval or
permits that we need when we need them, or if they contain unfavorable
conditions, it could substantially impair our ability to sell the SteriMed
System in certain jurisdictions or to import the system into the United States.
WE MAY NOT BE ABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND
PROPRIETARY TECHNOLOGY, WHICH COULD HAVE A MATERIAL AFFECT ON OUR BUSINESS AND
MAKE IT EASIER FOR OUR COMPETITORS TO DUPLICATE OUR PRODUCTS.
We regard certain aspects of our products, processes, services and
technology as proprietary, and we have trademarks and patents for certain
aspects of the SteriMed System. Our ability to compete successfully will depend
in part on our ability to protect our proprietary rights and to operate without
infringing on the proprietary right of others, both in the United States and
abroad. Our proprietary rights to Ster-Cid(R) relate to an exclusive worldwide
license that we had obtained from a third party manufacturer in Europe to
purchase the Ster-Cid(R) disinfectant. The patent positions of medical waste
technology companies generally involve complex legal and factual questions.
While patents are important to our business, the regulatory approvals are more
critical in permitting us to market our products. We may also apply in the
future for patent protection for uses, processes, products and systems that we
develop. There can be no assurance that any future patent that we apply for will
be issued, or that any existing patents issued will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
any competitive advantage, or that third parties will not infringe or
misappropriate our proprietary rights or that third parties will not
independently develop similar products, services and technology. We may incur
substantial costs in defending any patent or license infringement suits or in
asserting any patent or license rights, including those granted by third
parties, the expenditure of which we might not be able to afford. An adverse
determination could subject us to significant liabilities to third parties,
require us to seek licenses from or pay royalties to third parties or require us
to develop appropriate alternative technology. There can be no assurance that
any such licenses would be available on acceptable terms or at all, or that we
could develop alternate technology at an acceptable price or at all. Any of
these events could have a material adverse effect on our business and
profitability.
We may have to resort to litigation to enforce our intellectual property
rights, protect our trade secrets, determine the validity and scope of the
proprietary rights of others, or defend ourselves from claims of infringement,
invalidity or unenforceability. Litigation may be expensive and divert resources
even if we win. This could adversely affect our business, financial condition
and operating results such that it could cause us to reduce or cease operations.
WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE
Our future growth and profitability depend in part on our ability to
respond to technological changes and successfully develop and market new
products that achieve significant market acceptance. This industry has been
historically marked by very rapid technological change and the frequent
introductions of new products. There is no assurance that we will be able to
develop new products that will realize broad market acceptance.
THE NATURE OF OUR BUSINESS EXPOSES US TO PROFESSIONAL AND PRODUCT LIABILITY
CLAIMS, WHICH COULD MATERIALLY ADVERSELY IMPACT OUR BUSINESS AND PROFITABILITY
The malfunction or misuse of our SteriMed Systems may result in damage to
property or persons, as well as violation of various health and safety
regulations, thereby subjecting us to possible liability. Although our insurance
coverage is in amounts and deductibles customary in the industry, there can be
no assurance that such insurance will be sufficient to cover any potential
liability. We currently retain a claims made $2 million worldwide product
liability insurance policy. Further, in the event of either adverse claim
experience or insurance industry trends, we may in the future have difficulty in
obtaining product liability insurance or be forced to pay very high premiums,
and there can be no assurance that insurance coverage will continue to be
available on commercially reasonable terms or at all. In addition, there can be
no assurance that insurance will adequately cover any product liability claim
against us. A successful product liability, environmental or other claim with
respect to uninsured liabilities or in excess of insured liabilities could have
a material adverse effect on our business, financial condition and operations.
TO date, no claims have been made against us. We believe that our insurance
coverage is adequate to cover any claims made, and we review our insurance
requirement with our insurance broker on an annual basis.
6
OTHER PARTIES MAY ASSERT THAT OUR TECHNOLOGY INFRINGES ON THEIR INTELLECTUAL
PROPERTY RIGHTS, WHICH COULD DIVERT MANAGEMENT TIME AND RESOURCES AND POSSIBLY
FORCE US TO REDESIGN OUR PRODUCTS
Developing products based upon new technologies can result in litigation
based on allegations of patent and other intellectual property infringement.
While no infringement claims have been made or threatened against us, we cannot
assure you that third parties will not assert infringement claims against us in
the future, that assertions by such parties will not result in costly
litigation, or that they will not prevail in any such litigation. In addition,
we cannot assure you that we will be able to license any valid and infringed
patents from third parties on commercially reasonable terms or, alternatively,
be able to redesign products on a cost-effective basis to avoid infringement.
Any infringement claim or other litigation against or by us could have a
material adverse effect on us and could cause us to reduce or cease operations,
and even if we are successful in a litigation to defend such claim, there may be
adverse effects due to the significant expenses related to defending the
litigation.
THE LOSS OF CERTAIN MEMBERS OF OUR MANAGEMENT TEAM COULD ADVERSELY AFFECT OUR
BUSINESS
Our success is highly dependent on the continued efforts of George Aaron,
Chairman, President and Chief Executive Officer, and Jonathan Joels, Chief
Financial Officer, Treasurer and Secretary, who are our key management persons.
Should operations expand, we will need to hire persons with a variety of skills.
Competition for these skilled individuals could be intense, and there can be no
assurance that we will be successful in attracting and retaining key personnel
in the future. Our failure to do so could adversely affect our business and
financial condition. We do not have employment agreements with or carry any
"key-man" insurance on the lives of any of our officers or employees.
DEFENSE OF LITIGATION AND EFFECT OF NEGATIVE OUTCOME
We have been involved in defending two litigations, a Class Action and a
Federal Derivative Action, in which Jack Nelson, a former officer and director
of the Company has directly or indirectly made claims alleging
misrepresentations, mismanagement or other misconduct by us or certain of our
officers and directors. A third litigation, a State Court Action instituted by
Mr. Nelson, was settled in September 2003.
In May 2004, the Court in the Federal Derivative Action granted the motion
made by us and Messrs. Aaron and Joels for judgment on the pleadings based upon
the pre-suit demand requirement and dismissed the plaintiff's complaint without
prejudice, but denied defendants' motion for judgment on the pleadings based
upon the Private Securities Litigation Reform Act. The Court also granted the
plaintiff's cross-motion to file an amended complaint to add allegations of
insider trading. On September 30, 2004, our Board of Directors received a letter
from Mr. Nelson's attorney making a demand that we institute a derivative action
substantially similar to the contents of the complaint that had been filed in
the Federal Derivative Action. A Board committee has 90 days to respond to the
letter before Mr. Nelson takes further action.
In May 2004 and confirmed in July 2004, in a decision separate from the
decision in the Federal Derivative Action, the Court granted the defendants'
motion and dismissed the Class Action with prejudice. The initial plaintiff was
a relative of the wife of the plaintiff in both the Federal Derivative Action
and the State Court Action. The plaintiff did not file a notice of appeal during
the statutory time period.
No damages were specified in these cases. However, the cost of continuing
the defense has been material to us and any continued or new litigations and any
eventual judgment against us could have a material adverse effect on our
financial condition and continuation of operations. In addition, claims by the
defendant officers and directors for indemnification, notwithstanding our having
directors and officers insurance covering securities act claims in the Class
Action, could be material.
DEPENDENCE ON PRINCIPAL CUSTOMERS
Two principal customers, Euromedic and Lysmed, which are foreign
distributors in Central and Eastern Europe, accounted for approximately 81% of
our revenues of our SteriMed business in the nine months ended June 30, 2004,
and approximately 59% of our revenues for the 2003 fiscal year. While we
endeavor to expand our customer base and have been engaged in discussions with
end-users in the U.S., there can be no assurance that we will be successful in
this effort. In addition, the loss of one or both of our principal customers
would have a significant adverse impact to our business.
7
COMPETITION
There are numerous methods of handling and disposing of RMW, of which our
technology is one of the available systems. We are not aware of any competitive
product that is similar to the SteriMed Systems with respect to its design and
compactness. We believe that our SteriMed Systems, due to its ability to be used
on site, the cost basis and ease of use, offers a significant advantage over RMW
systems offered by our competitors. We realize, however, there can be no
assurance that a different or new technology may not supplant us in the market.
Further, we cannot guarantee that in the event that we are successful in the
deployment of our systems in the marketplace, the predominant companies in the
field, which have substantially greater resources and market visibility than us,
will not try to develop similar systems.
CONTROL BY MANAGEMENT
Prior to the offering herein, the executive officers and directors
beneficially own approximately 32% of the outstanding voting securities,
including shares underlying options and warrants held by them. Accordingly, they
could exercise a significant voting block in the election of directors and other
matters to be acted upon by stockholders.
MARKET RISKS
THERE IS ONLY A VOLATILE LIMITED MARKET FOR OUR COMMON STOCK
Recent history relating to the market prices of public companies indicates
that, from time to time, there may be periods of extreme volatility in the
market price of our securities because of factors unrelated to the operating
performance of, or announcements concerning, the issuers of the affected stock,
and especially for stock traded on the OTC Bulletin Board. Our common stock is
not actively traded, and the bid and asked prices for our common stock have
fluctuated significantly. In the past two fiscal years, the common stock traded
on the OTC Bulletin Board from a high of $0.31 to a low of $0.05 per share. See
"MARKET FOR OUR COMMON STOCK." General market price declines, market volatility,
especially for low priced securities, or factors related to the general economy
or to us in the future could adversely affect the price of the common stock.
With the low price of our common stock, any securities placement by us would be
very dilutive to existing stockholders, thereby limiting the nature of future
equity placements.
THE NUMBER OF SHARES BEING REGISTERED FOR SALE IS SIGNIFICANT IN RELATION TO OUR
TRADING VOLUME
All of the shares registered for sale on behalf of the selling stockholders
are "restricted securities" as that term is defined in Rule 144 under the
Securities Act. At September 30, 2004, we had an aggregate of 14,870,178 shares
of common stock reserved for the conversion of Series B Preferred Stock and
convertible notes and the exercised options and warrants. Of the 14,870,178
shares, an aggregate of 13,272,248 shares have been included in this prospectus.
We have filed this registration statement to register these restricted shares
for sale into the public market by the selling stockholders. These restricted
securities, if sold in the market all at once or at about the same time, could
depress the market price during the period the registration statement remains
effective and also could affect our ability to raise equity capital. Any
outstanding shares not sold by the selling stockholders pursuant to this
prospectus will remain as "restricted shares" in the hands of the holder, except
for those held by non-affiliates for a period of two years, calculated pursuant
to Rule 144.
WE HAVE NEVER PAID DIVIDENDS AND WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE
FUTURE
We do not believe that we will pay any cash dividends on our common stock
in the future. We have never declared any cash dividends on our common stock,
and if we were to become profitable, it would be expected that all of such
earnings would be retained to support our business. Since we have no plan to pay
cash dividends, an investor would only realize income from his investment in our
shares if there is a rise in the market price of our common stock, which is
uncertain and unpredictable.
8
SHARES ELIGIBLE FOR FUTURE SALE COULD NEGATIVELY AFFECT YOUR INVESTMENT IN US
The fact that the Company is seeking additional capital through the sale of
its securities, including shares of our preferred stock, which include granting
certain registration rights to the investors could negatively impact us. At
September 30, 2004, we had 16,281,190 shares of common stock and 973,000 shares
of preferred stock which our Board of Directors could issue without any approval
of existing holders. The issuance of these shares, as well as the issuance of
any new shares, and any attempts to resell them could depress the market for the
shares being registered under this prospectus.
WE ARE SUBJECT TO PENNY STOCK REGULATIONS AND RESTRICTIONS
The Securities and Exchange Commission has adopted regulations which
generally define Penny Stocks to be an equity security that has a market price
less than $5.00 per share or an exercise price of less than $5.00 per share,
subject to certain exemptions. As of August 31, 2004, the closing bid and asked
prices for our common stock were $0.16 and $0.16 per share and therefore, it is
designated a "Penny Stock." As a Penny Stock, our common stock may become
subject to Rule 15g-9 under the Securities Exchange Act of 1934, as amended
("Exchange Act"), or the Penny Stock Rule. This rule imposes additional sales
practice requirements on broker-dealers that sell such securities to persons
other than established customers and "accredited investors" (generally,
individuals with a net worth in excess of $1,000,000 or annual incomes exceeding
$200,000, or $300,000 together with their spouses). For transactions covered by
Rule 15g-9, a broker-dealer must make a special suitability determination for
the purchaser and have received the purchaser's written consent to the
transaction prior to sale. As a result, this rule may affect the ability of
broker-dealers to sell our securities and may affect the ability of purchasers
to sell any of our securities in the secondary market.
For any transaction involving a penny stock, unless exempt, the rules
require delivery, prior to any transaction in a penny stock, of a disclosure
schedule prepared by the Securities and Exchange Commission ("SEC") relating to
the penny stock market. Disclosure is also required to be made about sales
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stock.
There can be no assurance that our common stock will qualify for exemption
from the penny stock restrictions. In any event, even if our common stock were
exempt from the Penny Stock restrictions, we would remain subject to Section
15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any
person from participating in a distribution of penny stock, if the SEC finds
that such a restriction would be in the public interest.
CERTAIN PROVISIONS OF OUR CHARTER COULD DISCOURAGE POTENTIAL ACQUISITION
PROPOSALS OR CHANGE IN CONTROL
Certain provisions of our Certificate of Incorporation and of Delaware law
could discourage potential acquisition proposals and could make it more
difficult for a third party to acquire or discourage a third party from
attempting to acquire control of us. These provisions could diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of the common
stock. Our Board of Directors, without further stockholder approval, may issue
preferred stock that would contain provisions that could have the effect of
delaying or preventing a change in control or which may prevent or frustrate any
attempt by stockholders to replace or remove the current management. The
issuance of additional shares of preferred stock could also adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others.
FORWARD LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus may
contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "should," "expect," "anticipate," "estimate," "believe,"
"intend" or "project" or the negative of these words or other variations on
these words or comparable terminology.
9
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our technology, (c) anticipated trends in our industry, and (d) our needs for
working capital. These statements may be found under "Management's Discussion
and Analysis or Plan of Operations" and "Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
USE OF PROCEEDS
We will not receive any portion of the proceeds from the sale of common
stock by the selling stockholders, nor will we receive proceeds from conversion
of the convertible promissory notes. We may receive proceeds of up to $1,029,884
if all the warrants and options underlying some of the shares sold are exercised
and no cashless-exercise procedure is used. If all the convertible promissory
notes are converted into common stock, the conversion would have the effect of
eliminating $1,500,000 principal amount of debt. Management currently
anticipates that any such proceeds will be utilized for working capital and
other general corporate purposes. We cannot estimate how many, if any, warrants
and options may be exercised or convertible promissory notes may be converted as
a result of this offering.
We are obligated to bear the expenses of the registration of the shares. We
anticipate that these expenses will be approximately $80,000.
DIVIDEND POLICY
We have never declared dividends or paid cash dividends. We intend to
retain and use any future earnings for the development and expansion of our
business and do not anticipate paying any cash dividends in the foreseeable
future. Moreover, covenants in the convertible promissory notes prevent us from
paying any dividends on our common stock while those notes are outstanding.
MARKET FOR OUR COMMON STOCK
PRINCIPAL MARKET AND MARKET PRICES
Our common stock has traded in the over-the-counter market on the OTC
Electronic Bulletin Board (OTCBB) under the symbol CAPR. The following table
sets forth for the indicated periods the high and low bid prices of the common
stock for the two fiscal years ended September 30, 2004, and for the period from
October 1, 2004 through November 2, 2004 as reported on the OTCBB. These prices
are based on quotations between dealers, and do not reflect retail mark-up,
mark-down or commissions, and may not necessarily represent actual transactions.
---------------------------------------------------------------------------------
FISCAL YEAR ENDING FISCAL YEAR ENDED FISCAL YEAR ENDED
FISCAL PERIOD 9/30/05 9/30/04 9/30/03
---------------------------------------------------------------------------------
High Low High Low High Low
---------------------------------------------------------------------------------
First Quarter* $0.19 $0.11 $0.25 $0.11 $0.15 $0.07
---------------------------------------------------------------------------------
Second Quarter - - 0.25 0.05 0.13 0.08
---------------------------------------------------------------------------------
Third Quarter - - 0.22 0.05 0.13 0.10
---------------------------------------------------------------------------------
Fourth Quarter - - 0.25 0.11 0.31 0.10
---------------------------------------------------------------------------------
*Through November 2, 2004.
APPROXIMATE NUMBER OF HOLDERS OF OUR COMMON STOCK
On September 30, 2004, there were approximately 1,250 stockholders of
record of our common stock. Since a substantial amount of the shares are held in
nominee name for beneficial owners, we believe that there are a substantial
number of additional beneficial owners.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and the notes thereto and the other financial
information appearing elsewhere in this prospectus. In addition to historical
information contained herein, the following discussion and other parts of this
prospectus contain certain forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
in the forward-looking statements due to factors discussed under "Risk Factors",
as well as factors discussed elsewhere in this prospectus. The cautionary
statements made in this prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this prospectus.
RESULTS OF OPERATIONS
Our continuing operations are classified as the infectious medical waste
business. In the year ended September 30, 2002, our operations were classified
into two business segments: imaging services (Strax) and the therapeutic drug
monitoring assay business (TDM Business). As more fully described in Note L and
Note J to the Consolidated Financial Statements, in fiscal year 2003 we
completed the sale of both our imaging business (Strax) effective as of
September 30, 2003, as well as the sale of our TDM business segment effective
October 9, 2002. As a result, our consolidated balance sheet for the 2003 and
2002 fiscal years have been restated to reflect the Strax business and the TDM
business as discontinued operations. These changes in our business operations
make it difficult to compare our prior financial results by period.
FISCAL YEAR ENDED SEPTEMBER 30, 2003 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 2002
------------------------------------------------------------------
Revenues generated for fiscal year 2003 were primarily generated by MCM
product sales and rental revenues which totaled $550,579 for the fiscal year
ended September 30, 2003. There are no comparisons for the prior fiscal year as
the Company commenced this business effective December 17, 2002. Consulting
income of $50,000 which was generated for the fiscal year ended September 30,
2003, was in connection with the sale of the TDM business.
Selling, general and administrative expenses totaled $4,155,660 for Fiscal
2003 versus $1,582,636 for Fiscal 2002. This increase reflects the costs related
to the acquisition and ongoing operations of MCM in both the US and its overseas
subsidiary which totaled approximately $1.4 million, as well as substantial
increases in both legal and insurance fees. Legal fees increased by
approximately $820,000 and related primarily to the costs involved in defending
the on-going litigation filed against us together with related settlement costs.
Insurance increased by approximately $150,000 due to fees required to purchase
tail policies due to a change in our insurance carriers.
The operating loss from operations totaled $4,052,867 for Fiscal 2003
versus $1,582,636 for Fiscal 2002. This increase represents the acquisition of
the operations of MCM. In Fiscal 2003, income from operations of the
discontinued TDM business, including the gain on disposal, totaled $3,287,587.
The loss from operations from the discontinued Strax business, including the
gain on disposal of $125,658, totaled $18,830 was also included in Fiscal 2003.
These decreases of $740,000 and $207,000 reflect the curtail of certain legal
actions against us.
NINE MONTHS ENDED JUNE 30, 2004 COMPARED TO NINE MONTHS ENDED JUNE 30, 2003
---------------------------------------------------------------------------
Revenues generated from product sales totaled $674,931 and $410,983 for the
nine month periods ended June 30, 2004 and 2003, respectively. This increase in
revenues was as a result of the continuing efforts of our distributors to obtain
approvals to sell our products in the EU countries. Revenues generated from
leased equipment rentals totaled $49,548 and $29,035 for the nine month periods
ended June 30, 2004 and 2003, respectively. Consulting income of $37,500 was
generated for the nine month periods ended June 30, 2004 and 2003 in connection
with the sale of the TDM business.
Cost of product sales and leased equipment amounted to $551,382 or 72.4% of
total revenues versus $381,645 or 79.9% of total revenues for the nine month
period ended June 30, 2004 and 2003, respectively.
Selling, general and administrative expenses totaled $2,276,980 for the
nine months ended June 30, 2004 versus $3,296,488 for the nine months ended June
30, 2003. This decrease is due to a significant reduction for legal expenses
11
relating to litigation defense costs as disclosed herein as well as reduced
insurance expenses relating to changes in our business for the nine months ended
June 30, 2004 versus June 30, 2003.These decreases of $740,000 and $207,000
reflect the reduction in the activity of certain legal actions as substantial
time had been spent in the prior period in preparing motions to dismiss, and
these motions were decided in the current period with the decisions basically
favorable to us.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, our cash and cash equivalent position approximated
$337,600 versus $775,000 at September 30, 2003. This decrease is principally due
to the use of funds to support our operating activities.
Our predecessor auditors included an explanatory paragraph in their report
on our financial statements for the year ended September 30, 2003, to state that
our recurring losses from operations and the pendency of certain legal
proceedings at September 30, 2003, raise substantial doubt about our ability to
continue as a going concern. Our ability to continue as a going concern is
dependent upon raising capital and achieving profitable operations. We cannot
assure you that our business plans will be successful in addressing this issue.
We have for the past several years met our need for capital in our various
businesses through loans from officers, directors and related parties other than
the monies received from the sales of the TDM business, which were primarily
used to finance the recently acquired MCM business. Due to the poor equity
market for companies such as us, there has been significant difficulty in
obtaining funds from traditional sources.
During the third quarter of fiscal year 2004 we raised $1.5 million, prior
to fees and expenses, through the issuance of 8% Senior Secured Convertible
Promissory Notes, repayable, together with interest, from April 27, 2005 to June
10, 2005, subject to prepayment or conversion by the investors into shares of
our common stock at a conversion price of $.15 per share. The proceeds from the
sale of the convertible promissory notes were utilized for the expansion of the
infectious medical waste disposal business and for general working capital
needs.
During the second quarter of fiscal 2004, we raised $500,000 through a
short-term bridge loan, issuing notes due on July 31, 2005, and granting
warrants to purchase 333,333 shares of our common stock exercisable at $0.25 per
share for a period of five years. The funds were utilized primarily for general
working capital. The majority of these funds was provided by our management. The
notes bear interest at a rate of 11% per annum and are secured by a first lien
on any royalties received by Opus Diagnostics Inc. from Seradyn, Inc. in
accordance with their Royalty Agreement. For every three dollars ($3.00) loaned,
the lender received two warrants to purchase one share of common stock,
exercisable at $0.25 per share for a period of five years. The estimated fair
value of the warrants approximated $27,400 using the Black Scholes Model and
such amount shall be treated as a discount to debt and a corresponding increase
to paid in capital. The discount shall be amortized over the life of the loan.
Effective September 30, 2003, upon the sale of Strax, the purchase price
was $412,000, and may be subject to adjustment based upon collections of the
accounts receivable outstanding as of the date of closing. Fifty percent of the
purchase price, which had been held in escrow, was paid on closing and the
balance is payable in installments commencing January 1, 2004 and ending
December 31, 2004, evidenced by a note secured by the accounts receivables of
Strax Institute, Inc, the entity into which the purchaser placed the Strax
assets. We utilized the funds for general working capital purposes.
During October 2002, our subsidiary Opus sold the assets of its TDM
Business for $6,000,000, subject to adjustment on a dollar for dollar basis to
the extent the net asset value of the purchased assets as shown on a
post-closing proforma asset statement was greater the $420,000 or less than
$380,000. We have received a further payment of $54,970 as a post closing
payment adjustment. We used the net cash proceeds to pay down debts and
liabilities, repayment of the short-term loan and, in December 2002, used
$1,835,000 as part of the MCM purchase price. The balance of the funds were used
for general working capital purposes.
During September 2002, warrant holders representing 3,297,700 shares of
common stock exercised their warrants in our warrant price reduction program. As
a result, we raised an aggregate of $409,668 and also substantially reduced the
number of outstanding warrants. We used the proceeds for general working capital
purposes.
12
During June 2002, we obtained a short-term loan in the principal amount of
$250,000, with interest at prime plus 3% per annum and due on September 30, 2003
(see Note E to the Notes to the Consolidated Financial Statements herein). The
proceeds of the short-term loan were used to fund an initial loan to MCM of up
to $250,000. On October 10, 2002, the holders of the short-term loan were repaid
an aggregate of $250,000 plus accrued interest. For each $1.00 principal amount
loaned, the lender received a warrant to purchase one share of common stock,
exercisable after six months at $0.09 per share for a period of five years.
In light of the continuing cash requirements needed to develop the MCM
business, we are actively seeking additional funding. These funds are required
to expand our marketing effort both in the US and in overseas markets. In the
overseas markets, we are also required to secure the necessary approvals and
permits. Delays in obtaining these approvals will limit our ability to generate
near term sales revenues. Similarly, to meet the needs of these new markets, we
will be required to manufacture units to supply these requirements without undue
delay. This will require us to invest working capital into inventory. Due to our
current capital structure, suppliers may not grant us credit terms. Our
inability to have on hand adequate working capital reserves may restrict our
ability to produce adequate numbers of units for inventory. We will continue our
efforts to seek 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 our low stock price
and current revenue base, and if successful, will not be dilutive to existing
stockholders. We may also require funds for future acquisitions to complement
our existing business, or to seek an acquisition that could generate a source of
capital. To date, management, their affiliates and the recent $1.5 million
placement have been the primary resources of funding. In addition, depending
upon the outcome of the pending legal actions, additional funding for legal
expenses could also be required. Consequently, our viability could be
threatened. Accordingly, the auditors' report on the 2003 financial statements
contains an explanatory paragraph expressing a substantial doubt about our
ability to continue as a going concern. We hope to obtain sufficient financing
to execute our business plan. In the event financing is not forthcoming, we will
endeavor to restructure our operations and explore opportunities to sell, take
the business private or merge our MCM business. Failure to raise adequate funds
to develop the MCM business or for general working capital would jeopardize our
future survival.
Net cash used in operations for Fiscal 2003 amounted to $5,059,056. Net
cash provided by investing activities for Fiscal 2003 amounted to $5,911,125.
Net cash flows used for financing activities for Fiscal 2003 amounted to
$582,532.
CONTRACTUAL OBLIGATIONS
THE FOLLOWING TABLE SETS FORTH OUR CONTRACTUAL OBLIGATIONS AS OF JUNE 30, 2004
TOTAL LESS THAN 1-3 YEARS MORE THAN
----- --------- --------- ---------
1 YEAR 5 YEARS
------ -------
Long Term Debt Obligations............. $2,000,000 $1,500,000 $500,000 -
Capital Lease Obligations.............. - - - -
Operating Lease Obligations............ $ 96,750 $ 96,750 - -
CONTINGENT OBLIGATIONS
Our principal contractual commitments include payments under operating
leases.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures. On an on-going basis, management
evaluates our estimates and assumptions, including but not limited to those
related to revenue recognition and the impairment of long-lived assets, goodwill
and other intangible assets. Management bases its estimates on historical
experience and various other assumptions that it believes to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
13
1. Revenue recognition
The infectious medical waste business recognizes revenues from either the
sale or rental of our SteriMed Systems. Revenues for sales are recognized at the
time that the unit is shipped to the customer. Rental revenues are recognized
based upon either services provided for each month of activity or evenly over
the year in the event that a fixed rental agreement is in place.
2. Goodwill and other intangibles
Goodwill and other intangibles associated with the MCM acquisition will be
subject to an annual assessment for impairment by applying a fair-value based
test. The valuation will be based upon estimates of future income of the
reporting unit and estimates of the market value of the unit.
RECENT ACCOUNTING PRONOUNCEMENTS
In 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 adoption of SFAS No. 146 did not have a material effect
on our consolidated financial position and results of operations.
In November 2002, the Emerging Issues Task Force (EITF) reached consensus
on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Revenue
arrangements with multiple deliverables include arrangements which provide for
the delivery or performance of multiple products, services and/or rights to use
assets where performance may occur at different points in time or over different
periods of time. EITF Issue No. 00-21 was effective for us beginning July 1,
2003 and did not have a material effect on our results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation in the event companies adopt SFAS No. 123 and account for
stock options under the fair value method. SFAS No. 148 also amends the
disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim Financial
Reporting (APB 28), to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. While the Statement does not
amend SFAS No. 123 to require companies to account for employee stock options
using the fair value method, the disclosure provisions of SFAS No. 148 are
applicable to all companies with stock-based employee compensation, regardless
of whether they account for that compensation using the fair value method of
SFAS No. 123 or the intrinsic value method of APB Opinion No. 25 Accounting for
Stock Issued to Employees (APB 25).
In May 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The changes in this Statement improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly. This
Statement is effective for contracts entered into or modified after June 30,
2003. The adoption of SFAS 149 did not have a material effect on our
consolidated 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
14
financial instruments existing at the adoption date. The adoption of SFAS 150
did not have a significant effect on our operations, consolidated financial
position or cash flows.
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). We do not have any entities that
require disclosure or new consolidation as a result of adopting the provisions
of FIN 46.
INFLATION
To date, inflation has not had a material effect on our business. We
believe that the effects of future inflation may be minimized by controlling
costs and increasing our manufacturing efficiency through the increase of our
product sales.
BUSINESS
BACKGROUND
Caprius, Inc. is engaged in the infectious medical waste disposal business.
In the first quarter of Fiscal 2003, we acquired a majority interest in M.C.M.
Environmental Technologies, Inc. which develops, markets and sells the SteriMed
and SteriMed Junior compact systems that simultaneously shred and disinfect
Regulated Medical Waste. The SteriMed Systems are sold and leased in both the
domestic and international markets.
In December 2002, we closed the acquisition of our initial investment of
57.53% of the capital stock of MCM for a purchase price of $2.4 million. MCM
wholly-owns MCM Environmental Technologies Ltd., an Israeli corporation, which
initially developed the SteriMed Systems. Upon closing, our designees were
elected to three of the five seats on MCM's Board of Directors, with George
Aaron, President and CEO, and Jonathan Joels, CFO, filling two seats.
Additionally, as part of the transaction, certain debt of MCM to its existing
stockholders and to certain third parties was converted to equity in MCM or
restructured. Pursuant to its Letter of Intent with MCM, Caprius had provided
MCM with loans totaling $565,000, which loans were repaid upon closing by a
reduction in the cash portion of the purchase price. For the six month period
that commenced on July 17, 2004 and ends on January 17, 2005, pursuant to a
Stockholders Agreement, the stockholders of MCM (other than the Company) have
the right to put all of their MCM shares to MCM, and MCM has the right to call
all of such shares not currently owned by us. The party who first exercises its
put or call rights is required to accompany its notice of put or call with its
proposal for the price of the stock interest in MCM to be sold or purchased, as
applicable. The recipient is then required to give notice to the exercising
party of its proposed price for such interest. The parties shall then negotiate
and agree upon an agreed price. At our option, we may pay the purchase price for
the remaining MCM shares in cash or in shares of our common stock. Neither party
has given notice of its put or call.
Caprius, Inc. was founded in 1983 and through June 1999 essentially
operated in the business of developing specialized medical imaging systems, as
well as operating the Strax Institute, a comprehensive breast imaging center. In
June 1999, we acquired Opus and began manufacturing and selling medical
diagnostic assays constituting the TDM Business. In October 2002, we sold the
TDM business to Seradyn, Inc. The Strax Institute was sold in September 2003.
15
DESCRIPTION OF MCM ENVIRONMENTAL TECHNOLOGIES INC. (MCM) BUSINESS-
BACKGROUND OF THE REGULATED MEDICAL WASTE INDUSTRY IN THE UNITED STATES
In 1988, the Federal Government passed the Medical Waste Tracking Act
("MWTA"). This act defined medical waste and the types of medical waste that
were to be regulated. In addition to defining categories of medical waste, the
law mandated that generators of Regulated Medical Waste ("RMW") be responsible
for and adhere to strict guidelines and procedures when disposing of RMW. The
mandates included a "cradle to grave" responsibility for any RMW produced by a
facility, the necessity to track the disposal of RMW and defined standards for
segregating, packaging, labeling and transporting of RMW.
The MWTA led to the development of individual state laws regulating how RMW
is to be disposed of. As a result of these laws, it became necessary for medical
waste generating facilities to institute new procedures and processes for
transporting medical waste from the facility to an offsite treatment and
disposal center, or obtain their own on-site system for treatment and disposal
acceptable to the regulators. By 1999, Health Care Without Harm, a coalition of
240 member organizations, estimated that 250,000 tons of RMW was produced
annually.
The other major impact on the RMW market was the adoption of the Clean Air
Amendments of 1997. This act dramatically reduced or eliminated the type of
emissions that are permitted from the incineration of RMW. Due to this,
generators of RMW, which were incinerating their waste, were forced into costly
upgrades of their incinerators or to find other methods of disposal. Hospital
incinerators decreased from 6,200 in 1988 to 115 in 2003 (Mackinac Chapter,
Sierra Club Newsletter Aug-Oct 2003).
Most generators of RMW use waste management firms to transport, treat and
dispose of their waste. Due to the legislative and other market factors, the
costs for this type of service have been increasing at a dramatic pace. At the
same time, many medical waste generators are coming under increasing pressure to
reduce expenses as a result of the decreasing percentage of reimbursement from
Medicare and other third party providers. Additionally, the added liability of
RMW generators as a result of the "cradle to grave" manifest requirement has
made it more attractive to use medical waste management methods that do not
require manifest systems. The combination of these pressures is forcing medical
waste generators to seek innovative methods for their waste disposal. MCM
believes these factors create a demand for an onsite RMW treatment option. MCM
has identified and is working with specific segments and niches within the RMW
market on which it feels it might capitalize. The specifics of these will be
discussed in the Marketing section.
BACKGROUND OF THE REGULATED MEDICAL WASTE INDUSTRY OUTSIDE OF THE UNITED STATES
The industrialized countries of the European Union and Japan are
implementing medical waste laws that are or will be similar to US regulations.
In 1994, the European Commission implemented a directive where member states had
to adhere to the provisions of the United Nations Economic Commission for Europe
("UNECE") European Agreement on the International Carriage of Dangerous Goods by
Road. This requires that clinical or medical waste would be packed, marked,
labeled and documented according to defined specifications. Regulations and cost
factors have prompted European RMW generators to seek alternative medical waste
disposal options. MCM recognizes an excellent opportunity for SteriMed sales in
Europe, and is working with regulators, potential joint venture partners and
distributors.
Throughout the less industrialized and third world countries, the disposal
of hospital waste is coming under increasing scrutiny and regulations. Many
countries are in the process of updating and enforcing regulations regarding the
disposal of RMW. MCM is attempting to establish relationships worldwide directly
or through distributors, in many of these countries.
THE MCM STERIMED SYSTEM
The SteriMed System is a patented, environmentally friendly, on-site
disinfecting and disposal unit that can process regulated clinical waste,
including sharps, dialysis filters, pads, bandages, plastic tubing and even
glass, in a 12 minute cycle. The units simultaneously shred, grind, mix and
disinfect the waste with the proprietary Ster-Cid(R) solution. After treatment,
the material may be discarded as unrecognizable conventional solid waste, in
accordance with appropriate regulatory requirements. The resultant treated waste
is as low as 10% of the original volume.
16
As the technology for disinfection is chemical based, within the
definitions used in the industry, it is considered as an alternative treatment
technology.
The SteriMed System is comprised of two different sized units, and the
required Ster-Cid(R) disinfectant solution which can be utilized with both
units. The larger SteriMed can treat up to 20 gallons (75 liters) of medical
waste per cycle. The smaller version, SteriMed Junior, can treat 4 gallons (15
liters) per cycle.
We have the worldwide exclusive rights for the manufacture, use and sale of
the Ster-Cid(R) proprietary disinfectant used in the SteriMed System. The
Ster-Cid(R) is currently manufactured solely for us by the licensor. In the
event that the licensor is unable to manufacture the Ster-Cid(R), we have the
right to have Ster-Cid manufactured by an alternative manufacturer. Ster-Cid(R)
is approximately 90% biodegradable. Ster-Cid(R) is considered a pesticide by the
U.S. EPA and, in compliance with FIFRA, it is registered with the U.S. EPA. The
process of registering a pesticide under FIFRA involves submission of an
application package to the U.S. EPA. The EPA's review of this application
includes assessment of the hazards to human health and the environment that may
be posed by the pesticide. This process can take up to a year or more to
complete. MCM had assigned an agent experienced with the FIFRA registration
process to carry out this process for Ster-Cid(R). This process was completed in
September 1999 at which time the Ster-Cid(R) was assigned a FIFRA Registration
number. On an annual basis, MCM is required to report to the U.S. EPA the
quantities of Ster-Cid(R) sold and projections for the upcoming year.
During the SteriMed disinfecting cycle, the concentration of Ster-Cid(R) is
approximately 0.5% of the total volume of liquids. The Ster-Cid(R) disinfectant
has been tested in independent laboratories and shown to meet U.S. EPA
guidelines for disinfection. Furthermore, it is accepted by POTW, allowing for
its discharge into the sewer system.
Both SteriMed Systems are safe and easy to operate, involving 1/2 day of
training provided by our technical support staff to operators as designated by
the end-user. The operator is trained to handle the daily and weekly
responsibilities for the routine preparation, maintenance, and minor
troubleshooting of the SteriMed System. Daily maintenance includes filling the
system with the Ster-Cid, removal and replacement of the filter bags, and
disposing of the filter bag as black bag waste.
The trained operator places the red bag waste containing RMW into the
SteriMed receiver chamber and activates the start button. The water and
Ster-Cid(R) are then automatically released into the treatment chamber. The
shredding, grinding and mixing of the waste is then initiated to expose all
surfaces of the medical waste to the chemical solution during the 12 minute
processing cycle. At the end of each specified number of cycles, trained
operator then puts the residue into a regular black bag, ready for disposal as
regular solid waste.
Both SteriMed and the SteriMed Junior are equipped with an integrated
monitoring system, including a PLC display, which indicates each of the system's
functions to guide the operator through its operations. Access to the PLC
program is secured, accessible only by MCM's technicians to prevent operators
from overriding the treatment process. Relevant information concerning treatment
parameters may be electronically forwarded, at the end of each treatment cycle,
to a designated printer at any location within the facility. In addition, the
system is capable, at the option of the facility, to have the treatment
parameters for all cycles in a day forwarded to MCM's maintenance center.
REGULATIONS AND REGULATORY COMPLIANCE FOR ALTERNATIVE MEDICAL WASTE TREATMENT
TECHNOLOGIES IN THE UNITED STATES
Our use of the Ster-Cid(R) disinfectant in the SteriMed System is
registered by the U.S. EPA under FIFRA. The SterCid(R) disinfectant is
considered a pesticide, and is registered under FIFRA Number 71814. FIFRA gives
the federal government control over the distribution, sale and use of
pesticides. All pesticides used in the U.S. must be registered (licensed) by the
U.S. EPA under FIFRA. Registration of pesticides is to seek assurance that they
will be properly labeled, and if used in accordance with label specifications,
will not cause unreasonable harm to the environment.
The MCM SteriMed systems are regulated at the state level by the individual
states' Environmental, Conservation, Natural Resources, or Health Department.
Each state has its own specific approval requirements. Generally, most states
require an application for registration or approval be submitted along with back
up information, including but not limited to operating manuals, service manuals,
and procedures. Additionally, many states require contingency and safety plans
17
be submitted, and that efficacy testing be performed. MCM has demonstrated
through efficacy testing that it can inactivate the 4Log10 concentration of
Bacillus atrophaeus (formerly Bacillus subtilis) spores. This meets or exceeds
most state regulatory requirements.
The SteriMed Senior has been cleared for marketing in 45 states and the
SteriMed Junior in 39 states. The Ster-Cid(R) disinfectant has been registered
in 49 states. It is our objective to obtain approvals from the remaining states
in 2004.
Local and county level authorities generally require that discharge permits
be obtained from POTW by all facilities that discharge a substantial amount of
liquids or specifically regulated substances to the sewer system. The SteriMed
System process effluent has been characterized and found to be within the lower
range of the general discharge limits set forth by the National Pollutant
Discharge Elimination System (NPDES) Permitting Program, which are used to
establish POTW discharge limits.
These approvals allow the SteriMed System effluent to be discharged to a
municipal sewer and the treated disinfected waste to be disposed of in a
municipal landfill.
The SteriMed process, unlike many other waste medical disposal
technologies, is not subject to the Clean Air Act Amendments of 1990 because
there is no incineration or generation of toxic fumes in the process. It is also
not subject to the Hazardous Materials Transportation Authorization Act of 1994
as there is no transportation of hazardous waste involved.
REGULATIONS AND REGULATORY COMPLIANCE FOR ALTERNATIVE MEDICAL WASTE TREATMENT
TECHNOLOGIES OUTSIDE OF THE UNITED STATES
CE Mark compliancy is an expected requirement for equipment sold in the
European Union ("EU"). The SteriMed Systems are CE Mark compliant. In order to
meet the specific regulatory requirements of the individual members of the EU,
MCM will undertake further efficacy testing where necessary in order to
demonstrate that the SteriMed conforms to all the standards in the specific EU
member country. Outside of the EU, we are required to review and meet whatever
the specific standards a country may impose. In countries where we have
distributors, they are required to obtain the necessary regulatory approvals on
our behalf at their expense.
COMPETITION
RMW has routinely been treated and disposed of by of incineration. Due to
the pollution generated by medical waste incinerators, novel technologies have
been developed for the disposal of RMW. Some of the issues confronting these
technologies are: energy requirements, space requirements, unpleasant odor,
radiation exposure, excessive heat, volume capacity and reduction, steam and
vapor containment, and chemical pollution. The use of the SteriMed System
eliminates concern about these issues: space and energy requirements are
minimal, there are no odors, radiation, steam, vapor or heat generated, solid
waste volume is reduced by up to 90% and the disinfecting chemical is 94%
biodegradable. The following are the various competitive technologies:
Autoclave (steam under pressure): Autoclaves and retort systems are the
most common alternative method to incineration used to treat medical waste.
Autoclaves are widely accepted because they have historically been used to
sterilize medical instruments. However, there are drawbacks as autoclaves may
have limitations on the type of waste they can treat, the ability to achieve
volume reduction, and odor problems.
Microwave Technology: Microwave technology is a process of disinfection
that exposes material to moist heat and steam generated by microwave energy. The
waves of microwave energy operate at a very high frequency of around 2.45
billion times per second. This generates the heat needed to change water to
steam and carry out the disinfection process at a temperature between 95 and 100
degrees centigrade. Use of this technology requires that proper precautions be
taken to exclude the treatment of hazardous material so that toxic emissions do
not occur. Also offensive odors may be generated around the unit. The capital
cost is relatively high.
Thermal Processes: Thermal processes are dry heat processes and do not use
water or steam, but forced convection, circulating heated air around the waste
or using radiant heaters. Companies have developed both large and small dry-heat
systems, operating at temperatures between 350oF-700oF. Use of dry heat requires
longer treatment times.
18
High Heat Thermal Processes: High heat thermal processes operate at or
above incineration temperatures, from 1,000oF to 15,000oF. Pyrolysis, which does
not include combustion or burning, contains chemical reactions that create
gaseous and residual waste products. The emissions are lower than that created
by incineration, but the pyrolysis demands heat generation by resistance heating
such as with bio-oxidation, induction heating, natural gas or a combination of
plasma, resistance hearing and superheated steam.
Radiation: Electron beam technology creates ionized radiation, damaging
cells of microorganisms. Workers must be protected with shields and remain in
areas secured from the radiation.
Chemical Technologies: Disinfecting chemical agents that integrate
shredding and mixing to ensure adequate exposure are used by a variety of
competitors. Chlorine based chemicals, using sodium hypochlorite and chlorine
dioxide, are somewhat controversial as to their environmental effects and their
impact on wastewater. Non-chloride technologies are varied and include peracetic
acid, ozone gas, lime based dry powder, acid and metal catalysts as well as
alkaline hydrolysis technology used for tissue and animal waste.
Among the competitors are Stericycle, Inc., Steris Corporation, Sanitec,
Inc. Positive Impact Waste Solutions, Inc., Waste Processing Solutions Company,
Global Environmental Technologies, LLC, and Waste Reduction, Inc.
COMPETITIVE FEATURES OF THE MCM STERIMED SYSTEM
Seizing the opportunity afforded by the regulatory changes and pricing
pressures in the healthcare industry, we are positioning our products as viable
alternatives to the traditional medical waste disposal methods. The SteriMed
System seeks to offer medical waste generators a true on-site option that is
less risky, less expensive, and more environmentally friendly than the
alternatives. The main competitive advantages of the SteriMed System are:
Safety
------
a) No need to pack containers of medical waste
b) No need to transport infectious waste through facilities with
patients
c) No need to ship infectious medical waste on public roads
d) Environmentally sound approach for disinfection - uses
biodegradable chemicals; does not release smoke, odor, steam or
other emissions to the air; removes the need for incineration
e) Noise level during cycle is approx. 70.1dB(A), regarded below
levels of noise safety concerns by most government regulations
Labor
-----
a) Reduce the exposure to infectious waste by limiting the time an
employee handles, stores and packs the waste
b) No need to administer and track waste that is shipped from the
facility
c) Ease of use
d) Employee can continue to perform their regular functions while
the SteriMed treatment cycle is operational
Convenience
-----------
a) Easily installed requiring only electricity, water and sewage
outlet. No special ventilation or lighting required.
b) Can fit through regular doorway.
c) Limited training required for operators.
d) Due to size, units can be strategically placed in a health care
facility near high waste generation sites (e.g. floor of
operating room, infectious disease ward)
Cost Saving
-----------
a) Less labor time
b) No transportation costs to incineration site
c) Our preferred business model is to rent the SteriMed Systems to
U.S. facilities generating the infectious clinical waste. This
model obviates the need for capital investment by users, and
should also reduce previous operating expenses in disposing of
medical waste.
19
Compliant with Federal and States regulations
---------------------------------------------
Enable infectious medical waste generating facilities to replace
existing systems while meeting federal, state and local
environmental as well as health regulations.
These features are intended to make the SteriMed System a very attractive
solution to health care organizations, especially those that are forced to
reconsider their current medical waste management programs because of federal
and state regulations or because of pressures to reduce operating costs.
MARKETING STRATEGY
We have designed and are implementing a marketing program which maximizes
the uniqueness and strengths of the SteriMed Systems while enhancing our
customers' cash flow and minimizing their financial restraints. Our sales focus
is to those sites which best fit the capabilities and requirements of our
systems. These include those sites generating approximately 2,000 to 12,000
pounds of RMW per month and are able to provide a room with a minimum of 75
square feet with proper plumbing and electricity for the storage and operation
of the machine. Within the United States these facilities include dialysis
centers, surgical centers, blood banks, commercial laboratories (both research
and clinical), large physician group practices and specific sites within
hospitals.
Many of these facilities are owned by national or international
corporations operating many facilities. By focusing our sales efforts to these
corporations we will be able to have multiple machine placements within the same
organization. This offers many advantages to the customer and to us. Not only
will we be able to maximize our selling efforts, we will also be able to
compound our warranty and service effectiveness. This strategy should enable us
to maximize resources and quickly obtain market penetration. We are presently
working with a number of these customers in the implementation of this strategy.
We do not have the depth of marketing or financial capacity that many of
our competitors have and thus are reliant upon generating interest in our
products by virtue of our technical advantages. This aspect is emphasized in our
limited budget allocated for marketing.
Our business marketing models in the U.S. are either lease or purchase of
the SteriMed System. The basic lease terms are a single monthly fee which will
include the cost of the SteriMed, disposables and service for the life of the
lease. Lease terms are usually five years. In the rest of the world, only the
purchase option is available. Leasing is not available outside of the US because
of the potential difficulty in monitoring and collecting monthly leasing fees.
Our distributors, however, are free to sell or lease the SteriMed System in
their respective markets. Regulatory approvals are required prior to marketing
in any country, whether the business is conducted by us or our distributors.
To maximize and augment our sales efforts in the U.S., we have been
actively recruiting distributors. Ideally, we are seeking local and regional
distributors who will have the exclusive right to sell the SteriMed products
with their prescribed geographical area. In order to gain exclusivity, the
distributor must commit to minimum annual purchases. The distributor is
obligated to work within the guidelines and regulatory approvals set up and
maintained by us. To date we have one exclusive, one non-exclusive distributor,
and we are in negotiations with four others.
Internationally, we have distribution agreements in the following
countries: Argentina, Australia, Brazil, Columbia, Costa Rica, Cyprus, Greece,
Japan, Mexico, Paraguay, Poland, Scandinavia (Norway, Sweden, Finland and
Iceland), Singapore, Taiwan, Tunisia and Uruguay. In each of the countries, it
is the distributors' responsibility to obtain, at their own expense, all
regulatory approvals which will be registered in the name of MCM.
MANUFACTURING
We recognize that to be successful, we need to manufacture units that are;
1) Robust
2) Reliable
3) Reproducible in their activity
20
Presently, we manufacture the SteriMed at our facility in Moshav Moledet,
Israel. Our current inventory of the SteriMed Junior was manufactured by a third
party manufacturer in Israel. We are actively seeking alternative locations for
the manufacture of our units, including within the U.S. This includes
subassembly manufacturers which will enable us to complete the final assembly at
our own facilities if this proves to be the most cost effective solution. We
anticipate that we would be able to complete the final assembly of the SteriMed
Junior in our own facilities in the U.S. By the time we will need larger scale
manufacturing capacity, we believe we will have located and qualified an
alternative manufacturing location to fulfill these requirements and at costs
acceptable to us, either in the North America, Russia, or China. We do not have
sufficient experience in performing final assembly to be confident that we can
produce a reliable product in adequate working quantities and in a timely
manner. Any key components that have to be sourced from an alternative supplier
could lead to delays in production or problems with quality control until we
have experience with the new suppliers. The inability to find such manufacturers
will constrain our growth potential. We are reliant upon certain critical
components from third parties in order to manufacture our products. Failure to
obtain these components in a timely fashion or at a commercially reasonable
price could adversely affect our business.
Approximately half of the SteriMed components are commercially available
from third party suppliers. The remaining components are either generic with
modification or customized specifically for the SteriMed. We presently have
depots for parts and supplies located in Ridgefield, NJ and Moledet, Israel.
MAINTENANCE AND CUSTOMER SERVICE MODEL
Critical to the successful use of the SteriMed System is the proper
training of the personnel carrying out the installation, operation and service
of the equipment. Our technical service staff assists clients in the
installation of units and the training of their staff and on-site operators.
This training program is strongly geared to safety and maintenance to assure
ongoing safe and smooth operation of the unit. After installation and training,
operation of the unit is monitored by our technical staff to assure proper
performance. Our technical staff is on call to assist in fixing problems or
perform repairs. Our goal is to minimize problems through ongoing training and
strict adherence to maintenance schedules. Our Customer Service staff is
available to help with any questions or issues our customers might have.
The basic warranty covers parts and labor for one year. Thereafter, we
offer an extended warranty program.
PROPRIETARY RIGHTS
There exist various medical waste treatment technologies that can be
combined and employed in different ways, making trademarks and patents very
important pieces of intellectual property to possess in the medical waste
treatment industry.
MCM acquired and/or applied for trademarks and patents for our SteriMed and
Ster-Cid(R) products as indicated in the following tables. The validation for
patents is extended to fifteen years, provided an annual fee (on renewal dates)
is paid in the respective country.
SteriMed System has an International Class 10 Trademark for Israel, United
States, Canada, Japan, Australia, Mexico, Russia, Hungary, Poland, and for
Community Trademark ("CTM" - European).
MCM STERIMED - INTERNATIONAL CLASS 10 TRADEMARK:
-----------------------------------------------------------------------------------
APPLICATION RENEWAL
FILE NO. COUNTRY APPLICATION NO. DATE TRADEMARK NO. DATE
-----------------------------------------------------------------------------------
99200 Israel 113,697 7/20/1997 113,697 07/20/2007
-----------------------------------------------------------------------------------
99207 U.S.A 75/904,419 01/28/2000 2,724,738 10/20/2013
-----------------------------------------------------------------------------------
99208 Canada 1035659 11/12/1999 TMA 596,538 12/04/2018
-----------------------------------------------------------------------------------
99209 CTM(European) 1380146 11/11/1999 1380146 11/11/2009
-----------------------------------------------------------------------------------
99210 Japan 11-103145 11/12/1999 4462258 03/23/2011
-----------------------------------------------------------------------------------
21
99211 Australia 813208 11/09/1999 813208 11/09/2009
-----------------------------------------------------------------------------------
99212 Mexico 472508 02/23/2001 701862 02/23/2011
-----------------------------------------------------------------------------------
99214 Russia 99719243 11/18/1999 209618 11/18/2009
-----------------------------------------------------------------------------------
99216 Hungary m-9905278 11/10/1999 165158 11/10/2009
-----------------------------------------------------------------------------------
99218 Poland Z-209695 11/10/1999 148086 11/10/2009
-----------------------------------------------------------------------------------
The Ster-Cid(R) disinfectant has an International Class 5 Trademark for
Israel, United States, Canada, Japan, Australia, Mexico, Russia, Hungary,
Poland, and CTM.
-----------------------------------------------------------------------------------
APPLICATION RENEWAL
FILE NO. COUNTRY APPLICATION NO. DATE TRADEMARK NO. DATE
-----------------------------------------------------------------------------------
99200 Israel 131893 11/01/1999 131893 11/01/2006
-----------------------------------------------------------------------------------
99201 U.S.A 75/904,150 01/29/2000 2,713,884 05/06/2013
-----------------------------------------------------------------------------------
99202 Canada 1035658 11/12/1999 TMA 596,329 12/03/2018
-----------------------------------------------------------------------------------
99203 CTM(European) 1380195 11/11/1999 1380195 11/11/2009
-----------------------------------------------------------------------------------
99204 Japan 11-103144 11/12/1999 4562185 04/19/2007
-----------------------------------------------------------------------------------
99205 Australia 813207 11/09/1999 813207 11/09/2009
-----------------------------------------------------------------------------------
99206 Mexico 412940 02/23/2001 656603 02/25/2010
-----------------------------------------------------------------------------------
99213 Russia 99719294 11/18/1999 200276 11/17/2009
-----------------------------------------------------------------------------------
99215 Hungary M-9905279 11/10/1999 164682 11/10/2009
-----------------------------------------------------------------------------------
99217 Poland Z-209696 11/10/1999 145760 11/10/2009
-----------------------------------------------------------------------------------
The SteriMed has patents in Australia, Japan, United States, Canada, Europe
and South Africa. Additionally, there are patent applications pending in the
United States (provisional), Australia, Brazil, Mexico, Russia, Canada, China,
India, and Patent Corporation Treaty ("PCT").
MCM STERIMED PATENTS:
---------------------------------------------------------------------------------------------
APPLICATION
FILE NO. COUNTRY APPLICATION NO. DATE PATENT NO. PATENT DATE VALID UNTIL
---------------------------------------------------------------------------------------------
9346 Israel 108,311 01/10/1994 108,311 12/23/1999 01/10/2014
---------------------------------------------------------------------------------------------
9452 Australia 10096/95 01/09/1995 684,323 04/2/1998 01/09/2015
---------------------------------------------------------------------------------------------
9453 Japan 7-011844 01/23/1995 3058401 04/21/2000 01/27/2015
---------------------------------------------------------------------------------------------
9454 U.S.A 08/369,533 01/05/1995 5,620,654 04/15/1997 04/15/2014
---------------------------------------------------------------------------------------------
9456 Canada 2,139,689 01/06/1995 2,139,689 10/5/1999 01/06/2015
---------------------------------------------------------------------------------------------
9455 Europe 95630001.6 01/05/1995 EP0662346 03/28/2001 01/05/2015
---------------------------------------------------------------------------------------------
MCM STERIMED PCT INTERNATIONAL PHASE PATENTS:
---------------------------------------------------------------------------------------------------
APPLICATION
FILE NO. COUNTRY APPLICATION NO. DATE PATENT NO. PATENT DATE VALID UNTIL
---------------------------------------------------------------------------------------------------
PCT PCT/IL02/00093 02/04/2002 WO2002/062479 A1 08/15/2002 9/05/2005
---------------------------------------------------------------------------------------------------
2337 Australia 2002230065 02/04/2002 Pending* Pending 02/04/2022
---------------------------------------------------------------------------------------------------
2338 Brazil 200300398 07/31/2003 Pending* Pending 02/04/2022
---------------------------------------------------------------------------------------------------
2339 Mexico PA/a/2003/006946 08/04/2003 Pending* Pending 02/04/2022
---------------------------------------------------------------------------------------------------
22
2340 Russia 2003127023 09/04/2003 Pending* Pending 02/04/2022
---------------------------------------------------------------------------------------------------
2341 So.Africa 2003/5602 07/21/2003 2003/5602 09/23/2003 02/04/2022
---------------------------------------------------------------------------------------------------
2342 Canada 2437219 08/01/2003 Pending* Pending 02/04/2022
---------------------------------------------------------------------------------------------------
2343 China 02806986.2 09/22/2003 Pending* Pending 02/04/2022
---------------------------------------------------------------------------------------------------
2344 India 01389/chenp/03 09/02/2003 Pending* Pending 02/04/2022
---------------------------------------------------------------------------------------------------
2373 USA 09/824,685 04/04/2001 6494391 12/17/2002 04/04/2021
---------------------------------------------------------------------------------------------------
2313/354 Europe 02711185.5 09/05/2003 P210477PCT/EP Pending 02/04/2022
---------------------------------------------------------------------------------------------------
*Applied for as a temporary patent until the PCT takes effect.
We maintain, in-house, a system that tracks all expiration dates for our
trademarks and patents. This internal tracking system alerts us when renewal
submissions are required.
STRAX INSTITUTE BUSINESS
For several years prior to September 30, 2003, we operated Strax, a
comprehensive breast imaging center located in Lauderhill, Florida. Strax was a
multi-modality breast care center performing approximately 20,000 procedures
annually comprising of x-ray mammography, ultrasound, stereotactic biopsy and
bone densitometry. As of September 30, 2003, we sold Strax for $412,000. 50% of
the purchase price was paid on closing and the balance is payable in
installments evidenced by a note secured by the accounts receivables of Strax
Institute, Inc. Additionally, two of our executive officers are restricted for a
period of five years from competing in the mammography and bone densitometry
business in the States of Florida and New Jersey.
THERAPEUTIC DRUG MONITORING BUSINESS
From June to October 9, 2002, our subsidiary Opus was engaged in the
development, distribution and sale of diagnostic assays, controls and
calibrators for therapeutic drug monitoring ("TDM") which were sold under the
trademark Innofluor in kit form for use on the Abbott TDx and TDxFLx
instruments. Opus received and accepted an unsolicited offer from Seradyn to
purchase the assets of its TDM Business for $6 million plus future royalties.
Seradyn had been a contract manufacturer of the Opus TDM kits. Under a two year
Consulting Agreement ending on October 8, 2004, Opus consults Seradyn with
ongoing projects for an annual fee of $50,000. The purchased assets included
three diagnostic assays still in development, for which Opus will receive
royalty payments upon the commercialization of any of these assays based upon
varying percentages of net sales for up to ten years from closing. We have been
informed that one of the assays under development for a new drug for
anti-rejection in transplantation has been completed. The drug has already
received approval in certain countries where the assay test kit to monitor the
drug is already being sold. Opus will begin to generate royalty income based
upon the sales of this assay during calendar year 2004. Caprius, Opus and its
three executive officers entered into non-compete agreements with Seradyn
restricting them for five years from competing in the TDM business.
EMPLOYEES
As of September 30, 2004, we employed six full time employees, including
three senior managers, at our New Jersey corporate headquarters.
MCM employed three full time employees in the U.S. and 10 full time
employees and 1 part time employee at its facility in Israel.
None of our employees is represented by any labor organization and we are
not aware of any activities seeking such organization. We consider our relations
with employees to be good.
As the level of our activities grow, additional personnel may be required.
PROPERTIES
We lease 2,758 square feet of office space in Fort Lee, New Jersey for
executive and administrative personnel pursuant to a lease that expires on June
30, 2005 at a base monthly rental of approximately $6,665, plus escalation.
23
We also lease approximately 1,500 square feet of space in Ridgefield, NJ
for warehousing and assembly at a monthly cost of $1,850. This lease expires on
April 30, 2005 and is subject to a 5% increment yearly. In Israel, we lease
2,300 square feet of industrial space at a monthly cost of approximately $865
and the lease expires on March 31, 2005.
We believe the premises leased are adequate for our current and near term
requirements.
LITIGATION
In June 2002, Jack Nelson, a former Caprius executive officer and director,
commenced two legal proceedings against us and George Aaron and Jonathan Joels,
executive officers, directors and principal stockholders. The two complaints
alleged that the individual defendants made misrepresentations to the plaintiff
upon their acquisition of a controlling interest in the Company in 1999 and
thereafter made other alleged misrepresentations and engaged in mismanagement
and other misconduct and took other actions as to the plaintiff to the supposed
detriment of the plaintiff and Caprius. One action was brought in Superior Court
of New Jersey, Bergen County ("State Court Action"), and the other was brought
as a derivative action in Federal District Court in New Jersey ("Federal
Derivative Action"). In September 2003, we resolved the State Court Action by
making an Offer of Judgment which was accepted by the plaintiff. Under the terms
of the Offer of Judgment, which was made without any admission or finding of
liability on part of the defendants, we paid $125,000 to the plaintiff and the
action was discontinued.
On May 3, 2004, the Court in the Federal Derivative Action granted the
motion made by us and Messrs. Aaron and Joels for judgment on the pleadings
based upon the pre-suit demand requirement and dismissed the plaintiff's
complaint without prejudice, but denied defendants' motion for judgment on the
pleadings based upon the Private Securities Litigation Reform Act. The Court
also granted the plaintiff's cross-motion to file an amended complaint to add
allegations of insider trading.
In September 2002, we were served with a complaint naming us and our
principal officers and directors in the Federal District Court of New Jersey as
a purported class action (the "Class Action"). The allegations in the complaint
cover the period between February 14, 2000 and June 20, 2002. The initial
plaintiff is a relative of the wife of the plaintiff in the State Court Action
and Federal Derivative Action. The allegations in the purported Class Action
were substantially similar to those in the other two Actions. The complaint
sought an unspecified amount of monetary damages, as well as the removal of the
defendant officers as shareholders.
On September 30, 2004, our Board received a letter written from Mr.
Nelson's attorney making a demand that we institute a derivative action
substantially similar to the allegations presented in the Federal Derivative
Action. A Board committee has 90 days to respond to the letter before Mr. Nelson
takes further action.
On May 3, 2004, in a decision separate from the decision in the Federal
Derivative Action, the Court granted the defendants' motion and dismissed the
Class Action. The federal securities claims asserted by the plaintiffs were
dismissed with prejudice, and having dismissed all federal law claims, the Court
declined to exercise jurisdiction over the remaining state law claims and
dismissed those claims without prejudice. On May 14, 2004, the plaintiffs filed
a motion for reconsideration, which defendants opposed and subsequently this
motion for reargument was denied. The plaintiff did not file a notice of appeal
during the statutory time period.
The independent directors have authorized us to advance the legal expenses
of Messrs. Aaron and Joels in these litigations with respect to claims against
them in their corporate capacities, subject to review of the legal bills and
compliance with applicable law, and Messrs. Aaron and Joels will repay us in the
event it was determined that they were not entitled to be indemnified as to the
claim for which the advance was made.
In September 2002, BDC Corp., d/b/a BDC Consulting Corp., brought an action
against us and Mr. Aaron in the Circuit Court for the Seventeenth Judicial
Circuit, Broward County, Florida seeking an unspecified amount of damages
arising from the defendants' alleged tortious interference with a series of
agreements between the plaintiff and third party MCM pursuant to which the
plaintiff had intended to purchase MCM. Although we believed there was no merit
to the plaintiff's claim, in October 2003, in order to avoid a lengthy and
expensive litigation, we and Mr. Aaron settled the action for the sum of
$83,000. The purchaser of Strax is an entity controlled by the same person who
is a principal in BDC Corp. Under our Purchase Agreement for the purchase of the
majority interest in MCM, MCM, its subsidiaries and certain pre-existing
shareholders of MCM have certain obligations to indemnify us with respect to
24
damages, losses, liabilities, costs and expenses arising out of any claim or
controversy in respect to the BDC complaint. We have made a claim for
indemnification which we believe will be resolved within the current calendar
year.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
--------------------------------
As of September 30, 2004, our directors and executive officers were:
Director
Name Age Position Since
---- --- -------- -----
George Aaron 52 Chairman of the Board, President and 1999
Chief Executive Officer
Jonathan Joels 48 Chief Financial Officer, Treasurer, 1999
Secretary and Director
Elliott Koppel 60 VP Sales and Marketing --
Sol Triebwasser, Ph.D.(1)(2) 83 Director 1984
Jeffrey L. Hymes, M.D.(1)(2) 52 Director 2004
--------------------
(1) Member of the Audit Committee
(2) Member of the Compensation/Option Committee
The principal occupations and brief summary of the background of each
director and executive officer during the past five years is as follows:
GEORGE AARON. Mr. Aaron has been Chairman of the Board, President and CEO
of the Company since June 1999. He also served as a Director on the Board of the
Company from 1992 until 1996. From 1992 to 1998, Mr. Aaron was the co-Founder
and CEO of Portman Pharmaceuticals, Inc. and in 1994 co-founded CBD
Technologies, Inc. of which he remains a Director. Mr. Aaron also serves on the
Board of Directors of DeveloGen AG, who recently merged with Peptor Ltd. (the
company that had acquired Portman Pharmaceuticals). From 1983 to 1988, Mr. Aaron
was the Founder and CEO of Technogenetics Inc. (a diagnostic company). Prior to
1983, Mr. Aaron was Founder and Partner in the Portman Group, Inc. and headed
international business development at Schering Plough. Mr. Aaron is a graduate
of the University of Maryland.
JONATHAN JOELS. Mr. Joels has been CFO, Treasurer and Secretary of the
Company since June 1999. From 1992 to 1998, Mr. Joels was the co-founder and CFO
of Portman Pharmaceuticals, Inc. and in 1994 co-founded CBD Technologies, Inc.
Mr. Joels' previous experience included serving as a principal in Portman Group,
Inc., CFO of London & Leeds Corp. and Chartered Accountant positions with both
Ernst & Young and Hacker Young between 1977 and 1981. Mr. Joels qualified and
was admitted as a Chartered Accountant to the Institute of Chartered Accountants
in England and Wales in 1981 and holds a BA Honors Degree in Accountancy (1977)
from the City of London.
ELLIOTT KOPPEL. Mr. Koppel has been VP of Marketing and Sales of the
Company since June 1999. From 1996 to June 1999 he served as CEO of ELK
Enterprises, a consulting and advertising company for the Medical Device
industry. From 1993 to 1996, he was VP Sales and Marketing for Clark
Laboratories Inc. From 1992 to 1993, Mr. Koppel was Director of the Immunology
Business Unit at Schiapparelli BioSystems. From 1990 to 1992, he was VP of Sales
and Marketing at Enzo BioChem. From 1986 to 1990, Mr. Koppel was VP of Clinical
Sciences, Inc. Between 1974 and 1986 he held the positions of Sales
Representative, Regional Manager, and International Marketing Manager at Warner
Lambert Diagnostics. Prior to 1974 Mr. Koppel was Sales Representative and
Product Manager with Ortho Diagnostics. Mr. Koppel has BS in Commerce from Rider
University.
JEFFREY L. HYMES, M.D. Dr. Hymes has been a Director of the Company since
May, 2004. In 1998, Dr. Hymes co-founded National Nephrology Associates (NNA), a
privately held dialysis company, until its acquisition by Renal Care Group in
April 2004, having served as NNA's President and Chief Medical Officer from 1998
25
to 2004. Prior to that time, Dr. Hymes was a co-founder of REN Corporation, a
publicly traded dialysis company that was sold to GAMBRO in 1995. Dr. Hymes is
currently the President of Nephrology Associates, P.C., Nashville, TN, a
19-physician nephrology practice. Dr. Hymes is a graduate of Yale College and
received his MD degree from the Albert Einstein College of Medicine of Yeshiva
University.
SOL TRIEBWASSER, PH.D. Dr. Triebwasser has been a Director of the Company's
since 1984. Until 1996, Dr. Triebwasser was Director of Technical Journals and
Professional Relations for the IBM Corporation in Yorktown Heights New York and
currently a Research Staff member emeritus. Since receiving his Ph.D. in physics
from Columbia in 1952, he had managed various projects in device research and
applications at IBM. Dr. Triebwasser is a fellow of the Institute for Electrical
and Electronic Engineers, the American Physical Society and the American
Association for the Advancement of Science.
Messrs. Aaron and Joels are brothers-in-law.
The Board of Directors met, either in person or telephonically, six times
in fiscal 2003. Each of the directors attended or participated in 75% or more of
the meetings.
BOARD COMMITTEES
The Board of Directors has standing Audit and Compensation Committees.
The Audit Committee reviews with our independent accountants the scope and
timing of the accountants' audit services and any other services they are asked
to perform, their report on our financial statements following completion of
their audit and our policies and procedures with respect to internal accounting
and financial controls. In addition, the Audit Committee reviews the
independence of the independent public accountants and makes annual
recommendations to the Board of Directors for the appointment of independent
public accountants for the ensuing year. The Audit Committee was involved in the
selection of new auditors for the 2004 fiscal year. The Audit Committee met five
times during fiscal 2003.
The Compensation Committee reviews and recommends to the Board of Directors
the compensation and benefits of all officers of the Company, reviews general
policy matters relating to compensation and benefits of employees of the Company
and administers the Company's Stock Option Plans. The Compensation/Option
Committee met once during fiscal 2003.
The Board of Directors appoints other committees as needed.
DIRECTOR COMPENSATION
Directors who are employees of the Company are not paid any fees or
additional compensation for services as members of the Company's Board of
Directors or any committee thereof. In October 2002, Dr. Triebwasser was granted
options under the Company's 2002 Stock Option Plan to purchase 100,000 shares of
Common Stock at a price of $0.15 per share vesting over two years. Additionally,
the board approved that effective October 2002, the non- employee director's fee
would be $20,000 per annum. In May 2004, the Board resolved that any new
non-employee Board members would be entitled to an annual fee of $5,000 and
75,000 options under the Company's 2002 Stock Option plan. Upon his appointment
to the Board, Dr. Jeffrey Hymes received the non-employees director fee of
$5,000, payable annually, and was granted options to purchase 75,000 shares of
common stock exercisable at $0.20 per share, vesting one third on the grant date
and the balance vesting over a two year period in equal installments.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning all cash and
non-cash compensation awarded to, earned by or paid to our Chief Executive
Officer and other executive officers with total compensation in excess of
$100,000 during the three fiscal years ended September 30, 2003:
26
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payouts
Securities
Other Restricted Underlying
Name and Annual Stock Options LTIP All Other
Principal Salary Bonus Compensation Award(s) SARs Payouts compensation
Position Year ($) ($) ($) ($) (#) ($) ($)
-------------------------------------------------------------------------------------------------------------
George Aaron 2003 240,000 160,000 -0- -0- 300,000 -0- -0-
President/CEO 2002 160,000 -0- -0- -0- -0- -0- -0-
2001 160,000 -0- -0- -0- -0- -0- -0-
-------------------------------------------------------------------------------------------------------------
Jonathan Joels 2003 176,000 112,000 -0- -0- 300,000 -0- -0-
CFO 2002 112,000 -0- -0- -0- -0- -0- -0-
2001 112,000 -0- -0- -0- -0- -0- -0-
-------------------------------------------------------------------------------------------------------------
Elliott Koppel 2003 92,000 28,000 -0- -0- 100,000 -0- -0-
-------------------------------------------------------------------------------------------------------------
We do not have any written employment agreements with any of our executive
officers. Mr. Aaron, Mr. Joels and Mr. Koppel have been paid annual base
salaries of $240,000, $176,000, and $92,000 respectively and the Company leases
automobiles for Messrs. Aaron and Joels in amounts not to exceed $1,000 and $750
per month, respectively, and also pays their automobile operating expenses. Mr.
Koppel is reimbursed $700 per month for automobile expenses plus normal
automobile expenses excluding insurance. Messrs. Aaron, Joels and Koppel are
reimbursed for other expenses incurred by them on behalf of the Company in
accordance with Company policies. In October 2002, Messrs. Aaron, Joels and
Koppel were paid performance related bonuses of $160,000, $112,000 and $28,000.
We do not have any annuity, retirement, pension or deferred compensation
plan or other arrangements under which any executive officers are entitled to
participate without similar participation by other employees. As of September
30, 2003, under our 401(k) plan we did not make any matching contribution.
STOCK OPTIONS
The following tables set forth contain certain information concerning the
grant of stock options and the number and value of securities underlying
exercisable and unexercisable stock options as of the fiscal year ended
September 30, 2003 by the executive officers listed in the Summary Compensation
Table above.
Individual
Grants
(a) (b) (c) (d) (e)
% of Total Options/
Name Number of Securities SARS Granted to
Underlying Options/ Employee(s) Exercise on Base Expiration
SARs Granted (#) in Fiscal Year Price ($/Sh) Date
----------------------------------------------------------------------------------------------
George Aaron 300,000 34.8% $0.15 10/17/12
Jonathan Joels 300,000 34.8% $0.15 10/17/12
Elliott Koppel 100,000 11.6% $0.15 10/17/12
----------------------------------------------------------------------------------------------
FISCAL YEAR END OPTION VALUE
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT SEPT. 30, OPTIONS AT SEPT. 30, 2003
NAME 2003 EXERCISABLE/UNEXERCISABLE EXERCISABLE ($)
---- ------------------------------ ---------------
George Aaron 200,000/200,000 $-0-
Jonathan Joels 200,000/200,000 $-0-
Elliott Koppel 333,333/66,667 $-0-
27
Due to the pending expiration of both the 1993 Employee Stock Option Plan
and 1993 Non-Employee Stock Option Plan, in May 2002 our Board of Directors
adopted the 2002 Stock Option Plan ("2002 Plan") which was ratified at our
stockholder meeting of June 26, 2002. The 2002 Plan covers 1,500,000 shares of
Common Stock reserved for issuance pursuant to the exercise of options granted
thereunder. Under the 2002 Plan, options may be awarded to both employees and
directors. These options may be qualified or not qualified pursuant to the
regulations of the Internal Revenue Code.
During October 2002, we granted a total of 961,000 options to our officers,
directors, and employees under the 2002 Plan for an aggregate of 961,000 shares
of Common Stock. Of these, 300,000 options each were granted to Messrs. Aaron
and Joels, 100,000 to Mr. Koppel and 100,000 to Dr. Triebwasser. All of these
options were priced at $0.15 per share, vested one third on the grant date and
the balance vests over a two year period in equal installments. During May 2004,
75,000 options priced at $0.20 were granted to Dr. Jeffrey Hymes. These options
vested one third on the grant date with the balance vesting over a two year
period in equal installments. All of these options expire 10 years after the
date of grant and were granted at fair market value or higher at time of grant.
During 1993, we adopted a employee stock option plan and a stock option
plan for non-employee directors. The employee stock option plan provides for the
granting of options to purchase not more than 1,000,000 shares of common stock.
The options issued under the plan may be incentive or nonqualified options. The
exercise price for any incentive options cannot be less than the fair market
value of the stock on the date of the grant, while the exercise price for
nonqualified options will be determined by the option committee. The Directors'
stock option plan provides for the granting of options to purchase not more than
200,000 shares of common stock. The exercise price for shares granted under the
Directors' plan cannot be less than the fair market value of the stock on the
date of the grant. Both plans expired May 25, 2003.
SECURITY OWNERSHIP
The following table sets forth, as of September 30, 2004, certain
information regarding the beneficial ownership of our common stock by (i) each
person who is known by us to own beneficially more than five percent of the
outstanding common stock, (ii) each of our directors and executive officers, and
(iii) all directors and executive officers as a group:
Amount and
Nature of
Amount and Nature of Beneficial Percentage of
Name of Beneficial Ownership(1) Ownership(1) of Securities
Beneficial Owner* Position with Company of Common Stock Preferred Stock ***
---------------------------------------------------------------------------------------------------------------
Shrikant Mehta None 4,917,898 - 23.26%
Combine International
354 Indusco Court
Troy, Michigan 48083
George Aaron Chairman of the Board; 3,898,589(2) - 18.6%
Chief Executive
Officer; President
Jonathan Joels Director; Chief 3,810,739(3) - 18.17%
Financial Officer;
Treasurer;
Secretary
General Electric Company None 1,159,793(4) 27,000 5.37%
Medical Services Division (100%)
3000 No. Grandview Blvd.
Waukesha, WI 53188
Elliott Koppel VP Sales & Marketing 549,234(5) - 2.63%
28
Sol Triebwasser, Ph.D. Director 113,400(6) - **
Jeffrey L. Hymes, M.D. Director 25,000(7) - **
All executive officers and 8,396,962(8) 31.81%
Directors as a group (5
persons)
--------------
* Address of all holders except Mr. Mehta and General Electric Company is c/o
Caprius Inc., One Parker Plaza, Fort Lee, NJ 07024
** Less Than one percent (1%)
*** Does not include the Series B Preferred Stock, as it is non-voting except
on matters directly related to such series.
(1) Includes voting and investment power, except where otherwise noted. The
number of shares beneficially owned includes shares each beneficial owner
and the group has the right to acquire within 60 days of September 30, 2004
pursuant to stock options, warrants and convertible securities.
(2) Includes (i) 7,050 shares in retirement accounts, (ii) 117,500 shares
underlying warrants presently exercisable, (iii) 100 shares jointly owned
with his wife and (iv) 400,000 shares underlying options presently
exercisable.
(3) Includes (i) 960,000 shares as trustee for his children, (ii) 110,000
shares underlying warrants presently exercisable, (iii) 17,500 shares
underlying warrants owned by his wife for which he disclaims beneficial
ownership, (iv) 400,000 shares underlying options presently exercisable.
(4) Includes 1,159,793 shares underlying 27,000 shares of Series B Preferred
Stock.
(5) Includes (i) 73,334 shares underlying warrants and (ii) 400,000 shares
underlying options presently exercisable.
(6) Includes 112,000 shares underlying options presently exercisable.
(7) Includes 25,000 shares underlying options presently exercisable and
excludes 50,000 shares underlying options which are currently not
exercisable.
(8) Includes (i) 300,834 shares underlying warrants and (ii) 1,337,000 shares
underlying options presently exercisable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the second quarter of fiscal 2004, we authorized short-term bridge
loans for an aggregate of $500,000 through the issuance of loan notes due on
July 31, 2005. The funds were utilized primarily for working capital. The
majority of the funds were provided by management of the Company. The loan notes
bear interest at a rate of 11% per annum and are secured by a first lien on the
royalties due to Opus from Seradyn, in accordance with their Royalty Agreement.
For every three dollars ($3.00) loaned, the lender received two warrants to
purchase one share of our common stock, exercisable at $0.25 per share for a
period of five years. The exercise price was in excess of the then market price.
During Fiscal 2003, MCM conducted business with The P.O.M. Group, Inc.
("POM") located in Michigan. MCM was introduced to POM by Shirkant Mehta, who
was a Caprius director from April 2000 to February 2004 and who beneficially
owns approximately 17.8% of our common stock. Mr. Mehta is also a principal
shareholder in POM. POM has significantly assisted MCM in the design,
manufacture and longevity of certain key components of the MCM SteriMed System.
To date, we have paid POM $36,845 for design work, purchased components and
disposables.
During September 2002, we had entered into a short-term line of credit
arrangement with Mr. Mehta, whereby he agreed to extend a $500,000 line of
credit to us for up to 18 months at an interest rate of 11% per annum. In return
for the provision of the line of credit, Mr. Mehta was granted warrants to
purchase 500,000 shares of Common Stock, exercisable at $0.11 per share for a
29
period of five years. As we were unable to reach mutually satisfactory terms
with Mr. Mehta as to the terms of the line of credit, in February 2004, Mr.
Mehta was relieved from his obligation under the line of credit and he returned
the warrants that had been granted to him. Additionally, Mr. Mehta had
previously agreed to provide consulting services for an initial period of one
year in connection with the MCM business, specifically relating to the areas of
financing and manufacturing, at an annual fee of $100,000 commencing on the
closing date of the MCM acquisition. As additional consideration for us
relieving Mr. Mehta of his obligations for the line of credit, Mr. Mehta waived
his rights with respect to the deferred payments we may have owed to him in the
amount $100,000 and we forgave Mr. Mehta's obligations to perform consulting
services for the Company.
During September 2002, warrant holders representing 3,297,700 shares of
Common Stock took the opportunity to exercise their warrants in our warrant
price reduction program. The reduced exercise price for each of the outstanding
warrants was equal to 20% of its present exercise price, but not less than $0.11
per share. Included as part of this warrant price reduction program were Messrs.
Aaron, Joels, Koppel and Mehta, executive officers and/or directors, who
exercised 193,750, 133,750, 11,000 and 2,400,000 warrants respectively.
During June 2002, we completed a short-term loan aggregating $250,000
through loan notes due on September 30, 2003. Included as part of this
short-term loan were executive officers, Messrs. Joels and Koppel who
contributed $10,000 and $15,000 respectively, other of our employees as well as
related family members. These funds were used principally to fund the loans to
MCM pursuant to the letter of intent. For each $1.00 principal amount loaned,
the lender received a warrant to purchase one share of our Common Stock,
exercisable after six months at $0.09 per share for a period of five years. On
October 10, 2002, we repaid these loans, plus accrued interest at the prime rate
plus 3%.
During February and March 2001, we completed a short-term bridge loan
aggregating $300,000 through secured loan notes due on February 28, 2002.
Included as part of this bridge loan, Messrs. Mehta, Aaron, Koppel and the
spouse of Mr. Joels contributed $200,000, $17,500, $15,000 and $17,500
respectively. These funds were used principally for working capital and to
purchase raw materials previously owned by Oxis, the previous manufacturer and
owner of the Opus TDM products. The loan notes bore interest at a rate of 11%
per annum and were secured by the assets of the Strax Institute. For each $1.00
principal amount loaned, the lender received a warrant to purchase one share of
Common Stock, exercisable at $0.08 per share for a period of five years. On
October 10, 2002, we repaid the bridge loan holders in an aggregate of $300,000
plus accrued interest.
The independent directors have authorized us to advance the legal expenses
of Messrs. Aaron and Joels in the litigations described in
"Business-Litigation," subject to review of the legal bills and in compliance
with applicable regulations and laws, with respect to claims made against them
in their corporate capacities. Each of them undertook to repay his advances in
the event it was determined that he was not entitled to be indemnified as to the
claim for which he received the advances. No determination of advances has been
made for fiscal year ended September 30, 2003 or for the nine months ended June
30, 2004.
We believe that each of the above referenced transactions was made on terms
no less favorable to us than could have been obtained from an unaffiliated third
party. Furthermore, any future transactions or loans between us and our
officers, directors, principal stockholders or affiliates will be on terms no
less favorable to us than could be obtained from an unaffiliated third party,
and will be approved by a majority of disinterested directors.
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue 50,000,000 shares of common stock, $.01 par
value, of which 20,446,562 shares were issued and outstanding as of September
30, 2004.
The holders of common stock are entitled to one vote for each share held of
record on all matters to be voted by stockholders. There is no cumulative voting
with respect to the election of directors with the result that the holders of
more than 50% of the shares of common stock and other voting shares voted for
the election of directors can elect all of the directors.
30
The holders of shares of common stock are entitled to dividends when and as
declared by the Board of Directors from funds legally available therefore, and,
upon liquidation are entitled to share pro rata in any distribution to holders
of common stock, subject to the right of holders of outstanding preferred stock.
No dividends have ever been declared by the Board of Directors on the common
stock. See "Dividend Policy." Holders of our common stock have no preemptive
rights. There are no conversion rights or redemption or sinking fund provisions
with respect to our common stock. All of the outstanding shares of common stock
are, and all shares sold hereunder will be, when issued upon payment therefore,
duly authorized, validly issued, fully paid and non-assessable.
PREFERRED STOCK
We are authorized to issue 1,000,000 shares of preferred stock, par value
$.01 per share, of which 27,000 shares of Series B Preferred Stock were
outstanding at July 31, 2004. The Series B Preferred Stock ranks senior to any
other shares of preferred stock which may be created and the common stock. It
has a liquidation value of $100.00 per share, plus accrued and unpaid dividends,
is non-voting except if the Company proposes an amendment to its Certificate of
Incorporation which would adversely affect the rights of the holders of the
Series B Preferred Stock, and is convertible into 1,159,793 shares of Common
Stock, subject to customary anti-dilution provisions. No fixed dividends are
payable on the Series B Preferred Stock, except that if a dividend is paid on
the common stock, dividends are paid on the shares of Series B Preferred Stock
as if they were converted into shares of common stock. The Series B Preferred
Stock is convertible for ten years from the date of purchase, August 18, 1997,
and subject to mandatory conversion upon a change of control or the expiration
of the 10-year period.
We may issue the remaining authorized preferred stock in one or more series
having the rights, privileges, and limitations, including voting rights,
conversion rights, liquidation preferences, dividend rights and redemption
rights, as may, from time to time, be determined by the Board of Directors.
Preferred stock may be issued in the future in connection with acquisitions,
financings, or other matters, as the Board of Directors deems appropriate. In
the event that we determine to issue any shares of preferred stock, a
certificate of designation containing the rights, privileges and limitations of
this series of preferred stock will be filed with the Secretary of State of the
State of Delaware. The effect of this preferred stock designation power is that
our Board of Directors alone, subject to Federal securities laws, applicable
blue sky laws, and Delaware law, may be able to authorize the issuance of
preferred stock which could have the effect of delaying, deferring, or
preventing a change in control without further action by our stockholders, and
may adversely affect the voting and other rights of the holders of our common
stock.
TRANSFER AGENT
American Stock Transfer Company, New York, New York, is the transfer agent
for our common stock.
SELLING STOCKHOLDERS
The selling stockholders are comprised of: (i) persons who beneficially own
an aggregate of 10,000,000 shares of common stock issuable upon conversion of
the promissory notes which were purchased in the convertible promissory notes
private placement, (ii) designees of Sands Brothers International Limited
("SBIL"), the selected dealer for the convertible notes, who beneficially own
1,425,000 shares of common stock issuable upon exercise of certain dealer
warrants, (iii) our executive officers, two of whom also are directors and (iv)
persons who participated in prior placements of our securities. None of the
selling stockholders has held any position or office or had any material
relationship with us or any of our predecessors or affiliates within three years
of the date of this prospectus, except for George Aaron, Jonathan Joels, Elliott
Koppel, Beverly Tkaczenko and Shrikant Mehta. Mr. Aaron has been Chairman of the
Board, President and CEO of our company since June 1999, and also had served as
a director on our board of directors from 1992 until 1996. Mr. Joels has served
as a director, CFO, Treasurer and Secretary since June 1999. Debra Joels is the
wife of Jonathan Joels. Messrs. Aaron and Joels, whose shares are included in
the 11,373,026 shares presently outstanding, have agreed not to initiate any
open market transactions to sell more than 100,000 shares each per fiscal
quarter. Mr. Koppel has been Vice President of Sales and Marketing since June
1999. Ms. Tkaczenko has been our Director of Corporate Communications since June
1998 and an employee since October 1995. Mr. Mehta had been a director from
April 2000 through February 2004.
The following table sets forth, as of September 30, 2004 and upon
completion of this offering, information with regard to the beneficial ownership
of our common stock by each of the selling stockholders. The term "Selling
Stockholder" includes the stockholders listed below and their respective
transferees, assignees, pledges, donees and other successors.
31
Because the selling stockholders may offer all, some or none of their
common stock, no definitive estimate as to the number of shares thereof that
will be held by the selling stockholders after such offering can be provided and
the following table has been prepared on the assumption that all shares of
common stock offered under this prospectus will be sold.
SHARES PERCENT AMOUNT PERCENT
BENEFICIALLY BENEFICIALLY SHARES BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED TO BE OWNED AFTER OWNED AFTER
NAME(1) OFFERING BEFORE OFFERING OFFERED OFFERING(2) OFFERING
George Aaron 3,898,589 (3) 18.60% 3,498,589 400,000 1.91%
Diana Anderson 20,000(21) * 20,000 0 -
Avenue Asset Partners 333,333 (4) 1.60% 333,333 0 -
William Bartholomay 333,333 (4) 1.60% 333,333 0 -
Roberto Bianchi 138,334 (5) * 138,334 0 -
Bonanza Trust 335,000(21) 1.61% 335,000 0 -
Carcap Co. LLC 166,667 (4) * 166,667 0 -
Chicago Investments Inc. 402,083 (6) 1.93% 333,333 0 -
Marc A.Cohen 166,667 (4) * 166,667 0 -
James F. Corman 166,667 (4) * 166,667 0 -
FCC Ltd. 333,333 (4) 1.60% 333,333 0 -
Fiserv Sec. A/C/F Harvey Kohn SEP IRA 333,333 (4) 1.60% 333,333 0 -
Fiserv Sec. A/C/F Cary Sucoff Con IRA 226,667 (7) 1.10% 226,667 0 -
Johns George 28,100 (8) * 28,100
Jeff Glassman 166,667 (4) * 166,667 0 -
Stanley Goldberg Ttee Lynn Intrater Ttee 166,667 (4) * 166,667 0 -
Goldberg Rev Trust U/A 12/17/93
John J. Harte Ttee / John J. Harte MPP u/a 333,333 (4) 1.60% 333,333 0 -
10/24/01
Debra Joels 17,500 (9) * 17,500 0 -
Jonathan Joels 3,793,239(10) 18.10% 3,393,239 400,000 1.91%
Nicholas Joels 56,667(11) * 56,667 0 -
Kanter Family Foundation 333,333 (4) 1.60% 333,333 0 -
Katie & Adam Bridge Partners LP 166,667 (4) * 166,667 0 -
Kurt Kilstock 237,500(12) 1.15% 237,500 0
Helen Kohn 250,000(21) 1.21% 250,000 0 -
Elliott Koppel 549,234(13) 2.63% 149,234 400,000 1.91%
KWG Trust 335,000(21) 1.61% 335,000 0 -
Steven J. Lamberg 100,000(14) * 100,000 0 -
Baiju Mehta 450,000(15) 2.17% 450,000 0 -
Shrikant Mehta 4,917,898(16) 23.26% 4,917,898 0 -
Roger Miller 666,667 (4) 3.16% 666,667 0 -
Linden Nelson 315,000(17) 1.52% 315,000 0 -
John Pappajohn 1,333,333 (4) 6.12% 1,333,333 0 -
Prakash D. Parikh 90,000(18) * 90,000 0 -
Sudesh Rami 8,100(19) * 8,100 0 -
Deborah Steinberger Raz and Amir Raz Jtwros 133,333 (4) * 133,333 0 -
Deborah Steinberger Raz 33,500(20) * 33,500 0 -
Sands Brothers Venture Capital LLC 333,333 (4) 1.60% 333,333 0 -
Sands Brothers Venture Capital LLC II 333,334 (4) 1.60% 333,334 0 -
Sands Brothers Venture Capital LLC III 2,000,000 (4) 8.91% 2,000,000 0 -
Sands Brothers Venture Capital LLC IV 500,000 (4) 2.39% 500,000 0 -
Lisa Sucoff 80,000(21) * 80,000 0 -
Ronit Sucoff 250,000(21) 1.21% 250,000 0 -
Maryellen Spedale 5,000(21) * 5,000 0 -
Jonathan Steinberger 163,333(22) * 163,333 0 -
32
Ruth Steinberger and Michel Steinberger 842,331(23) 4.04% 400,000 0 -
Ruth Steinberger 60,000(24) * 60,000 0 -
Howard Sterling 150,000(21) * 150,000 0 -
Trude Taylor 666,667 (4) 3.16% 666,667 0 -
Beverly Tkaczenko 162,000(25) * 6,000 156,000 *
* Less than one percent (1%).
1. Unless otherwise indicated in the footnotes to this table, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property
laws where applicable. Beneficial ownership includes shares of common stock
underlying convertible notes, warrants or options, regardless of when
convertible or exercisable. Ownership is calculated based upon 20,446,562
shares outstanding as of September 30, 2004.
2. Assumes the sale of all shares offered hereby.
3. Includes (i) 117,500 shares issuable upon exercise of warrants at exercise
prices ranging from $0.08 to $0.25 per share and (ii) 400,000 shares
issuable upon exercise of options.
4. Consists of a portion of 10,000,000 shares issuable upon conversion of
convertible promissory notes at $0.15 per share.
5. Consists of 138,334 shares issuable upon exercise of warrants at exercise
prices ranging from $0.08 to $0.25 per share.
6. Includes (i) 333,333 shares issuable upon conversion of promissory notes
described in Note (4) and (ii) 68,750 shares issuable upon exercise of
warrants at an exercise price of $0.20 per share.
7. Includes (i) 166,667 shares issuable upon conversion of promissory notes
described in Note (4) and (ii) 60,000 additional shares.
8. Includes 5,400 shares issuable upon exercise of warrants at exercise prices
ranging from $0.50 to $0.75 per share.
9. Consists of 17,500 shares issuable upon exercise of warrants at an exercise
price of $0.08 per share. She is the wife of Jonathan Joels, however, she
disclaims that Mr. Joels has any beneficial interest in her shares.
10. Includes (i) 110,000 shares issuable upon exercise of warrants at exercise
prices ranging from of $0.09 to $0.25 per share and (ii) 400,000 shares
issuable upon exercise of options. This does not include 17,500 shares
underlying warrants beneficially owned by Mr. Joels' wife. Mr. Joels
disclaims any beneficial interest in such shares.
11. Includes 56,667 shares issuable upon exercise of warrants at an exercise
price of $0.25 per share.
12. Consists of 237,500 shares issuable upon exercise of warrants at exercise
prices ranging from $0.09 to $0.20 per share. Mr. Kilstock, the
father-in-law of Messrs. Aaron and Joels, maintains that neither of them
has any beneficial ownership in his holdings.
13. Includes (i) 73,334 shares issuable upon exercise of warrants at exercise
prices ranging from of $0.08 to $0.25 per share and (ii) 400,000 shares
issuable upon exercise of options.
14. Includes 60,000 shares issuable upon exercise of warrants at exercise
prices ranging from $0.50 to $0.75 per share.
15. Includes 300,000 shares issuable upon exercise of warrants at exercise
prices ranging from $0.50 to $0.75 per share.
33
16. Includes (i) 200,000 shares issuable upon exercise of warrants at exercise
prices ranging from $0.08 per share and (ii) 500,000 issuable upon exercise
of options at an exercise price of $0.15 per share.
17. Includes 210,000 shares issuable upon exercise of warrants at exercise
prices ranging from $0.50 to $0.75 per share.
18. Includes 60,000 shares issuable upon exercise of warrants at exercise
prices ranging from $0.50 to $0.75 per share.
19. Includes 5,400 shares issuable upon exercise of warrants at exercise prices
ranging from $0.50 to $0.75 per share.
20. Includes 30,000 shares issuable upon exercise of warrants at an exercise
price of $0.09 per share. Does not include 100,000 shares owned jointly
with her husband.
21. Consists of a portion of 1,425,000 shares issuable upon exercise of dealer
warrants at an exercise price of $.28 per share.
22. Includes (i) 133,333 shares issuable upon conversion of promissory notes
described in Note (4) and (ii) 30,000 shares issuable upon exercise of
warrants at an exercise price of $0.09 per share.
23. Includes 400,000 shares issuable upon conversion of promissory notes
described in note (4). Does not include shares separately owned by Ruth
Steinberger.
24. Consists of 60,000 shares issuable upon exercise of warrants at an exercise
price of $0.09 per share.
25. Includes (i) 5,000 shares issuable upon exercise of warrants at an exercise
price of $0.09 per share and (ii) 156,000 shares issuable upon exercise of
options at an exercise price of $0.15 per share.
SBIL had been retained by us to act as a selected dealer for the sale and
issuance of the convertible promissory notes which were purchased in the
promissory notes private placement. As part of its compensation in the
placement, we granted dealer warrants to SBIL. SBIL has transferred these
warrants to certain designees. Certain affiliates of SBIL participated in the
private placement.
All selling stockholders who are natural persons have dispositive power
with respect to the shares that they are selling. With regard to selling
stockholders which are not natural persons, the persons with dispositive power
as to their shares are: Avenue Asset Partners (George Parry, Partner), Carcap
Co. LLC (Richard Carney, Managing Partner), Chicago Investments Inc. (Joshua S.
Kanter, President), Kanter Family Foundation (Joel S. Kanter, President), Katie
& Adam Bridge Partners LP (Steven Sands, General Partner), KWG Trust (Jeff
Zaluda, Trustee for Agent), Sands Bros. Venture Capital LLC, II, III, and IV
(Steven Sands, Member Manager) and FCC Ltd. (Yacov Reizman, CEO).
Under the terms of the Registration Rights Agreement entered into as part
of the placement of the convertible promissory notes, we are obligated to file
this registration statement by September 8, 2004 and to cause it to become
effective by November 5, 2004, subject to certain adjustments. In the event this
registration statement is not filed by September 8, 2004 or declared effective
by November 5, 2004, we are obligated to pay each of the participants in the
placement (a) an amount in cash, as liquidated damages, equal to one percent
(1%) of the aggregate purchase price paid by such participant under the
Securities Purchase Agreement with respect to the convertible promissory notes
and (b) an additional amount in cash equal to one percent (1%) of the price paid
by such participant under the Securities Purchase Agreement for each 30 day
period thereafter, until such time that the registration statement is filed or
declared effective, as the case may be. Under the terms of the Registration
Rights Agreement, we have agreed to keep the registration statement effective
until all the shares from the convertible promissory notes private placement
have been sold or such shares may be sold without the volume restrictions under
Rule 144(k) of the Securities Act.
We are subject to various registration rights agreements with the other
selling stockholders under which we have certain obligations to include their
shares of common stock in this prospectus.
34
PLAN OF DISTRIBUTION
The selling stockholders of our common stock and any of their pledgees,
assignees and successors-in-interest may, from time to time, sell any or all of
their shares of common stock on the OTC Bulletin Board, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales entered into after the date of this
prospectus;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
Brokers or dealers effecting transactions in the shares should confirm the
registration of these securities under the securities laws of the states in
which transactions occur or the existence of an exemption from registration.
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the ledge or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
The selling stockholders and any broker-dealers or agents that are involved
in selling the shares will be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. The selling stockholders have informed us
that they do not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
We are required to pay certain fees and expenses incurred by us incident to
the registration of the shares. We have agreed to indemnify the selling
stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
35
LEGAL MATTERS
Thelen Reid & Priest LLP, New York will pass upon the validity of the
common stock being offered hereby for the Company.
EXPERTS
The consolidated financial statements included in the Prospectus
constituting part of this Registration Statement have been audited by BDO
Seidman, LLP, an independent registered public accounting firm to the extent and
for the periods set forth in their report (which contains an explanatory
paragraph regarding the Company's ability to continue as a going concern)
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
In March 2004, BDO Seidman, LLP ceased serving as our accountants.
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act with respect to the common stock offered hereby. This prospectus,
which constitutes part of the registration statement, does not contain all of
the information set forth in the registration statement and the exhibits and
schedule thereto, certain parts of which are omitted in accordance with the
rules and regulations of the SEC. For further information regarding our common
stock and us please review the registration statement, including exhibits,
schedules and reports filed as a part thereof. Statements in this prospectus as
to the contents of any contract or other document filed as an exhibit to the
registration statement, set forth the material terms of such contract or other
document but are not necessarily complete, and in each instance reference is
made to the copy of such document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
We are also subject to the informational requirements of the Exchange Act
which requires us to file reports, proxy statements and other information with
the SEC. Such reports, proxy statements and other information along with the
registration statement, including the exhibits and schedules thereto, may be
inspected at public reference facilities of the SEC at Judiciary Plaza, 450
Fifth Street N.W., Washington D.C. 20549. Copies of such material can be
obtained from the Public Reference Section of the SEC at Judiciary Plaza, 450
Fifth Street N.W., Washington, D.C. 20549 at prescribed rates. Because we file
documents electronically with the SEC, you may also obtain this information by
visiting the SEC's Internet website at http://www.sec.gov.
36
CAPRIUS, INC. AND SUBSIDIARIES
I N D E X
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity (Deficiency) F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Caprius, Inc.
We have audited the accompanying consolidated balance sheets of Caprius,
Inc. and subsidiaries as of September 30, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board ("United States"). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Caprius,
Inc. and subsidiaries at September 30, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company and its subsidiaries will continue as a going concern.
As discussed in Note A to the consolidated financial statements, the Company and
its subsidiaries have suffered recurring losses from operations. Furthermore, as
discussed in Note H (2) the Company and its principal officers and directors are
defendants in certain legal proceedings whereby the plaintiffs are seeking
unspecified monetary damages as well as the removal of the defendant officers as
shareholders of the Company. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties. These matters raise substantial doubt about their ability to
continue as a going concern. Management's plans in regard to this matter are
described in Note A.
/s/ BDO Seidman, LLP
Boston, Massachusetts
November 14, 2003
F-2
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30, September 30,
2004 2003 2002
------------ ------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 337,575 $ 774,819 $ 505,282
Accounts receivable, net of reserve for bad debts of $5,163, $6,500,
and $13,000 and at June 30, 2004. September 30, 2003 and 2002 209,997 79,660 141,731
Inventories 741,802 820,484 -
Other current assets 117,112 78,634 6,948
Due from sale of Strax-short-term 169,458 308,037 -
Deferred financing cost, net of accumulated amortization of $25,583 127,917 - -
Net assets of TDM business segment - - 2,511,147
------------ ------------ ------------
Total current assets 1,703,861 2,061,634 3,165,108
------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 159,340 153,222 193,469
Medical equipment - - 314,318
Equipment for lease 108,321 108,321 -
Leasehold improvements 18,359 18,119 950
------------ ------------ ------------
286,020 279,662 508,737
Less: accumulated depreciation 176,939 123,902 478,136
------------ ------------ ------------
Net property and equipment 109,081 155,760 30,601
------------ ------------ ------------
OTHER ASSETS:
Due from sale of Strax-long-term - 103,973 -
Note receivable - - 350,000
Deferred financing cost, net of accumulated amortization of $29,913
and $2,301 at September 30, 2003 and September 30, 2002 - 11,437 39,049
Deferred acquisition costs - - 189,463
Goodwill 737,010 737,010 -
Intangible assets net of accumulated amortization of $424,417 and
$213,417 at June 30, 2004 and September 30, 2003 615,583 826,583 -
Other 13,330 13,330 22,794
------------ ------------ ------------
Total other assets 1,365,923 1,692,333 601,306
------------ ------------ ------------
TOTAL ASSETS $ 3,178,865 $ 3,909,727 $ 3,797,015
============ ============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
CURRENT LIABILITIES:
Notes payable, net of unamortized discount of $5,000 at
September 30, 2002 $ - $ - $ 546,650
Secured convertible notes 1,500,000 - -
Accounts payable 793,599 1,109,080 408,841
Accrued expenses 350,764 469,024 198,087
Accrued compensation 114,316 110,940 86,018
Current maturities of long-term debt and capital lease obligations - - 12,806
------------ ------------ ------------
Total current liabilities 2,758,679 1,689,044 1,252,402
F-3
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, NET OF CURRENT
MATURITIES (INCLUDING NOTE PAYABLE - RELATED PARTY, NET OF
UNAMORTIZED DISCOUNT OF $19,788 AS OF JUNE 30, 2004) 480,212 - 22,226
TOTAL LIABILITIES 3,238,891 1,689,044 1,274,628
------------ ------------ ------------
MINORITY INTEREST IN MCM SUBSIDIARY 20,000 20,000 -
------------ ------------ ------------
STOCKHOLDERS' (DEFICIENCY) 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, 2004, September 30, 2003 and September 30, 2002.
Liquidation preference $2,700,000 2,700,000 2,700,000 2,700,000
Common stock, $.01 par value
Authorized - 50,000,000 shares
Issued - 20,469,062 shares at September 30, 2003 and June 30,
2004 and 20,419,062 shares at September 30, 2002 204,691 204,691 204,191
Additional paid-in capital 67,637,158 67,581,258 67,579,258
Accumulated deficit (70,619,625) (68,283,016) (67,958,812)
Treasury stock (22,500 common shares, at cost) (2,250) (2,250) (2,250)
------------ ------------ ------------
Total stockholders' equity (deficiency) (80,026) 2,200,683 2,522,387
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY $ 3,178,865 $ 3,909,727 $ 3,797,015
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30, Nine Months Ended June 30,
----------------------------- ------------------------------
2003 2002 2004 2003
------------ ------------ ------------ ------------
REVENUES: (Unaudited)
Product sales $ 501,879 $ - $ 674,931 $ 410,983
Equipment rental income 48,700 49,548 29,035
Consulting fees 50,000 - 37,500 37,500
------------ ------------ ------------ ------------
Total revenues 600,579 - 761,979 477,518
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of product sales and equipment rental income 357,708 - 551,382 381,645
Research and development 122,116 - 171,301 135,051
Selling, general and administrative 4,155,660 1,582,636 2,276,980 3,296,488
------------ ------------ ------------ ------------
Total operating expenses 4,635,484 1,582,636 2,999,663 3,813,184
------------ ------------ ------------ ------------
Operating loss (4,034,905) (1,582,636) (2,237,684) (3,335,666)
------------ ------------ ------------ ------------
Interest expense, net (17,962) - (70,500) (1,914)
------------ ------------ ------------ ------------
Loss from continuing operations (4,052,867) (1,582,636) (2,308,184) (3,337,580)
Income from operations of discontinued TDM
business segment (including gain on disposal
of $3,214,189 in October 2002) 3,287,587 1,421,633 - 3,192,587
Loss from operations of discontinued Strax
business segment (including gain on disposal
of $125,658 at September 30, 2003) (18,830) (256,690) (28,425) (81,946)
------------ ------------ ------------ ------------
Loss before minority interest (784,110) (417,693) (2,336,609) (226,939)
Loss applicable to minority interest 459,906 - - 363,471
------------ ------------ ------------ ------------
Net (loss) income $ (324,204) $ (417,693) $ (2,336,609) $ 136,532
============ ============ ============ ============
Net income (loss) per basic and diluted common share
Continuing operations $ (0.18) $ (0.09) $ (0.11) $ (0.16)
Discontinued operations 0.16 0.07 - 0.15
------------ ------------ ------------ ------------
Net income (loss) per basic and diluted common share $ (0.02) $ (0.02) $ (0.11) $ (0.01)
============ ============ ============ ============
Weighted average number of common shares outstanding,
basic and diluted 20,402,315 17,171,140 20,446,562 20,396,562
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIENCY)
Series B Convertible Common Stock Treasury Stock
Preferred Stock $0.01 Par Value $0.01 Par Value
-------------------- ------------------ -----------------
Total
Additional Stockholders'
Number of Number of Paid-in Accumulated Number of Equity
Shares Amount Shares Amount Capital Deficit Shares Amount (Deficiency)
--------------------------------------------------------------------------------------------------------
BALANCE,
SEPTEMBER 30, 2001 27,000 $2,700,000 17,121,362 $171,214 $67,154,517 $(67,541,119) 22,500 $(2,250) $2,482,362
Fair value of warrants
issued in connection with
MCM financing - - - - 6,700 - - - 6,700
Fair value of warrants
issued in connection with
Line of Credit Agreement - - - - 41,350 - - - 41,350
Exercise of warrants
issued in connection with
Bridge Financing - - 38,500 385 7,315 - - - 7,700
Exercise of Series A warrants - - 2,172,800 21,728 217,280 - - - 239,008
Exercise of Series B warrants - - 1,086,400 10,864 152,096 - - - 162,960
Net loss - - - - - (417,693) - - (417,693)
--------------------------------------------------------------------------------------------------------
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
Exercise of options - - 50,000 500 2,000 - - - 2,500
Net loss - - - - - (324,204) - - (324,204)
--------------------------------------------------------------------------------------------------------
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
Fair Value of warrants
issued in connection with
bridge financing (unaudited) - - - - 27,400 - - - 27,400
Fair value of warrants
issued in connection with
secured convertible notes
(unaudited) - - - - 28,500 - - - 28,500
Net loss (unaudited) - - - - - (2,336,609) - - (2,336,609)
--------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2004
UNAUDITED) 27,000 $2,700,000 20,469,062 $204,691 $67,637,158 $(70,619,625) 22,500 $(2,250) $ (80,026)
========================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, Nine Months Ended June 30,
----------------------------- ------------------------------
2003 2002 2004 2003
------------- ------------- ------------- -------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (324,204) $ (417,693) $ (2,336,609) $ 136,532
Adjustments to reconcile net (loss) income to
net cash (used in) operating activities:
Minority interest in loss of MCM (459,906) - - (363,471)
Gain on sale of TDM business (3,214,189) - - (3,123,748)
Gain on sale of Strax business (125,658) - -
Amortization of debt discount on bridge financing 30,962 10,651 7,613 24,059
Amortization of deferred financing cost - - 25,583 -
Depreciation and amortization 271,164 243,961 275,474 157,311
Impairment of Goodwill - 67,356 - -
Changes in operating assets and liabilities:
Accounts receivable, net (272,363) 123,560 (130,337) (204,808)
Inventories (603,012) 71,338 78,682 (206,507)
Other current assets (58,338) (1,624) (38,478) 187,615
Accounts payable and accrued expenses (303,512) 244,388 (430,366) (12,689)
------------- ------------- ------------- -------------
Net cash (used in) provided by
operating activities (5,059,056) 341,937 (2,548,438) (3,405,706)
------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of TDM business 6,000,000 - - 5,400,000
Change in Deferred Acquisition Costs - (189,463) - -
Proceeds from sale of Strax business - - 242,552 -
Acquisition of property and equipment - - (6,358) -
Acquisition of MCM, net of cash acquired
(including loans to MCM) (88,875) (350,000) - (278,338)
------------- ------------- ------------- -------------
Net cash provided by (used in) investing activities 5,911,125 (539,463) 236,194 5,121,662
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,500 409,668 - -
Proceeds from issuance of debt and warrants - 250,000 - -
Proceeds from issuance of notes payable-related parties - - 500,000 -
Proceeds from issuance of secured convertible notes - - 1,500,000 -
Financing fees in connection with convertible notes - - (125,000) -
Repayment of debt and capital lease obligations (585,032) (46,636) - (560,736)
------------- ------------- ------------- -------------
Net cash (used in) provided by financing activities (582,532) 613,032 1,875,000 (560,736)
------------- ------------- ------------- -------------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 269,537 415,506 (437,244) 1,155,220
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 505,282 89,776 774,819 505,282
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 774,819 $ 505,282 $ 337,575 $ 1,660,502
============= ============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 29,270 $ 55,119 $ 11,642 $ 11,135
============= ============= ============= =============
NON CASH TRANSACTIONS:
Sale of Strax Business Segment in exchange for
Note Receivable $ 412,000 $ -
The accompanying notes are an integral part of these consolidated financial statements.
F-7
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Nine Month Periods Ended
June 30, 2004 and 2003 is unaudited.)
(NOTE A) - Business and Basis of Presentation
---------------------------------------------
Caprius, Inc. ("Caprius" or the "Company") was founded in 1983 and through
June 1999 essentially operated in the business of medical imaging systems as
well as healthcare imaging and rehabilitation services. On June 28, 1999, the
Company acquired Opus Diagnostics Inc. ("Opus") and began manufacturing and
selling medical diagnostic assays constituting the Therapeutic Drug Monitoring
("TDM") Business. After the close of the 2002 fiscal year, the Company made
major changes in its business through the sale of the TDM Business and the
purchase of a majority interest in M.C.M. Environmental Technologies, Inc.
("MCM"). Until the end of 2003 fiscal year, the Company continued to own and
operate a comprehensive imaging center located in Lauderhill, Florida. On
September 30, 2003, the Company completed the sale of the Strax Institute
("Strax") to Eastern Medical Technologies. The sale consisted of the business of
the Strax Institute comprehensive breast imaging center located in Lauderhill,
Florida.
During the fiscal year ended September 30, 2003, the Company's operations
were infectious medical waste business. In fiscal year ended September 30, 2002
the Company's operations were two business segments: imaging and rehabilitation
services ("Strax") and the therapeutic drug monitoring assay business (the "TDM
Business").
As discussed in Notes J & L, the Company disposed of it's TDM business in
October, 2002 and Strax effective September 30, 2003. Operations related to the
TDM business and Strax have been reclassified to discontinued operations for the
years ended September 30, 2003 and 2002.
The accompanying consolidated financial statements have been prepared
assuming that the Company and its subsidiaries will continue as a going concern.
The Company and its subsidiaries have incurred substantial losses in recent
years, which raise substantial doubt about its ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. The Company and its
subsidiaries have available cash and cash equivalents of $774,819 at September
30, 2003 and $337,575 at June 30, 2004. The Company and its subsidiaries intend
to utilize the funds for working capital purposes to continue developing the
business of MCM. The Company and its subsidiaries continue to pursue efforts to
identify additional funds through various funding options, including banking
facilities and equity offerings in order to provide capital for future
expansion. In addition, depending upon the outcome of the pending legal action,
additional funds could be required to cover legal expenses. There can be no
assurance that such funding initiatives will be successful and any equity
placement could result in substantial dilution to current stockholders.
The accompanying consolidated financial statements as of June 30, 2004 and
for the nine months ended June 30, 2004 and 2003 are unaudited: however, in the
opinion of management all adjustments (consisting solely of normal recurring
adjustments) necessary to a fair presentation of the consolidated financial
statements for these interim periods have been made. The results of the interim
period are not necessarily indicative of the results to be obtained for a full
fiscal year.
(NOTE B) - Summary of Significant Accounting Policies
-----------------------------------------------------
[1] Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly or majority owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
[2] Revenue recognition
The breast imaging center (sold in fiscal 2003) recognized revenue as
services were provided to patients. Reimbursements for services provided to
patients covered by Blue Cross/Blue Shield, Medicare, Medicaid, HMOs and other
contracted insurance programs are generally less than rates charged by the
Company. Differences between gross charges and estimated third-party payments
F-8
were recorded as contractual allowances in determining net patient service
revenue during the period that the services were provided.
Revenue from the sale of a comprehensive line of assays for therapeutic
drug monitoring (sold in fiscal 2003) was recognized when the products were
shipped to the customer.
Revenues from the MCM medical waste business are recognized when SteriMed
units are sold or rented to customers. Units under rental programs are billed on
a monthly basis. Any disposables or additional services, including training and
maintenance, are billed when shipped or provided. EITF Issue No. 00-21 was
effective for the Company beginning July 1, 2003, and did not have a material
effect on the Company's results of operations.
[3] Cash equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
[4] Inventories
Inventories are accounted for at the lower of cost or market using the
first-in, first-out ("FIFO") method.
[5] Equipment, furniture and leasehold improvements
Equipment, furniture and leasehold improvements are recorded at cost.
Depreciation and amortization are computed by the straight-line method over the
estimated lives of the applicable assets, or term of the lease, if applicable.
Asset Classification Useful Lives
-------------------- ------------
Medical equipment 5-8 years
Office furniture and equipment 3-5 years
Leasehold Improvements Term of Lease
[6] Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," the Company and its subsidiaries review the carrying
values of their long-lived assets (other than goodwill) for possible impairment
whenever events or changes in circumstances indicate that the carrying amounts
of the assets may not be recoverable. Any long-lived assets held for disposal
are reported at the lower of their carrying amounts or fair values less costs to
sell.
[7] Goodwill and other intangibles
The Company and its subsidiaries account for goodwill and other intangibles
assets in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization, and how goodwill and other intangible assets should be accounted
for after it has been initially recognized. SFAS No. 142 provides that goodwill
and intangible assets that have indefinite useful lives not be amortized but
rather be tested at least annually for impairment. Intangible assets with finite
lives will continue to be amortized.
At September 30, 2003, goodwill results from the excess of cost over the
fair value of net assets acquired related to the MCM business.
Other intangible assets include technology, customer relationship and
permits and are amortized on a straight-line basis over three to five years.
Total amortization expense related to the other intangible assets for the years
ended September 30, 2003 and 2002 were $213,417 and $0, respectively. For the
nine months ended June 30, 2004 and 2003 total amortization expense related to
other intangible assets was $424,417 and $80,000, respectively.
F-9
Intangible Assets:
ASSET TYPE COST ACCUMULATED SEPTEMBER 30, 2003 JUNE 30, 2004
AMORTIZATION NET BOOK VALUE NET BOOK VALUE
-----------------------------------------------------------------------------------------------
Technology $550,000 $137,500 $412,500 $275,000
----------------------------------------------------------------------------------------------
Permits 290,000 45,917 244,083 140,000
----------------------------------------------------------------------------------------------
Customer Relationships 200,000 30,000 170,000 200,583
----------------------------------------------------------------------------------------------
$1,040,000 $213,417 $826,583 $615,583
========== ======== ======== ========
Expected amortization over the next 5 years:
SEPTEMBER 30, AMORTIZATION
2004 $281,333
2005 281,333
2006 143,834
2007 98,000
2008 22,083
--------
$826,583
During the year ended September 30, 2002, the Company and its subsidiaries
had determined that the carrying amount of certain long-lived assets of the
Strax Institute may not be recoverable. The resultant impairment of long-lived
assets necessitated a write-down of $67,356 of goodwill of the Strax Institute
for the year ended September 30, 2002. This impairment charge is included in the
accompanying consolidated statements of operations under the heading of loss
from operations of discontinued Strax business segment.
[8] Net loss per share
Net loss per share is computed in accordance with Statement of Financial
Standards No. 128, "Earning Per Share" ("SFAS No. 128"). SFAS No. 128 requires
the presentation of both basic and diluted earnings per share.
Basic net loss per common share was computed using the weighted average
common shares outstanding during the period. Outstanding warrants and options
had an anti-dilutive effect and were therefore excluded from the computation of
diluted net loss per common share.
[9] Income taxes
The Company utilizes the liability method of accounting for income taxes,
as set forth in Statement of Financial Accounting Standards No. 109. "Accounting
for Income Taxes". Under this method, deferred tax liabilities and assets are
recognized for the expected tax consequences of temporary differences between
the carrying amount and the tax basis of assets and liabilities.
[10] Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[11] Financial instruments
The carrying amounts of cash and cash equivalents, notes and accounts
receivable, accounts payable and accrued expenses are reasonable estimates of
their fair values because of the short-term nature of those instruments. The
F-10
Company estimates that the carrying values of notes payable, current maturities
of long-term debt and long-term debt approximate fair value as the notes and
loans bear interest at current market rates.
[12] Foreign currency
The Company follows the provisions of SFAS No. 52, "Foreign Currency
Translation." The functional currency of the Company's foreign subsidiary is the
U.S. dollar. All foreign currency asset and liability amounts are re-measured
into U.S. dollars at end-of-period exchange rates, except for certain assets,
which are measured at historical rates. Foreign currency income and expense are
re-measured at average exchange rates in effect during the year, except for
expenses related to balance sheet amounts re-measured at historical exchange
rates. Exchange gains and losses arising from re-measurement of foreign
currency-denominated monetary assets and liabilities are included in operations
in the period in which they occur. Exchange gains and losses included in the
accompanying consolidated statements of operations are $24,267 and $0 for the
years ended September 30, 2003 and 2002.
[13] Recent Accounting Pronouncements
In 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.
In November 2002, the Emerging Issues Task Force (EITF) reached consensus
on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Revenue
arrangements with multiple deliverables include arrangements which provide for
the delivery or performance of multiple products, services and/or rights to use
assets where performance may occur at different points in time or over different
periods of time. EITF Issue No. 00-21 was effective for the Company beginning
July 1, 2003, and did not have a material effect on the Company's results of
operations.
In May 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The changes in this Statement improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly. This
Statement is effective for contracts entered into or modified after June 30,
2003. The adoption of SFAS 149 did not have a material effect on our
consolidated 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 adoption of SFAS 150
did not have a significant effect on the Company's operations, consolidated
financial position or cash flows.
F-11
[14] Stock-Based Compensation
The Company accounts for stock-based compensation under the intrinsic value
method in accordance with the provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations.
In December 2002 the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." SFAS No. 148, which amends SFAS No. 123, requires the measurement
of the fair value of stock options or warrants to be included in the statement
of operations or disclosed in the notes to financial statements. The Company has
determined that it will account for its stock-based compensation under the
Accounting Principles Board (APB) No. 25 and elect the disclosure-only
alternative under SFAS No. 148. The Company has computed the pro forma
disclosures under SFAS No. 148 for options and warrants granted using the
Black-Scholes option-pricing model for the years ended September 30, 2003 and
2002. The assumptions used during the years ended September 30, 2003 and 2002
were as follows:
September 30,
2003 2002
-------- -------------
Risk free interest rate 5.00% 5.59% - 7.78%
Expected dividend yield -- --
Expected lives 10 years 10 years
Expected volatility 80% 80%
Weighted average value of grants per share $.10 $.05
Weighted average remaining contractual life of
options outstanding (years) 5.9 4.7
The pro forma effect of applying FAS No. 148 would be as follows:
Nine Months ended June 30, Years Ended September 30,
(unaudited)
2004 2003 2003 2002
Net loss, as reported $(2,336,609) $136,532 $(324,204) $(417,693)
Deduct: Total stock-based employee compensation (43,425) (85,197) (112,544) (88,224)
espenses determined under fair value based method
for all awards, net of related taxes
Pro forma net (loss)income( $(2,380,034) $51,335 $(436,748) $(505,917)
Earnings (loss) per share: $(0.11) $0.01 $(0.02) $(0.02)
Basic and diluted - as reported
Basic and diluted - pro forma $(0.11) $0.00 $(0.02) $(0.02)
[15] Concentration of Credit Risk and Significant Customers
Statement of Financial Accounting Standards No. 105, "Disclosure of
Information About Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," requires disclosure
of any significant off-balance-sheet and credit risk concentrations. Although
collateral is not required, the Company periodically reviews its accounts
receivable and provides estimated reserves for potential credit losses.
Financial instruments which potentially expose the Company to concentration
of credit risk are mainly comprised of trade accounts receivable. Management
believes its credit policies are prudent and reflect normal industry terms and
business risk. The Company does not anticipate non-performance by the counter
parties and, accordingly, does not require collateral. The Company maintains
reserves for potential credit losses and historically such losses, in the
aggregate, have not exceeded management's expectations. For the year ended
September 30, 2003, one customer accounted for approximately 30% of the
consolidated total revenue. Accounts receivable due from this customer as of
September 30, 2003 amounted to $47,000. There were no significant customers for
the year ended September 30, 2002. For the nine months ended June 30, 2004,
revenue from two customers was approximately $486,000 ($305,000 for the nine
months ended June 30, 2003 which represented 64% of the total revenue) and
$131,000 representing 64% and 17% of total revenue, respectively. At June 30,
F-12
2004 accounts receivable from these customers were approximately $169,000 and
$0.
The Company has cash on deposit with 2 banks that exceeds the federally
insured limits by approximately $584,000 as of September 30, 2003. The Company
has not experienced any losses in such accounts and management believes they are
not exposed to any significant credit risk on cash.
(NOTE C) - Accrued Expenses
---------------------------
Accrued Expenses consist of the following:
June 30, 2004 September 30, 2003 September 30,2002
(unaudited)
Accrued professional fees $ 63,000 $ 55,000 $121,087
Directors fees - 60,000 15,000
Accrued taxes 160,000 160,000 --
Accrued royalties 110,969 112,299 --
Accrued exp related to Strax - 55,052 --
Accrued other 16,795 26,673 12,000
Accrued exp related to Opus -- -- 50,000
-------- -------- --------
$350,764 $469,024 $198,087
======== ======== ========
(NOTE D) - Inventory
--------------------
Inventories consist of the following:
JUNE 30, 2004 SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) 2003 2002
---- ----
Raw materials $271,300 $569,100 $ --
Finished goods $470,502 251,384 --
-------- -------- ----
$741,802 $820,484 $ --
======== ======== ====
(NOTE E) - Notes Payable and Line of Credit
-------------------------------------------
During the third quarter of fiscal 2004, the Company raised an aggregate of
$1.5 million through the issuance of 8% Senior Secured Convertible Promissory
Notes ("the Notes"), prior to fees and expenses. The Company granted a security
interest in substantially all of the assets of the Company. The Notes mature in
one year and can be converted into shares of common stock at the election of the
investor at any time using a conversion price of $0.20 per share. If certain
conditions are not met as of September 30, 2004, then the conversion price shall
be reduced to $0.15 per share. This reduction would result in an additional
charge of approximately $200,000 to the statement of operations at such time.
The financing was arranged through Sands Brothers International Ltd. ("Sands")
which has been retained by the Company to act as selected dealer for the sale
and issuance of the Notes. Based upon the funds raised, Sands received a six
percent fee and an expense allowance of one percent of the gross proceeds and
warrants valued at approximately $29,000 using the Black Scholes Model to
purchase 1,425,000 shares of the Company's common stock at an exercise price of
F-13
$0.28 per share for a period of five years. The total fees for the offering were
$125,000. The debt issuance cost is being amortized over the term of the loan.
Amortization for the three months ended June 30, 2004 amounted to $25,583.
During the second quarter of fiscal 2004, the Company authorized a
short-term bridge loan for an aggregate of $500,000 through the issuance of loan
notes due on July 31, 2005. The funds were utilized primarily for general
working capital. The majority of the funds were provided by management of the
Company. The loan notes bear interest at a rate of 11% per annum and are secured
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 estimated fair
value of the warrants approximated $27,400 using the Black Scholes Model and
such amount was treated as a discount to debt and a corresponding increase to
paid in capital. The discount is being amortized over the life of the loan. For
the nine months ended June 30, 2004, the Company recorded an additional interest
expense related to this discount of approximately $7,500, and that amount is
included in interest expense, net in the condensed consolidated statement of
operations.
Line of Credit
--------------
During 2002, the Company entered into a $500,000 line of credit agreement
with Mr. Mehta, a board member of the Company that was to expire on March 2004.
Borrowings under the line were to bear interest at 11% per annum. In connection
with this agreement, the Company issued warrants to purchase 500,000 shares of
the Company's common stock at an exercise price of $0.11. The warrants were
exercisable immediately and were to expire in September 2007. These warrants
were determined to have a market value of $41,350 which is being amortized over
the term of the related debt agreement. In February 2004, Mr. Mehta and the
Company were unable to reach mutually satisfactory terms for the underlying
provisions of the loan, and therefore Mr. Mehta relinquished his offer for the
line of credit and returned the warrants granted to him.
MCM Financing
-------------
During 2002, the Company obtained a short-term loan in the principal amount
of $250,000, with interest at prime (4.25% at September 30, 2002) plus 3% per
annum and due on September 30, 2003 (the "Company Loan"). All $250,000 of the
loan proceeds were from officers and employees of the Company as well as related
family members. For each $1.00 principal amount loaned, the lender received a
warrant to purchase one share of the Company's Common Stock, exercisable after 6
months at $0.09 per share for a period of five years. The fair market value of
the warrant on the date of grant was determined to be $6,700, which was
amortized over the term of the related debt. The proceeds of the Company Loan
together with an additional $100,000 of working capital were used to fund a loan
to MCM totaling $350,000 as of September 30, 2002. The $350,000 loan to MCM is
at prime plus 2% per annum and was converted to equity upon the acquisition of
the interest in MCM in December 2002. The Company loan plus accrued interest was
repaid from the proceeds of the Opus sale in October 2002.
Bridge loan Financing
---------------------
During 2001, the Company completed a short term bridge loan of $300,000,
through the issuance of loan notes bearing interest at 11% together with
warrants to purchase common stock of the Company. Of the total proceeds,
$250,000 of loans were from officers and directors of the Company and related
parties. The $300,000 bridge loan notes were due for repayment on February 28,
2002, which was extended to October 31, 2002. On October 10, 2002, the Company
repaid the bridge loan holders the $300,000 plus accrued interest. The fair
value of warrants issued in connection with the bridge loan amounting to $12,000
was reflected as a discount to the face value of the bridge loan. The notes were
collateralized by substantially all assets of the Company.
(NOTE F) - Capital Lease Obligations
------------------------------------
Capital lease obligations at September 30, 2003 and 2002 and June 30, 2004
consisted of the following:
F-14
JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2002
---- ----
-------------------------------------------------------------------------------------------------------
Various capital leases, secured by the respective
medical equipment, interest rates ranging from
10.0% - 12.7%, monthly payments of principal and
interest ranging from $1,720 to $3,700, maturities
ranging from November 2002 to October 2004. $ -- $ -- $35,032
-------------------------------------------------------------------------------------------------------
Less: current maturities -- -- 12,806
------- ------- -------
-------------------------------------------------------------------------------------------------------
$ -- $ -- $22,226
======= ======= =======
As of September 30, 2003 the Company has no capital lease obligations due
to the sale of the Strax Institute. All of the obligations for the equipment
disclosed in Fiscal 2002 was transferred in the sale of the Strax Institute.
(NOTE G) - Income Taxes
-----------------------
At September 30, 2003 and 2002, the Company had a deferred tax asset
totaling approximately $17,680,000 and $17,800,000 respectively, due primarily
to net operating loss carryovers. A valuation allowance was recorded in 2003 and
2002 for the full amount of this asset due to uncertainty as to the realization
of the benefit.
The Company's Israeli subsidiary had carried forward losses for tax
purposes in the amount of approximately $6 million. A valuation allowance has
been recorded for the full amount of the deferred tax asset generated from these
loss carry forwards due to uncertainty as to the realization of the benefit.
At September 30, 2003 the Company had available net operating loss carry
forwards for tax purposes, expiring through 2023 of approximately $52,010,000.
The Internal Revenue Code contains provisions which will limit the net operating
loss carry forward available for use in any given year if significant changes in
ownership interest of the Company occur.
(NOTE H) - Commitments and Contingencies
----------------------------------------
[1] Operating leases
The Company leases facilities under non-cancelable operating leases
expiring at various dates through fiscal 2005. Facility leases require the
Company to pay certain insurance, maintenance and real estate taxes. Lease
expense for all operating leases totaled approximately $235,250 and $215,000 for
the years ended September 30, 2003 and 2002, respectively.
Future minimum rental commitments under operating leases are as follows:
Fiscal Year Amount
----------- ------
2004 118,700
2005 46,650
--------
Total $165,350
========
[2] Legal proceedings
In June 2002, Jack Nelson, a former Caprius executive officer and director,
commenced two legal proceedings against us and George Aaron and Jonathan Joels,
executive officers, directors and principal stockholders of the Company. The two
complaints alleged 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 Caprius. One action was brought in Superior Court
of New Jersey, Bergen County ("State Court Action"), and the other was brought
as a derivative action in Federal District Court in New Jersey ("Federal
Derivative Action"). In September 2003, we resolved the State Court Action by
making an Offer of Judgment which was accepted by the plaintiff. Under the terms
F-15
of the Offer of Judgment, which was made without any admission or finding of
liability on part of the defendants, we paid $125,000 to the plaintiff and the
action was discontinued.
On May 3, 2004, the Court in the Federal Derivative Action granted the
motion made by us and Messrs. Aaron and Joels for judgment on the pleadings
based upon the pre-suit demand requirement and dismissed the plaintiff's
complaint without prejudice, but denied defendants ' motion for judgment on the
pleadings based upon the Private Securities Litigation Reform Act. The Court
also granted the plaintiff's cross-motion to file an amended complaint to add
allegations of insider trading.
In September 2002, we were served with a complaint naming us and our
principal officers and directors in the Federal District Court of New Jersey as
a purported class action (the "Class Action"). The allegations in the complaint
cover the period between February 14, 2000 and June 20, 2002. The initial
plaintiff is a relative of the wife of the plaintiff in the State Court Action
and Federal Derivative Action. The allegations in the purported Class Action
were substantially similar to those in the other two Actions. The complaint
sought an unspecified amount of monetary damages, as well as the removal of the
defendant officers as shareholders.
On May 3, 2004, in a decision separate from the decision in the Federal
Derivative Action, the Court granted the defendants' motion to dismiss the Class
Action. The federal securities claims asserted by the plaintiffs were dismissed
with prejudice, and having dismissed all federal law claims, the Court declined
to exercise jurisdiction over the remaining state law claims and dismissed those
claims without prejudice. On May 14, 2004, the plaintiffs filed a motion for
reconsideration which defendants opposed and subsequently this motion for
reargument was denied. No appeal has been filed.
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 2 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 and is currently resolving this matter with the
indemnifying parties.
(NOTE I) - Capital Transactions
-------------------------------
[1] Preferred Stock - Class B
-------------------------
On August 18, 1997, the Company entered into various agreements with
General Electric Company ("GE") including an agreement whereby GE purchased
27,000 shares of newly issued Series B Convertible Redeemable Preferred Stock
(the "Series B Preferred Stock") for $2,700,000.
The Series B Preferred Stock consists of 27,000 shares, ranks senior to any
other shares of preferred stock which may be created and the Common Stock. It
has a liquidation value of $100.00 per share, plus accrued and unpaid dividends,
is non-voting except if the Company proposes an amendment to its Certificate of
Incorporation which would adversely affect the rights of the holders of the
Series B Preferred Stock, and is convertible into 1,597,930 shares of Common
Stock, subject to customary anti-dilution provisions. No fixed dividends are
payable on the Series B Preferred Stock, except that if a dividend is paid on
the Common Stock, dividends are paid on the shares of Series B Preferred Stock
as if they were converted into shares of Common Stock.
[2] Warrants
During the third quarter of Fiscal 2004, the Company raised an aggregate of
$1.5 million through the issuance of 8% Senior Secured Convertible Promissory
Notes. The financing was arranged through Sands Brothers International Ltd. who
F-16
was retained by the Company to act as selected dealer for the sale and issuance
of the Notes. Based upon the funds raised, Sands received warrants valued at
approximately $29,000 using the Black Scholes Model to purchase 1,425,000 shares
of the Company's common stock at an exercise price of $0.28 per share for a
period of five years. These warrants expire at various dates through June 2009.
During the second quarter of Fiscal 2004, the Company authorized a short
term bridge loan for an aggregate of $500,000 through the issuance of loan notes
due on July 31, 2005. For every three dollars ($3.00) loaned, the lender
received 2 warrants to purchase one share of Common Stock, exercisable at $0.15
per share for a period of five years. These warrants expire in January 2009.
During the fiscal year ended September 30, 2002, the Company offered to the
current warrant-holders a reduction in the exercise price of outstanding
warrants. Exercise prices were reduced by 80%, not to be below an exercise price
of $0.11 per share, during a set time period that expired on September 30, 2002.
All warrants exercised during fiscal year 2002 were exercised during the
reduction period.
In connection with various bridge financing agreements entered into during
fiscal year 2000, the Company issued warrants to purchase 368,500 shares of
common stock at exercise prices ranging from $0.20 to $1.00 (see below).
Warrants to purchase 68,750 shares at $0.20 per share were exercised in October
2000. Warrants to purchase 38,500 shares at $0.20 per share were exercised in
September 2002. As of September 30, 2003, there were warrants outstanding to
purchase 261,250 shares of common stock at an exercise price of $0.20 per share.
These warrants expire at various dates through March 2005.
In connection with the equity placement completed during fiscal year 2000,
the Company issued 2,600,000 Series A warrants and 1,300,000 Series B warrants.
Series A warrants to purchase 2,172,800 shares at $0.11 per share were exercised
in September 2002. Series B warrants to purchase 1,086,400 shares at $0.15 per
share were exercised in September 2002. As of September 30, 2003, there were
Series A and B warrants outstanding to purchase 640,800 shares of common stock
at exercise prices ranging from $0.50 to $0.75, with a weighted average exercise
price of $0.58.
In connection with MCM financing entered into during 2002, the Company
issued warrants to purchase 250,000 shares of common stock at $0.09. The market
value of the warrants issued was determined to be $6,700, which is being
amortized over the life of the related debt. These warrants expire in September
2007.
In connection with bridge financing entered into during 2001, the Company
issued warrants to purchase 300,000 shares of common stock at $0.08. The
warrants were determined to have a market value of $12,000 which was amortized
over the term of the related debt. These warrants expire in February 2006.
[3] Equity Private Placement
On April 27, 2000, the Company completed an equity private placement of
$1,950,000 through the sale of 650,000 units at $3.00 per unit. Each unit was
comprised of three shares of Common Stock, four Series A Warrants exercisable at
$0.50 per share and are callable by the Company if the Common Stock of the
Company trades above $3.00 for 15 consecutive days, two Series B Warrants
exercisable at $0.75 per share and are callable by the Company if the Common
Stock trades above $5.00 for 15 consecutive days. All of the warrants are
exercisable for a period of five years. In addition, the Company issued options
to two individuals who assisted with the financing. One individual received
options to purchase 500,000 shares of common stock at $0.75 through June 2005.
Another individual received options to purchase 500,000 shares of common stock
at $1.00 through June 2005.
[4] Stock options
The Company has an Incentive and Nonqualified Stock Option Plan which
provides for the granting of options to purchase not more than 100,000 shares of
common stock. Exercise prices for any incentive options are at prices not less
than the fair market value at the date of grant, while exercise prices for
nonqualified options may be at any price in excess of $.01. When fair market
value at the date of issuance is in excess of the option exercise price, the
excess is recorded as compensation expense. There were no options outstanding
under this plan as of September 30, 2003.
F-17
During 2002, the Company adopted a stock option plan for both employees and
non-employee directors. The employee and Directors stock option plan provides
for the granting of options to purchase not more than 1,500,000 shares of common
stock. The options issued under the plan may be incentive or nonqualified
options. The exercise price for any options will be determined by the option
committee. The plan expires May 15, 2012. As of September 30, 2003, there were
961,000 options outstanding under the 2002 plan, exercisable at $0.15 per share.
During October 2002, the Company granted a total of 961,000 options to officers,
directors, and employees under the 2002 plan. All options are exercisable at
$0.15 per share vesting one third immediately and the balance equally over a two
year period. In May 2004, the Board of Directors resolved that any new
non-employee Board member would be entitled to 75,000 options under the
Company's 2002 Stock Option Plan. Upon his appointment to the Board, Dr. Jeffrey
Hymes , was granted options to purchase 75,000 shares of Common Stock
exercisable at $0.20 per share, vesting one third on the grant date and the
balance vesting over a two year period in equal installments.
During 1993, the Company adopted a employee stock option plan and a stock
option plan for non-employee directors. The employee stock option plan provides
for the granting of options to purchase not more than 1,000,000 shares of common
stock. The options issued under the plan may be incentive or nonqualified
options. The exercise price for any incentive options cannot be less than the
fair market value of the stock on the date of the grant, while the exercise
price for nonqualified options will be determined by the option committee. The
Directors' stock option plan provides for the granting of options to purchase
not more than 200,000 shares of common stock. The exercise price for shares
granted under the Directors' plan cannot be less than the fair market value of
the stock on the date of the grant. Both plans expired May 25, 2003.
Stock option transactions under the 2002 plan are as follows:
Weighted Average
Number of Option Price Exercise Price
Shares Per Share Per Share
------ --------- ---------
Balance, September 30, 2002 50,000 $0.05 $0.05
Granted in 2003 961,000 $0.15 $0.15
Exercised in 2003 (50,000) $0.05 $0.05
-------- ----- -----
Balance, September 30, 2003 961,000 $0.15 $0.15
Granted in 2004 75,000 $0.20 $0.20
------ ----- -----
Balance, June 30, 2004 (unaudited) 1,036,000 $0.15 - $0.20 $0.15
========= ============= =====
Stock option transactions under the 1993 plan are as follows:
Weighted Average
Number of Option Price Exercise Price
Shares Per Share Per Share
------ --------- ---------
Balance, September 30, 2001 901,500 $ 0.15 - $ 5.00 $0.45
Cancelled in 2002 (157,000) $ 0.15 - $ 5.00 1.33
--------- --------------- -----
Balance, September 30, 2002 744,500 $ 0.15 - $ 5.00 $0.26
Cancelled in 2003 (15,000) $ 0.84 - $ 2.93 1.40
-------- --------------- -----
Balance, September 30, 2003 729,500 $ 0.15 - $ 5.00 $0.24
Cancelled in 2004 (2,500) $2.93 - $5.00 $4.17
------- ------------- -----
Balance, June 30 2004 (unaudited) 727,500 $0.15 - $5.00 $0.23
======= ============= =====
Stock option transactions not covered under the option plans are as
follows:
F-18
Weighted Average
Number of Option Price Exercise Price
Shares Per Share Per Share
------ --------- ---------
Balance, September 30, 2001 and 2002 1,053,861 $0.10 - $20.10 $0.89
Granted in 2003 1,000,000 $0.15 $0.15
Cancelled in 2003 (1,287) $16.20 $16.20
------- ------ ------
Balance, September 30, 2003 2,052,574 $0.10 - $20.10 $0.52
Cancelled in 2004 (1,001,287) $0.75 - $15.85 $0.90
----------- -------------- -----
Balance, June 30, 2004 (unaudited) 1,051,287 $0.10 - $20.10 $0.17
========= ============== =====
Weighted
Range of Price Average Price
Options exercisable Number of Shares Per Share Per Share
---------------------------------------------- ---------------- --------------- -------------
Plan shares at September 30, 2003 1,370,167 $0.15 - $5.00 $0.20
Non-plan shares at September 30, 2003 1,719,240 $0.10 - $20.10 $0.60
Plan shares at June 30, 2004 (unaudited) 1,392,667 $0.15 - $5.00 $0.19
Non-plan shares at June 30, 2004 (unaudited) 717,954 $0.10 - $20.10 $0.19
The following table summarizes information about stock options outstanding at
September 30, 2003 and June 30, 2004, respectively:
Outstanding Options
----------------------------------------
Weighted-
Average Weighted-
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life (years) Price
-----------------------------------------------------------------------------------
$0.10 - $0.25 2,726,000 8.2 $0.15
0.75-1.00 1,000,000 1.7 0.88
2.93 10,000 2.4 2.93
5.00 4,500 1.5 5.00
15.80-20.10 2,574 1.0 17.95
-----------------------------------------------------------------------------------
$0.10 - $20.10 at 09/30/03 3,743,074 6.4 $0.37
============== =========== ========= === =====
$0.10 - $20.10 at 06/30/04 (unaudited) 2,814,287 7.2 $0.18
============== ======================= ========= === =====
F-19
Exercisable Options
----------------------------------------
Weighted-
Average Weighted-
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life (years) Price
-----------------------------------------------------------------------------------
$0.10-$0.25 2,072,333 7.9 $0.16
0.75-1.00 1,000,000 1.7 0.87
2.93 10,000 2.4 2.93
5.00 4,500 1.5 5.00
15.80-20.10 2,574 1.1 17.95
-----------------------------------------------------------------------------------
$0.10 - $20.10 at 09/30/03 3,089,407 5.9 $0.42
============== =========== ========= === =====
-----------------------------------------------------------------------------------
$0.10 - $20.10 at 06/30/04 (unaudited) 2,110,621 6.9 $0.19
============== ======================= ========= === =====
(NOTE J) - Disposal of TDM business segment
-------------------------------------------
Effective October 9, 2002, the Company completed the sale of the assets and
certain liabilities of its TDM business segment for $6,000,000. Pursuant to a
Consulting Agreement, Opus will consult with Seradyn on ongoing projects for a
$50,000 annual fee for a two-year period. The sold assets included three
diagnostic assays still in development, for which Opus will receive royalty
payments upon the commercialization of any of these assays based upon varying
percentages of net sales. Caprius, Opus and its three executive officers entered
into non-compete agreements with Seradyn restricting them for five years from
competing in the TDM business. The sale of the TDM business has been reflected
as discontinued operations in the accompanying consolidated financial
statements. Assets applicable to the TDM business segment net of liabilities
assumed were segregated in the Company's balance sheet at September 30, 2002 and
shown as net assets of the TDM business segment. Revenues from discontinued
operations, which have been excluded from income from continuing operations in
the accompanying consolidated statements of operations for fiscal years 2003 and
2002, are shown below. The effects of the discontinued operations on net loss
and per share data are reflected within the accompanying consolidated statements
of operations.
A summary of net assets of the TDM business segment at September 30, 2002
were as follows:
2002
----
Current assets $638,609
Property and equipment 34,923
Intangible assets 2,001,937
Liabilities 164,322
-------
Net assets $2,511,147
==========
A summary of operations of the TDM business segment for the years ended
September 30, 2003 and 2002 is as follows:
2003 2002
---- ----
---------------------------------------------------------
Revenues $ 96,698 $ 2,170,446
---------------------------------------------------------
Operating Expenses 23,300 748,813
-------- -----------
---------------------------------------------------------
Income from Operations $ 73,398 $ 1,421,633
======== ===========
F-20
(NOTE K) - Acquisition of majority interest in
MCM Environmental Technologies, Inc.
-----------------------------------------------
On December 17, 2002, the Company completed the initial acquisition of
57.53% of the capital stock of MCM Environmental Technologies ("MCM"). The
Company acquired its interest for a purchase price of $2.4 million and currently
are the majority owners. MCM is engaged in the infectious medical waste
business. Upon closing, Caprius designees were elected to three of the five
seats on MCM's Board of Directors, with George Aaron, President and CEO, and
Jonathan Joels, CFO, filling two seats. At the time of the acquisition of MCM,
the Company's outstanding loans to MCM aggregated $565,000 which were paid by
reducing the cash portion of the purchase price. For a six month period
commencing 19 months and ending 25 months from December 17, 2002, pursuant to a
Stockholders Agreement, the stockholders of MCM (other than the Company) shall
have the right to put all of their MCM shares to MCM, and MCM shall have the
right to call all of such shares, at a price based upon a pre-set determination
calculated at such time. At the Company's option, the purchase price for the
remaining MCM shares may be paid in cash or the Company's common stock. The
acquisition was financed through proceeds from the sale of the TDM business.
Additionally, as part of the transaction, certain debt of MCM to its existing
stockholders and to certain third parties was converted to equity or
restructured. Legal and other costs incurred in 2002 directly related to the
acquisition totaled $189,463, and are included in deferred acquisition costs in
the accompanying consolidated balance sheet as of September 30, 2002. These
costs were allocated to the purchase price of MCM during the year ended
September 30, 2003. The acquisition was accounted for using the purchase method
of accounting under which the purchase price will be allocated to the assets
acquired and liabilities assumed based on their estimated fair values.
A summary of the acquisition of MCM Environmental Technologies:
Current Assets $2,313,851
Net PP&E 215,558
Liabilities (1,446,513)
----------
Net Tangible Assets $1,082,896
==========
Net Tangible Assets (57.53% Interest) $ 622,990
Goodwill & Intangible Assets 1,777,010
----------
Total Acquisition Cost $2,400,000
==========
Pro forma combined results of operations of the Company and the MCM
business acquired in December 2002 for the periods ended September 30, 2003 and
2002, assuming that the transaction had occurred on October 1, 2001 and after
giving effect to certain pro forma adjustments are as follows:
2003 2002
---- ----
Revenues $ 841,471 $2,037,743
Operating Expenses 4,821,892 3,351,822
Interest Income(expense) (17,962) 36,676
Loss from continuing operations ($3,998,383) ($1,277,403)
============ ============
(NOTE L) - Sale of Strax
------------------------
Effective September 30, 2003, the Company sold its comprehensive breast
imaging business, to Eastern Medical Technologies, Inc., a Delaware corporation
("EMT"), pursuant to a Stock Purchase Agreement dated September 30, 2003 (the
"Purchase Agreement") among Registrant, EMT and the other parties thereto. The
purchase price was $412,000 and may be subject to adjustment based upon the
amount of accounts receivable outstanding as of the date of closing. 50% of the
purchase price, which had been held in escrow, was paid on closing and the
balance is payable in installments commencing January 1, 2004 and ending
December 31, 2004, evidenced by a note secured by the accounts receivables of
Strax Institute, Inc. In addition, Registrant is required to provide certain
specified transitional services for up to 180 days pursuant to a Management
Services Agreement.
The sale of the Strax business has been reflected as discontinued
operations in the accompanying consolidated financial statements. Revenues from
discontinued operations, which have been excluded from income from continuing
F-21
operations in the accompanying consolidated statements of operations for fiscal
years 2003 and 2002, are shown below. The effects of the discontinued operations
on net loss and per share data are reflected within the accompanying
consolidated statements of operations.
A summary of operations of the Strax business segment for the years ended
September 30, 2003 and 2002 is as follows:
2003 2002
---- ----
Revenues $1,559,669 $1,549,794
Operating Expenses 1,704,157 1,806,484
---------- ----------
Loss from operations $ (144,488) $ (256,690)
========== ==========
(NOTE M) - Geographic Information at September 30, 2003:
--------------------------------------------------------
Loss from
Continuing
Geographic Location Revenues Long-Lived Assets Operations
------------------- -------- ----------------- ----------
United States $ 98,700 $ 237,061 $(3,820,205)
Israel 501,879 1,611,032 (232,662)
-------- ---------- -----------
$600,579 $1,848,093 $(4,052,867)
======== ========== ===========
F-22
NO DEALER, SALESPERSON OR OTHER PERSON HAS
BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE 25,083,411
ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN SHARES OF
THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE COMMON STOCK
BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
SELLING STOCKHOLDERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THOSE CAPRIUS, INC.
SPECIFICALLY OFFERED HEREBY OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THESE
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
EXCEPT WHERE OTHERWISE INDICATED, THIS PROSPECTUS
SPEAKS AS OF THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE PROSPECTUS
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY..............................1
THE COMPANY.....................................1
THE OFFERING....................................3
RISK FACTORS....................................3
SUMMARY FINANCIAL AND OPERATING INFORMATION.....3
RISK FACTORS....................................4
FORWARD LOOKING STATEMENTS......................9
USE OF PROCEEDS................................10
DIVIDEND POLICY................................10 _________, 2004
MARKET FOR OUR COMMON STOCK....................10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...................................11
BUSINESS.......................................15
MANAGEMENT.....................................25
SECURITY OWNERSHIP.............................28
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.................................29
DESCRIPTION OF SECURITIES......................30
SELLING STOCKHOLDERS...........................31
PLAN OF DISTRIBUTION...........................35
LEGAL MATTERS..................................36
EXPERTS........................................36
AVAILABLE INFORMATION..........................36
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS....F-1
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The only statue, charter provision, by-law, contract, or other arrangement
under which any controlling person, director or officers of the Registrant is
insured or indemnified in any manner against any liability which he may incur in
his capacity as such, is as follows:
Our certificate of incorporation limits the liability of our directors and
officers to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a corporation will not be personally liable for monetary
damages for breach of their fiduciary duties as directors, except liability for:
(i) breach of the directors' duty of loyalty; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law,
(iii) the unlawful payment of a dividend or unlawful stock purchase or
redemption, and (iv) any transaction from which the director derives an improper
personal benefit. Delaware law does not permit a corporation to eliminate a
director's duty of care, and this provision of our Certificate of Incorporation
has no effect on the availability of equitable remedies, such as injunction or
rescission, based upon a director's breach of the duty of care.
The effect of the foregoing is to require us to indemnify our officers and
directors for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he or she
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
Insofar as indemnification for liabilities may be permitted to our
directors, officers and controlling persons pursuant to the foregoing
provisions, or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of this offering in connection with the issuance and
distribution of the securities being registered, all of which are to be paid by
the Registrant, are as follows:
Registration Fee....................................... $ 551
Legal Fees and Expenses................................ 45,000
Accounting Fees and Expenses........................... 25,000
Printing............................................... 2,500
Miscellaneous Expenses................................. 6,949
-------
Total............................................. $80,000
=======
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During third quarter fiscal 2004, the Company sold an aggregate of $1.5
million of 8% Senior Secured Convertible Promissory Notes ("the Notes"), prior
to fees and expenses. The Company granted a security interest in substantially
all of the assets of the Company. The Notes mature in one year and can be
converted into shares of common stock at the election of the investor at any
time using a conversion price of $0.20 per share. If certain conditions are not
met as of September 30, 2004, then the conversion price shall be reduced to
$0.15 per share. Sands Brothers International Ltd. ("Sands") acted as selected
dealer for the sale and issuance of the Notes. Based upon the funds raised,
Sands received a six percent fee and an expense allowance of one percent of the
gross proceeds and warrants to purchase 1,425,000 shares of the Company's common
stock at an exercise price of $0.28 per share for a period of five years. Each
Note purchaser entered into a Purchase Agreement in which he represented, among
other things, as to his status as an "accredited investor" under Regulation D
and his awareness of the restrictions on resale or other transfer of the Notes
and the underlying shares of Common Stock. The placement claimed exemption from
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the registration provisions of the Securities Act of 1933 by reason of Section
4(2) thereof and Rule 144 thereunder.
During June 2002, the Company completed a short-term loan aggregating
$250,000 through loan notes due on September 30, 2003. Included as part of this
short-term loan were executive officers, Messrs. Joels and Koppel who
contributed $10,000 and $15,000 respectively, employees of the Company as well
as related family members. These funds were used principally to fund the loan to
M.C.M. Environmental Technologies, Inc. ("MCM") pursuant a the letter of intent,
in connection with the Company's purchase of a majority interest in MCM. For
each $1.00 principal amount loaned, the lender received a warrant to purchase
one share of the Company's Common Stock, exercisable after 6 months at $0.09 per
share for a period of five years. On October 10, 2002, the Company repaid these
loans, plus accrued interest at the prime rate plus 3%. The offering of these
notes and warrants to Messrs. Joels and Koppel in this financing was conducted
under Regulation D, Rule 506 of the Securities Act of 1933.
ITEM 27. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
All references to Registrant's Forms 8-K, 10-K, 10-QSB and 10-KSB include
reference to File No. 0-11914.
2.1 Agreement and Plan of Merger, dated January 20, 1997, by and among
Registrant, Medial Diagnostics, Inc. ("Strax"), Strax Acquisition
Corporation and US Diagnostic Inc. (incorporated by reference to
Exhibit 1 to Registrant's Form 8-K filed January 23, 1997).
2.2 Agreement and Plan of Merger dated as of June 28, 1999 among
Registrant, Caprius Merger Sub, Opus Diagnostics Inc. ("Opus"), George
Aaron and Jonathan Joels (incorporated by reference to Exhibit 2.1 to
Registrant's Form 8-K, filed July 1, 1999 (the "July 1999 Form 8-K")).
3.1 Certificate of Incorporation of Registrant. (incorporated by reference
to Exhibit 3 filed with Registrant's Registration Statement on Form
S-2, and amendments thereto, declared effective August 18, 1993 (File
No. 033-40201) ("Registrant's Form S-2")).
3.2 Amendment to Certificate of Incorporation of Registrant filed November
5, 1993 (incorporated by reference to Exhibit 3.2 to Registrant's Form
S-4, filed October 9, 1997(File No. 333-37481)).
3.3 Amendment to Certificate of Incorporation of Registrant, filed August
31, 1995, (incorporated by reference to Exhibit 3.1 to Registrant's
Form 8-K for an event of August 31, 1995 (the "August 1995 Form
8-K")).
3.4 Amendment to Certificate of Incorporation of Registrant, filed
September 21, 1995 (incorporated by reference to Exhibit 3.1 to
Registrant's Annual Report on Form 10-K for the nine months ended
September 30, 1995 (the "ANMR 1995 Form 10-K")).
3.5 Certificate of Designation of Series A Preferred Stock of the
Registrant (incorporated by reference to the Registrant's Form 8-K,
filed on March 31, 1996.
3.6 Certificate of Designation of Series B Convertible Redeemable
Preferred Stock of Registrant (incorporated by reference to Exhibit
3.1 to Registrant's Form 8-K, filed September 2, 1997).
3.7 Certificate of Merger, filed on June 28, 1999 with the Secretary of
State of the State of Delaware. (Incorporated by reference to Exhibit
3.1 of Form 8-K dated June 28, 1999).
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3.8 Amended and Restated By-laws of Registrant (incorporated by reference
to Exhibit 3.4 to Registrant's Form S-4).
4.1 Form of Warrant issued to certain employees in connection with
Registrant's Bridge Financing in March 2000 (incorporated by reference
to Exhibit 4.7 to Registrant's July 2000 Form SB-2, filed July 26,
2000 (File No. 333-42222)).
4.2 Form of Series A Warrant from Registrant's April 2000 private
placement of Units (the "April Private Placement") (incorporated by
reference to Exhibit 10.2 to Registrant's Form 8-K, filed April 28,
2000 (the "April 2000 Form 8-K")).
4.3 Form of Series B Warrant from the April Private Placement
(incorporated by reference to Exhibit 10.3 to Registrant's April 2000
Form 8-K).
4.4 Form of Warrant issued to each of Sandra Kessler and Nicholas Kessler,
by and through his Guardian ad litem (incorporated by reference to
Exhibit 4.10 to Registrant's September 2000 Form 10-KSB).
4.5 Form of Common Stock Purchase Warrants for up to 300,000 shares of
Common Stock, expiring February 28, 2006 (incorporated by Reference to
Exhibit 10.3 to the Registrant's Form 10-QSB for the fiscal quarter
ended March 31, 2001).
5* Opinion of Thelen Reid & Priest LLP.
10.1 Registrant's 1983 Incentive and Non-Qualified Stock Option Plan,
Amended and Restated as of February 1, 1988, and form of incentive
stock option (incorporated by reference to Exhibit 10.4 to
Registrant's Form S-2).
10.3.1 Registration Rights Agreement, dated August 18, 1997, between
Registrant and General Electric Company ("GE") (incorporated by
reference to Exhibit 10.2 to Registrant's Form 8-K, filed September 2,
1997).
10.3.2 Stockholders Agreement, dated August 18, 1997, between Registrant and
GE (incorporated by reference to Exhibit 10.3 to the Registrant's Form
8-K, filed September 2, 1997).
10.3.3 Settlement and Release Agreement, dated August 18, 1997, between the
Registrant and GE (incorporated by reference to Exhibit 10.4 to the
Registrant's Form 8-K, filed September 2, 1997).
10.3.4 License Agreement, dated August 18, 1997, between Registrant and GE
(incorporated by reference to Exhibit 10.4 to the Registrant's Form
8-K, filed September 2, 1997).
10.4.1 Severance and Consulting Agreement dated as of June 28, 1999 between
Registrant and Jack Nelson (incorporated by reference to Exhibit 10.4
to Registrant's July 1999 Form 8-K).
10.4.2 Form of Secured Promissory Note, dated as of December 28, 1999, from
Registrant to Nelson (incorporated by reference to Exhibit 10.16.1 to
Registrant's September 1999 Form 10-KSB).
10.4.3 Letter of Non-disparagement dated January 14, 2000 between Registrant
and Jack Nelson (incorporated by reference to Exhibit 10.4.3 to
Registrant's September 2001 Form 10-KSB).
10.4.4 Letter Agreement dated April 4, 2000 between Registrant and Nelson
relating to terms and conditions of payment as outlined in Severance
and Consulting Agreement dated as of June 28, 1999 (incorporated by
reference to Exhibit 10.4.4 to Registrant's September 2001 Form
10-KSB).
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10.5.1 Severance and Consulting Agreement between Registrant and Enrique
Levy, dated as of June 28, 1999 (incorporated by reference to Exhibit
10.5 to Registrant's July 1999 Form 8-K).
10.5.2 Form of Secured Promissory Note, dated as of December 28, 1999, from
Registrant to Levy (incorporated by reference to Exhibit 10.16.2 to
Registrant's September 1999 Form 10-KSB).
10.5.3 Form of Security Agreement, dated as of December 28, 1999, by
Registrant to Levy as Agent (incorporated by reference to Exhibit
10.16.3 to Registrant's September 1999 Form 10-KSB).
10.5.4 Letter of Non-disparagement dated January 14, 2000 between Registrant
and Levy (incorporated by reference to Exhibit 10.5.4 to Registrant's
September 2001 Form 10-KSB).
10.5.5 Letter Agreement dated April 4, 2000 between Registrant and Levy
relating to terms and conditions of payment as outlined in Severance
and Consulting Agreement dated as of June 28, 1999 (incorporated by
reference to Exhibit 10.5.5 to Registrant's September 2001 Form
10-KSB).
10.6.1 Form of Stock Purchase Agreement regarding the April Private Placement
(incorporated by reference to Exhibit 10.1 to Registrant's April 2000
Form 8-K).
10.6.2 Letter Agreement, dated March 27, 2000, between the Company and
certain purchasers (incorporated by reference to Exhibit 10.4 to
Registrant's April 2000 Form 8-K).
10.6.3 Letter Agreement, dated March 29, 2000, between the Company and
certain purchasers (incorporated by reference to Exhibit 10.5 to
Registrant's April 2000 Form 8-K).
10.6.4 Form of Option Agreement granted to Shrikant Mehta with respect to the
April Private Placement (incorporated by reference to Exhibit 10.17 to
Registrant's 2000 Form SB-2).
10.7.1 Purchase and Sale Agreement, dated as of October 9, 2002, Among
Registrant, Opus and Seradyn, Inc. ("Seradyn") (incorporated by
reference to Exhibit 10.1 to Registrant's Form 8-K for an event of
October 9, 2002 (the "October 2002 Form 8-K")).
10.7.2 Royalty Agreement, dated as of October 9, 2002, between Opus and
Seradyn (incorporated by reference to Exhibit 10.2 to Registrant's
October 2002 Form 8-K).
10.7.3 Non-compete Agreement, dated as of October 9, 2002, between Opus and
(incorporated by reference to Exhibit 10.3 to Registrant's October
2002 Form 8-K).
10.7.4 Consulting Agreement, dated as of October 9, 2002, between Opus and
Seradyn (incorporated by reference to Exhibit 10.4 to Registrant's
October 2002 Form 8-K).
10.8.1 Stock Purchase Agreement, dated December 17, 2002, among Registrant,
M.C.M. Technologies, Ltd. and M.C.M. Environmental Technologies,
Inc.(incorporated by reference to Exhibit 10.1 to Registrant's Form
8-K for an event of December 17, 2002 (the December 2002 Form 8-K").
10.8.2 Stockholders Agreement, dated December 17, 2002, among M.C.M.
Technologies, Inc. and the holders of its outstanding capital stock
(incorporated by reference to Exhibit 10.2 to Registrant's December
2002 Form 8-K).
10.8.3 Form of Unsecured Promissory Notes, issued for the short-term Loan
(incorporated by reference to Exhibit 10.13.3 to Registrant's
September 2002 Form 10-KSB.)
10.8.4 Form of Subscription Agreement relating to the short-term Loan
(incorporated by reference to Exhibit 10.13.4 to Registrant's
September 2002 Form 10-KSB).
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10.8.5 Form of Common Stock Purchase Warrant relating to the short-term Loan
(incorporated by reference to Exhibit 10.13.5 to Registrant's
September 2002 Form 10-KSB).
10.9.1 Form of Common Stock Warrant relating to Line of Credit (incorporated
by reference to Exhibit 10.14 to Registrant's September 2002 Form
10-KSB).
10.10.1 Stock Purchase Agreement, among Registrant, Strax Institute Inc. and
Eastern Medical Technologies, Inc. dated as of September 30, 2003
(incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K
for an event of October 9, 2003 (the "October 2003 Form 8-K")).
10.10.2 Non-negotiable Promissory Note of Eastern Medical Technologies, Inc.
to Registrant, dated September 30, 2003 (incorporated by reference to
Exhibit 10.2 to Registrant's October 2003 Form 8-K).
10.10.3 Security Agreement among Eastern Medical Technologies, Inc., Strax
Institute, Inc., and Registrant, dated as of September 30, 2003
(incorporated by reference to Exhibit 10.3 to Registrant's October
2003 Form 8-K).
10.10.4 Management Services Agreement between Registrant and Strax Institute
Inc., dated as of September 30, 2003 (incorporated by reference to
Exhibit 10.4 to Registrant's October 2003 Form 8-K).
10.10.5 Settlement Letter among BDC Corp. d/b/a/ BDC Consulting Corp,
Registrant and George Aaron, dated as of September 30, 2003
(incorporated by reference to Exhibit 10.5 to Registrant's October
2003 Form 8-K).
10.11.1 Securities Purchase Agreement, among Registrant and investors dated as
of April 26, 2004 (incorporated by reference to Exhibit 10.1 to
Registrant's Form 8-K for an event of April 27, 2004 (the "April 2004
Form 8-K")).
10.11.2 Form of 8% Senior Secured Convertible Promissory Note (incorporated by
reference to Exhibit 10.2 to Registrant's April 2004 Form 8-K).
10.11.3 Security and Pledge Agreement by the Registrant in favor of CAP Agent
Associates, LLC, dated April 26, 2004 (incorporated by reference to
Exhibit 10.3 to Registrant's April 2004 Form 8-K).
10.11.4 Registration Rights Agreement, dated April 26, 2004, between
Registrant and the purchasers of the Notes, and Sands Brothers
International Ltd. ("SBIL") (incorporated by reference to Exhibit 10.4
to Registrant's April 2004 Form 8-K).
10.11.5 Dealer Agreement, dated April 12, 2004, between Registrant and SBIL
(incorporated by reference to Exhibit 10.5 to Registrant's April 2004
Form 8-K).
10.11.6 Common Stock Purchase Warrant Agreement, dated April 26, 2004, between
Registrant and SBIL (incorporated by reference to Exhibit 10.6 to
Registrant's April 2004 Form 8-K).
10.12.1 Form of Secured Promissory Note issued for the short-term Bridge Loans
(incorporated by reference to Exhibit 10.11.1 Registrant's Form 10-KSB
for fiscal year ended September 30, 2003 (the "2003 Form 10-KSB")).
10.12.2 Form of Common Stock Purchase Warrant relating to the short-term
Bridge Loans (incorporated by reference to Exhibit 10.11.2 to
Registrant's 2003 Form 10-KSB).
10.12.3 Form of Guaranty and Security Agreement relating to the short-term
Bridge Loans (incorporated by reference to Exhibit 10.11.3 to
Registrant's 2003 Form 10-KSB).
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10.13 Letter on change in certifying accountant from BDO Seidman, LLP,
addressed to the Securities and Exchange Commission, dated March 19,
2004 (incorporated by reference to Exhibit 16.1 to Registrant's Form
8-K filed March 19, 2004).
10.14* License and Manufacturing Agreement between M.C.M Environmental
Technologies Inc. and CID Lines, dated November 26, 2002.
10.15* Distribution Agreement between M.C.M Environmental Technologies, LTD
and Euromedic Group, dated November 1, 2002.
10.16* Distribution Agreement between M.C.M Environmental Technologies, LTD
and Lysmed, L.L.C, dated January 12, 2001.
23* Consent of BDO Seidman, LLP
* Filed herewith
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act").
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of a prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
change in volume and price represents no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) to include any additional or changed material information with
respect to the plan of distribution.
(2) that, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at the time shall be deemed to be the initial bona fide offering
thereof.
(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions of its Certificate of Incorporation, By-Laws, the
General Corporation Law of the State of Delaware or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
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and is, therefore, unenforceable. In event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer of controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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POWER OF ATTORNEY
Each director and/or officer of the registrant whose signature appears
below hereby appoints George Aaron Agent as his attorney-in-fact to sign in his
name and behalf, in any and all capacities stated below, and to file with the
Securities and Exchange Commission, any and all amendments, including
post-effective amendments, to this registration statement.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Fort Lee, New Jersey, on the 29th day of October, 2004.
Caprius, Inc.
By: /s/ Jonathan Joels
-----------------------
Jonathan Joels
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed below by or on behalf of the
following persons in the capacities indicated on the 29th day of October, 2004.
SIGNATURE TITLE
--------- -----
/s/ George Aaron Chairman of the Board and
---------------- President
George Aaron
/s/ Jonathan Joels Director and Chief
------------------ Financial Officer
Jonathan Joels
/s/ Sol Triebwasser* Director
--------------------
Sol Triebwasser, Ph.D.
/s/ Jeffrey Hymes* Director
------------------
Jeffrey L. Hymes, MD
*By: /s/ George Aaron
----------------
George Aaron, Attorney-in-Fact