UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
X Annual Report Pursuant to Section 13 or 15 (d) of the
----- Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005
Transition Report Pursuant to Section 13 or 15 (d) of the
----- Securities Exchange Act of 1934
Commission File Number: 0-11914
CAPRIUS, INC.
(Name of Small Business Issuer in its charter)
Delaware 22-2457487
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Parker Plaza, Fort Lee, NJ 07024
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (201) 592-8838
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Securities to be registered under Section 12 (b) of the Exchange Act:
None
Securities to be registered under Section 12 (g) of the Exchange Act:
Common Stock, par value $ .01 per share
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed under
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X].
Revenues for the fiscal year ended September 30, 2005: $848,802
The aggregate market value of the voting stock held by non-affiliates of
the Registrant computed by reference to the price at which the stock was sold,
or the average bid and ask prices of such stock as of December 9, 2005:
$2,710,272
The number of shares outstanding of Registrant's Common Stock, $ .01 par
value, outstanding on December 9, 2005: 3,321,673 shares
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Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: Yes No X
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INDEX
Page No.
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PART I
Item 1. Description of Business 3
Item 2. Description of Property 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Common Equity, Related Stockholder Matters, and
Small Business Issuer of Equity Securities 11
Item 6. Management's Discussion and Analysis or Plan of Operations 12
Item 7. Financial Statements 19
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure 19
Item 8A. Controls and Procedures 19
Item 8B. Other Information 20
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act. 20
Item 10. Executive Compensation 22
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 24
Item 12. Certain Relationships and Related Transactions 26
Item 13. Exhibits 26
Item 14. Principal Accountant Fees and Services 31
SIGNATURES 32
2
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Caprius, Inc. ("Caprius", the "Company", "we", "us" and "our") is engaged
in the infectious medical waste disposal business. In the first quarter of
Fiscal 2003, we acquired a majority interest in M.C.M. Environmental
Technologies, Inc. ("MCM") which developed, markets and sells the SteriMed and
SteriMed Junior compact systems that simultaneously shred and disinfect
Regulated Medical Waste. The SteriMed Systems are sold and leased in both the
domestic and international markets.
In December 2002, 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 our 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. As part of the Stockholders
Agreement dated December 17, 2002, there were certain provisions relating to
performance adjustments for the twenty four month period post closing. As a
consequence, our ownership interest increased by 5% in the fiscal year 2004 and
by an additional 5% in the fiscal year 2005. Furthermore, our equity ownership
increased with the conversion of various loans made to MCM and cash calls made
by MCM during Fiscal 2005. As of September 30, 2005, our interest in MCM
increased to 96.66%.
During the first quarter of fiscal year 2005, an agreement was reached
between the Company and the 20% minority ownership of an MCM subsidiary which
had been dormant since inception. The minority shareholders shall be repaid
their initial investment, by way of a credit towards the site installation
expense of SteriMed units that they are purchasing for their dialysis centers.
The subsidiary was dissolved on February 9, 2005.
Caprius, Inc. was founded in 1983 and through June 1999 essentially
operated in the business of developing specialized medical imaging systems, as
well as operating the Strax Institute, a comprehensive breast imaging center. In
June 1999, we acquired Opus and began manufacturing and selling medical
diagnostic assays constituting the TDM Business. In October 2002, we sold the
TDM business to Seradyn, Inc. The Strax Institute was sold in September 2003.
DESCRIPTION OF MCM ENVIRONMENTAL TECHNOLOGIES INC. BUSINESS
BACKGROUND OF THE REGULATED MEDICAL WASTE INDUSTRY IN THE UNITED STATES
In 1988, the Federal Government passed the Medical Waste Tracking Act
("MWTA"). This act defined medical waste and the types of medical waste that
were to be regulated. In addition to defining categories of medical waste, the
law mandated that generators of Regulated Medical Waste ("RMW") be responsible
for and adhere to strict guidelines and procedures when disposing of RMW. The
mandates included a "cradle to grave" responsibility for any RMW produced by a
facility, the necessity to track the disposal of RMW and defined standards for
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.
3
The other major impact on the RMW market was the adoption of the Clean Air
Amendments of 1997. This act dramatically reduced or eliminated the type of
emissions that are permitted from the incineration of RMW. Due to this,
generators of RMW, which were incinerating their waste, were forced into costly
upgrades of their incinerators or to find other methods of disposal. Hospital
incinerators decreased from 6,200 in 1988 to 115 in 2003 (Mackinac Chapter,
Sierra Club Newsletter Aug-Oct 2003).
Most generators of RMW use waste management firms to transport, treat and
dispose of their waste. Due to the legislative and other market factors, the
costs for this type of service have been increasing at a dramatic pace. At the
same time, many medical waste generators are coming under increasing pressure to
reduce expenses as a result of the decreasing reimbursement payments from
Medicare and other third party providers. Additionally, the added liability of
RMW generators as a result of the "cradle to grave" manifest requirement has
made it more attractive to use medical waste management methods that do not
require tracking systems. The combination of these pressures is forcing medical
waste generators to seek innovative methods for their waste disposal. MCM
believes these factors create a demand for an onsite RMW treatment option. MCM
has identified and is working with specific segments and niches within the RMW
market on which it feels it might capitalize. The specifics of these will be
discussed in the Marketing section.
BACKGROUND OF THE REGULATED MEDICAL WASTE INDUSTRY OUTSIDE OF THE UNITED STATES
The industrialized countries of the European Union and Japan are
implementing medical waste laws that are or will be similar to US regulations.
In 1994, the European Commission implemented a directive where member states had
to adhere to the provisions of the United Nations Economic Commission for Europe
("UNECE") European Agreement on the International Carriage of Dangerous Goods by
Road. This requires that clinical or medical waste be packed, marked, labeled
and documented according to defined specifications. Regulations and cost factors
have prompted European RMW generators to seek alternative medical waste disposal
options. MCM recognizes an excellent opportunity for SteriMed sales in Europe,
and is working with regulators, potential joint venture partners and
distributors.
Throughout the less industrialized and third world countries, the disposal
of hospital waste is coming under increasing scrutiny and regulations. Many
countries are in the process of updating and enforcing regulations regarding the
disposal of RMW. MCM is attempting to establish relationships worldwide directly
or through distributors, in many of these countries.
THE MCM STERIMED SYSTEMS
The SteriMed Systems are patented, environmentally friendly, on-site
disinfecting, shredding and disposal systems that can process regulated clinical
waste, including sharps, dialysis filters, pads, bandages, plastic tubing and
even glass, in a 15 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 unrecognizable conventional solid waste, in accordance with appropriate
regulatory requirements. The resultant treated waste is as low as 10% of the
original volume.
The SteriMed Systems are 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. As the technology for disinfection is chemical based, within
the definitions used in the industry, it is considered as an alternative
treatment technology.
We have the worldwide exclusive rights for the manufacture, use and sale of
the Ster-Cid(R) proprietary disinfectant used in the SteriMed System. The
Ster-Cid(R) is currently manufactured solely for us by the licensor. In the
event that the licensor is unable to manufacture the Ster-Cid(R), we have the
right to have Ster-Cid(R) manufactured by an alternative manufacturer.
Ster-Cid(R) is approximately 90% biodegradable. Ster-Cid(R) is considered a
pesticide by the U.S. EPA and, in compliance with Federal Insecticide,
Fungicide, Rodenticide Act of 1972 ("FIFRA"), it is registered with the U.S.
EPA. The process of registering a pesticide under FIFRA involves submission of
an application package to the U.S. EPA. The EPA's review of this application
includes assessment of the hazards to human health and the environment that may
be posed by the pesticide. This process can take up to a year or more to
complete. MCM had assigned an agent experienced with the FIFRA registration
4
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.
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 the Publicly Owned
Treatment Works ("POTW") allowing for its discharge into the sewer system.
Both the SteriMed and SteriMed Junior 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 Systems. Daily maintenance includes
filling the system with the Ster-Cid(R), 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 them initiated to expose all
surfaces of the medical waste to the chemical solution during the 15 minute
processing cycle. At the end of each specified number of cycles, the 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 Systems is
registered by the U.S. EPA under FIFRA. The SterCid(R) disinfectant is
considered a pesticide, and is registered under FIFRA Number 71814. FIFRA gives
the federal government control over the distribution, sale and use of
pesticides. All pesticides used in the U.S. must be registered (licensed) by the
U.S. EPA under FIFRA. Registration of pesticides is to seek assurance that they
will be properly labeled, and if used in accordance with label specifications,
will not cause unreasonable harm to the environment.
The MCM SteriMed systems are regulated at the state level by the individual
states' Environmental, Conservation, Natural Resources, or Health Department.
Each state has its own specific approval requirements. Generally, most states
require an application for registration or approval be submitted along with back
up information, including but not limited to operating manuals, service manuals,
and procedures. Additionally, many states require contingency and safety plans
be submitted, and that efficacy testing be performed. MCM has demonstrated
through efficacy testing that it can inactivate the 4Log10 concentration of
Bacillus atrophaeus (formerly Bacillus subtilis) spores. This meets or exceeds
most state regulatory requirements.
The SteriMed Senior has been cleared for marketing in 47 states and the
SteriMed Junior in 42 states. The Ster-Cid(R) disinfectant has been registered
in 49 states. We are currently seeking to obtain approvals from the remaining
states.
Local and county level authorities generally require that discharge permits
be obtained from POTW by all facilities that discharge a substantial amount of
liquids or specifically regulated substances to the sewer system. The SteriMed
Systems 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.
5
These approvals allow the SteriMed Systems effluent to be discharged to a
municipal sewer and the treated disinfected solid waste to be disposed of in a
municipal landfill.
The process used by the SteriMed Systems, unlike many other waste medical
disposal technologies, is not subject to the Clean Air Act Amendments of 1990
because there is no incineration or generation of toxic fumes in the process. It
is also not subject to the Hazardous Materials Transportation Authorization Act
of 1994 as there is no transportation of hazardous waste involved.
REGULATIONS AND REGULATORY COMPLIANCE FOR ALTERNATIVE MEDICAL WASTE TREATMENT
TECHNOLOGIES OUTSIDE OF THE UNITED STATES
CE Mark compliancy is a requirement for equipment sold in the European
Union ("EU"). The SteriMed Systems are CE Mark compliant as well as ISO
Certified, 9001:2000 and 14001:1996. In order to meet the specific regulatory
requirements of the individual members of the EU, MCM has undertaken further
efficacy testing where necessary in order to demonstrate that the SteriMed
conforms to all the standards in the specific EU member country. Outside of the
EU, we are required to review and meet whatever the specific standards a country
may impose. In countries where we have distributors, they are required to obtain
the necessary regulatory approvals on our behalf at their expense.
COMPETITION
RMW has routinely been treated and disposed of by means of incineration.
Due to the pollution generated by medical waste incinerators, novel technologies
have been developed for the disposal of RMW. Some of the issues confronting
these technologies are: energy requirements, space requirements, unpleasant
odor, radiation exposure, excessive heat, volume capacity and reduction, steam
and vapor containment, and chemical pollution. The use of the SteriMed Systems
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.
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.
6
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 SYSTEMS
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 Systems are:
Safety
------
a) No need to pack containers with medical waste
b) Reduces the 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
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a) Easily installed requiring only electricity, water and sewage
outlet. No special ventilation or lighting required
b) Can fit through regular doorway
c) Minimal training required for operators
d) Due to size, units can be strategically placed in a health care
facility near high waste generation sites
Cost Saving
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a) Low cost of operation
b) No transportation costs to incineration site
c) Our preferred business model is to lease the SteriMed Systems to
U.S. facilities generating the infectious clinical waste. This
model obviates the need for capital investment by users, and
should also reduce previous operating expenses in disposing of
medical waste.
d) Ability to fix costs for a given period of time, avoiding future
price increases and surcharges
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.
7
These features are intended to make the use of the SteriMed Systems 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, plasmapheresis centers, blood banks, commercial
laboratories (both research and clinical), large physician group practices and
specific sites within hospitals
Many of these facilities are owned by national or international
corporations operating many facilities. By focusing our sales efforts to these
corporations we will be able to have multiple machine placements within the same
organization. This offers many advantages to the customer and to us. Not only
will we be able to maximize our selling efforts, we will also be able to
compound our warranty and service effectiveness. This strategy should enable us
to maximize resources and quickly obtain market penetration. We are presently
working with a number of these customers in the implementation of this strategy
and in fiscal year 2005, the Company received its first significant order in the
US for the SteriMed Junior Systems from a major dialysis company. In addition,
in December 2005 the Company received an order for two SteriMed Junior Systems
from the United States Department of Defense for use by the U.S. Navy. The units
are for laboratory test and evaluation as part of the U.S. Navy's Shipboard
Medical Waste Management Program.
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 Systems. 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 Systems 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, regional and
national distributors who will have the right to sell the SteriMed Systems and
related products within their prescribed geographical areas or business sectors.
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.
Internationally, we have distribution agreements in the following
countries: Argentina, Australia, Brazil, Columbia, Costa Rica, Cyprus, Greece,
Japan, Mexico, Paraguay, Poland, Scandinavia (Norway, Sweden, Finland and
Iceland), Singapore, Taiwan, Tunisia and Uruguay. In each of the countries, it
is the distributors' responsibility to obtain, at their own expense, all
regulatory approvals which will be registered in the name of MCM.
MANUFACTURING
The Company recognizes that to be successful, we need to manufacture units
that are:
1) Robust
2) Reliable
3) Reproducible in their activity
8
Presently, we manufacture the SteriMed at our facility in Moshav Moledet,
Israel. The SteriMed Junior is currently manufactured by a third party
manufacturer in Israel. We continue to seek sub-assembly manufacturers to enable
us to reduce the cost of the SteriMed Junior as well as alternative locations in
North America for the manufacture of our SteriMed Junior.
Approximately half of the SteriMed Systems' 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 Systems is the proper
training of the personnel carrying out the installation, operation and service
of the equipment. The Company provides our customers with a warranty covering
parts and labor for one year. Thereafter, we offer an extended warranty program.
Our technical service staff assists clients in the installation of units and the
training of their staff and on-site operators. This training program is strongly
geared to safety and maintenance to assure ongoing safe and smooth operation of
the unit. After installation and training, operation of the unit is monitored by
our technical staff to assure proper performance. Our technical staff is on call
to assist in fixing problems or perform repairs. Our goal is to minimize
problems through ongoing training and strict adherence to maintenance schedules.
Our Customer Service staff is available to help with any questions or issues our
customers might have.
PROPRIETARY RIGHTS
There exist various medical waste treatment technologies that can be
combined and employed in different ways, making trademarks and patents very
important pieces of intellectual property to possess in the medical waste
treatment industry.
MCM acquired and/or applied for trademarks and patents for our SteriMed and
Ster-Cid(R) products as indicated in the following tables. The validation for
patents is extended to fifteen years, provided an annual fee (on renewal dates)
is paid in the respective country.
SteriMed Systems 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:
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FILE NO. COUNTRY APPLICATION NO. APPLICATION DATE TRADEMARK NO. RENEWAL DATE
-------------------------------------------------------------------------------------------
99200 Israel 113,697 7/20/1997 113,697 07/20/2007
-------------------------------------------------------------------------------------------
99207 U.S.A. 75/904,419 01/28/2000 2,724,738 10/20/2013
-------------------------------------------------------------------------------------------
99208 Canada 1035659 11/12/1999 TMA 596,538 12/04/2018
-------------------------------------------------------------------------------------------
99209 CTM(European) 1380146 11/11/1999 1380146 11/11/2009
-------------------------------------------------------------------------------------------
99210 Japan 11-103145 11/12/1999 4462258 03/23/2011
-------------------------------------------------------------------------------------------
99211 Australia 813208 11/09/1999 813208 11/09/2009
-------------------------------------------------------------------------------------------
99212 Mexico 472508 02/23/2001 701862 02/23/2011
-------------------------------------------------------------------------------------------
99214 Russia 99719243 11/18/1999 209618 11/18/2009
-------------------------------------------------------------------------------------------
99216 Hungary m-9905278 11/10/1999 165158 11/10/2009
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99218 Poland Z-209695 11/10/1999 148086 11/10/2009
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The Ster-Cid(R) disinfectant has an International Class 5 Trademark for
Israel, United States, Canada, Japan, Australia, Mexico, Russia, Hungary,
Poland, and CTM.
9
MCM STER-CID(R) INTERNATIONAL CLASS 5 TRADEMARK:
------------------------------------------------
-------------------------------------------------------------------------------------------
FILE NO. COUNTRY APPLICATION NO. APPLICATION DATE TRADEMARK NO. RENEWAL DATE
-------------------------------------------------------------------------------------------
99200 Israel 131893 11/01/1999 131893 11/01/2006
-------------------------------------------------------------------------------------------
99201 U.S.A. 75/904,150 01/29/2000 2,713,884 05/06/2013
-------------------------------------------------------------------------------------------
99202 Canada 1035658 11/12/1999 TMA 596,329 12/03/2018
-------------------------------------------------------------------------------------------
99203 CTM(European) 1380195 11/11/1999 1380195 11/11/2009
-------------------------------------------------------------------------------------------
99204 Japan 11-103144 11/12/1999 4562185 04/19/2007
-------------------------------------------------------------------------------------------
99205 Australia 813207 11/09/1999 813207 11/09/2009
-------------------------------------------------------------------------------------------
99206 Mexico 412940 02/23/2001 656603 02/25/2010
-------------------------------------------------------------------------------------------
99213 Russia 99719294 11/18/1999 200276 11/17/2009
-------------------------------------------------------------------------------------------
99215 Hungary M-9905279 11/10/1999 164682 11/10/2009
-------------------------------------------------------------------------------------------
99217 Poland Z-209696 11/10/1999 145760 11/10/2009
-------------------------------------------------------------------------------------------
The SteriMed has patents in Australia, Japan, United States, Canada,
Europe and South Africa. Additionally, there are patent applications pending in
the United States (provisional), Australia, Brazil, Mexico, Russia, Canada,
China, India, and Patent Corporation Treaty ("PCT").
MCM STERIMED PATENTS:
---------------------
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FILE NO. COUNTRY APPLICATION NO. APPLICATION DATE PATENT NO. PATENT DATE VALID UNTIL
--------------------------------------------------------------------------------------------------
9346 Israel 108,311 01/10/1994 108,311 12/23/1999 01/10/2014
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9452 Australia 10096/95 01/09/1995 684,323 04/2/1998 01/09/2015
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9453 Japan 7-011844 01/23/1995 3058401 04/21/2000 01/27/2015
--------------------------------------------------------------------------------------------------
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:
---------------------------------------------
--------------------------------------------------------------------------------------------------------
FILE NO. COUNTRY APPLICATION NO. APPLICATION DATE PATENT NO. PATENT DATE VALID UNTIL
--------------------------------------------------------------------------------------------------------
PCT PCT/IL02/00093 02/04/2002 WO2002/062479 A1 N/A N/A
--------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------
2712 Hong Kong 4106248.3 08/20/2004 Pending* Pending N/A
--------------------------------------------------------------------------------------------------------
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.
10
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.
EMPLOYEES
As of December 9, 2005, we employed fifteen full time employees, including
three senior managers, of which five employees are located at our facility in
Israel.
None of our employees is represented by any labor organization and we are
not aware of any activities seeking such organization. We consider our relations
with employees to be good.
As the level of our activities grow, additional personnel may be required.
ITEM 2. DESCRIPTION OF PROPERTY
We lease 2,758 square feet of office space in Fort Lee, New Jersey for
executive and administrative personnel pursuant to a lease that expires on
January 31, 2006, at a base monthly rental of approximately $7,400, plus
escalation. We also lease approximately 1,500 square feet of space in
Ridgefield, NJ for warehousing and assembly at a monthly cost of $2,040. This
lease expires on January 31, 2006. We are currently looking for an alternative
location that will allow us to demonstrate the SteriMed Systems to prospective
customers.
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, 2006.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Common Stock has traded on the OTC Bulletin Board since June 8,
1999, upon the delisting of the Company's Common Stock from the NASDAQ Small Cap
Market. Our trading symbol is CAPS. As of September 30, 2005, the publicly
traded warrants had expired and the market terminated upon their expiration.
The following table sets forth, for the calendar quarters indicated, the
reported high and low bid quotations per share of the Common Stock as reported
on the OTCBB. Such quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission, and may not necessarily represent actual
transactions. These tables give retroactive effect to the Company's 1-for-20
reverse common stock split on April 5, 2005.
Common Stock High Low
---- ---
2005 (year ended September 30, 2005)
Fourth Quarter $ 2.97 $ 2.30
Third Quarter 4.99 2.75
Second Quarter 5.40 2.60
First Quarter 3.80 2.20
11
2004 (year ended September 30, 2004)
Fourth Quarter $ 5.00 $ 2.20
Third Quarter 4.40 1.00
Second Quarter 5.00 1.00
First Quarter 5.00 2.20
(a) We have not paid any dividends on our shares of Common Stock since
inception and do not expect to declare any dividends on our Common Stock in the
foreseeable future.
On September 30, 2005, there were approximately 1,100 holders of record of
the Common Stock. Since a large number of shares of Common Stock are held in
street or nominee name, it is believed that there are a substantial number of
additional beneficial owners of the Company's Common Stock.
(b) Not applicable
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto for the years ended
September 30, 2005 and 2004.
RESULTS OF OPERATIONS
Fiscal Year Ended September 30, 2005 Compared to Fiscal Year Ended
September 30, 2004
Revenues generated for fiscal 2005 were primarily generated by MCM product
sales and rental revenues which totaled $740,796 for fiscal year ended 2005 as
compared with $835,461 for fiscal year ended 2004. For fiscal year ended
September 30, 2005, three customers accounted for approximately 51% of the
consolidated total revenue. For the year ended September 30, 2004, two
customers, other than those in fiscal year 2005, accounted for approximately 72%
of the consolidated total revenue. Product sales and equipment rental income for
the fiscal year 2005 moderately decreased as the Company was negatively impacted
by the consolidation in the dialysis clinic market by several of the Company's
customers which caused them to place their purchasing decisions on hold during
the calendar year of 2005.
Consulting and royalty income from the TDM Business which was sold in 2002
to Seradyn, Inc. totaled approximately $108,000 as compared to $50,000 for
fiscal years ended September 30, 2005 and 2004 respectively. The increase of
approximately $58,000 was attributable to royalty income earned of approximately
$100,000 in fiscal year 2005 (none in fiscal year 2004) under the provisions of
a Royalty Agreement between Seradyn, Inc. and the Company. Pursuant to the terms
of the sale of the TDM business, the Company received consulting fees of
approximately $5,000 in fiscal year 2005 versus $50,000 in fiscal year 2004. The
consulting fee agreement expired in October 2004.
Cost of product sales and equipment rental income aggregated approximately
$491,000 as compared to $619,000 during fiscal years ended September 30, 2005
and 2004, respectively. The lower costs of approximately $128,000 were a result
of lower revenues and increased efficiencies in purchasing production materials
and manufacturing the SteriMed systems.
Research and development costs amounted to approximately $325,000 versus
$284,000 for fiscal years ended September 30, 2005 and 2004 respectively. The
increased costs are attributed to research and development activities relating
to the Company's production scale-up of components used to upgrade the SteriMed
systems.
12
Selling, general and administrative expenses totaled $2,730,071 for fiscal
year ended 2005 versus $3,020,212 for fiscal year ended 2004. This decrease is a
result of a reduction in professional fees of approximately $347,000, primarily
due to expenses incurred in defending prior litigations, offset by the
additional hiring of two employees.
Other income totaled $482,200 for fiscal year ended September 30, 2005 as
compared to $0 for the year ended September 30, 2004. This income resulted from
the favorable settlement of certain outstanding liabilities as well as an
insurance settlement of $350,000 for expenses incurred in defending prior
litigations which were settled in fiscal year 2005.
Interest expense, net totaled $323,026 for fiscal year ended September 30,
2005 versus $212,571 for the fiscal year ended September 30, 2004. The principal
reason for the increase of interest expense incurred during the fiscal year
ended September 30, 2005 related to the write-off of debt issuance costs and
debt discount of approximately $125,000 due to the early extinguishment of debt.
This debt which was principally converted to equity in 2005 was in connection
with the secured convertible notes and bridge financing (approximately $2.2
million) which occurred in the fiscal year ended September 30, 2004.
The loss from continuing operations totaled $2,538,408 for fiscal year
ended 2005 versus $3,249,963 for fiscal year ended 2004.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2005 our cash and cash equivalents position approximated
$1,257,000 versus $28,000 at September 30, 2004. As further discussed below, on
February 15, 2005 we received net proceeds of approximately $4 million from the
sale of Series C Preferred Stock and warrants, and approximately $2.1 million of
indebtedness was converted into or exchanged for Series C Preferred Stock.
During the first two quarters of fiscal 2005, the Company was advanced the
principal amount of $145,923 through short-term related party loans until
additional equity funding was secured. The terms of the loans were identical to
the terms of the $100,000 8% Senior Secured Convertible Promissory Note outlined
below. These funds were utilized for general working capital purposes. These
loans were repaid on February 15, 2005 as part of the Preferred Stock Equity
Financing arrangement.
On February 2, 2005 we raised $100,000 through the issuance of an 8% Senior
Secured Convertible Promissory Note, due April 3, 2005, subject to repayment in
the event of an equity financing in excess of $2 million or conversion by the
investors to shares of our common stock at $3.00 per share. This loan was repaid
on February 17, 2005 as part of the Preferred Stock Equity Financing
arrangement.
On February 15, 2005, we closed on a $4.5 million preferred stock equity
financing before financing related fees and expenses of approximately $435,000.
In connection with this financing, we issued 45,000 shares of Series C Mandatory
Convertible Preferred Stock ("Series C Preferred Stock") at a stated value of
$100 per share, together with Series A Warrants to purchase an aggregate of
465,517 shares of common stock at an exercise price of $5.60 per share for a
period of five years, and Series B Warrants to purchase an aggregate of 155,172
shares of common stock at an exercise price of $2.90 per share for a period of
five years exercisable after nine months, subject to a termination condition as
defined in the warrant. Simultaneously, the outstanding short-term secured debt
in the aggregate of approximately $2.1 million inclusive of interest, together
with $72,962 of unsecured indebtedness, were converted into 21,681 shares of
Series C Preferred Stock. Under the terms of the Series C Preferred Stock, upon
the 1-for-20 reverse stock split, effective April 5, 2005, the outstanding
Series C Preferred Stock was converted into 2,299,345 shares of common stock at
a conversion price of $2.90 per share (see Note E of the accompanying Financial
Notes).
Net cash used in operations for fiscal year 2005 amounted to $2,938,040.
Net cash provided by investing activities amounted to $29,781. Net cash flows
provided by financing activities for Fiscal 2005 amounted to $4,137,834 which
primarily resulted from the $4.5 million preferred stock equity financing before
financing related fees and expenses.
13
The net cash proceeds from the equity financing provided the funds
necessary to satisfy specific outstanding obligations and accrued expenses
outstanding at the time of the financing and to meet our needs for the business
through March 31, 2006, based upon our present business plan. Specifically,
the funds are being used to increase our marketing effort both in the US and
overseas markets. The availability of this working capital has enabled us to
build inventory to fulfill current needs arising from our increased marketing
efforts. In addition, as we start to increase our penetration in the US market,
we will need to expand our customer service and technical support capabilities
to meet the needs of our clients. Similarly, in overseas markets, resources will
be required to obtain regulatory approvals in markets where we believe there
exists great opportunities for our business.
In light of the cash requirement needed to develop the MCM business, the
Company is actively seeking funding. The Company will continue its efforts to
seek additional funds through funding options, including private and public
equity offerings, banking facilities, equipment financing, and government-funded
grants. There can be no assurance that such funding initiatives will be
successful due to the difficulty in raising equity from third parties given the
Company's low stock price and current revenue base, and if successful, will be
dilutive to existing stockholders. These funds are required to permit the
Company to expand its marketing efforts and for the manufacture of its SteriMed
System as well as for general working capital requirements. Accordingly, the
auditors' report on the 2005 financial statements contains an explanatory
paragraph expressing a substantial doubt about the Company's ability to continue
as a going concern.
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.
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 the market value of the
unit.
3. Off-balance sheet arrangements
The Company has no off-balance sheet arrangements, financings or other
relationships with unconsolidated entities known as "Special Purposes Entities"
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2005, the Financial Accounting Standards Board ("FASB")
ratified the Emerging Issues Task Force's ("EITF") Issue No. 05-7. "Accounting
for Modifications to Conversion Options Embedded in Debt Instruments and Related
14
Issues", which addresses whether a modification to a conversion option that
changes its fair value affects the recognition of interest expense for the
associated debt instrument after the modification, and whether a borrower should
recognize a beneficial conversion feature, not a debt extinguishments, if a debt
modification increases the intrinsic value of the debt. In September 2005, the
FASB ratified the following consensus reached in EITF Issue 05-08 ("Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature"):
a) the issuance of convertible debt with a beneficial conversion feature results
in a basis difference in applying FASB Statement of Financial Accounting
Standards SFAS No. 109, Accounting for Income Taxes. Recognition of such a
feature effectively creates a debt instrument and a separate equity instrument
for book purposes, whereas the convertible debt is treated entirely as a debt
instrument for income tax purposes; b) The resulting basis difference should be
deemed a temporary difference because it will result in a taxable amount when
the recorded amount of the liability is recovered or settled; and c) Recognition
of deferred taxes for the temporary difference should be reported as an
adjustment to additional paid-in capital. Both of these issues are effective in
the first interim or annual reporting period commencing after December 15, 2005,
with early application permitted. The effect of applying the consensus should be
accounted for retroactively to all debt instruments containing a beneficial
conversion feature that are subject to EITF Issue 00-27, "Application of Issue
No. 98-5 to Certain Convertible Debt Instruments" (and thus is applicable to
debt instruments converted or extinguished in prior periods but which are still
presented in the financial statements). Management does not believe these
pronouncements will have a material impact on the Company's consolidated
financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Correction." This Statement replaces APB Opinion No. 20, Accounting Changes, and
FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principal. The statements applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting changes and corrections of errors made in the fiscal
years beginning after December 15, 2005. Management does not believe this
pronouncement will have a material impact on the Company's consolidated
financial statements.
In December 2004, FASB issued its final standard on accounting for
share-based payments ("SBP"), FASB Statement No. 123(R) (revised 2004)
"Share-Based Payment." This statement requires companies to expense the value of
employee stock options and similar awards. Under FASB No. 123(R), SBP awards
result in a cost that will be measured at fair value of the awards' grant date,
based on the estimated number of awards that are expected to vest. Compensation
cost for awards that vest would not be reversed if the awards expire without
being exercised. Public entities that are small business issuers will be
required to apply Statement No. 123(R) as of the first annual reporting period
that begins after December 15, 2005. Although the adoption of FASB No. 123(R)
will have no adverse impact on the Company's balance sheet or total cash flows,
it will affect the Company's net income and earning per share. The actual
effects of adopting FASB No. 123(R) will depend on numerous factors, including
the amount of share-based payments granted in the future, the Company's future
stock price volatility, estimated forfeiture rates and employee stock option
exercise behavior.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." The amendments made by Statement 151
clarify that abnormal amounts of idle facility expense, freight, handling costs,
and wasted materials (spoilage) should be recognized as current-period charges
and require the allocation of fixed production overheads to inventory based on
the normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company does not believe the adoption of SFAS 151 will have a significant impact
on the Company's overall results of operations or financial position.
15
In October 2004, the FASB ratified the consensus reached in EITF Issue No.
04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings
Per Share." The EITF reached a consensus that contingently convertible
instruments, such as contingently convertible debt, contingently convertible
preferred stock, and other such securities should be included in diluted
earnings per share (if dilutive) regardless of whether the market trigger price
has been met. The consensus became effective for reporting periods ending after
December 15, 2004. The adoption of this statement did not have a significant
impact on the Company's consolidated financial statements.
FORWARD LOOKING STATEMENTS
The Company is including the following cautionary statement in this Annual
Report of Form 10-KSB to make applicable and take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 for any
forward-looking statements made by, or on behalf of, the Company.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements which are other than statements of historical facts. Certain
statements contained herein are forward-looking statements and accordingly
involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward-looking statements. Our
expectations, beliefs and projections are expressed in good faith and are
believed by us to have a reasonable basis, including without limitation,
management's examination of historical operating trends, data contained in our
records and other data available from third parties, but there can be no
assurance that management's expectation, beliefs or projections will result or
be achieved or accomplished. In addition to other factors and matters discussed
elsewhere herein, the following are important factors that, in our view, could
cause actual results to differ materially from those discussed in the
forward-looking statements: technological advances by our competitors, changes
in health care reform, including reimbursement programs, changes to regulatory
requirements relating to environmental approvals for the treatment of infectious
medical waste, capital needs to fund any delays or extensions of development
programs, delays in the manufacture of new and existing products by us or third
party contractors, the loss of any key employees, the outcome of existing
litigations, delays in obtaining federal, state or local regulatory clearance
for new installations and operations, changes in governmental regulations, the
location of the MCM business in Israel, and availability of capital on terms
satisfactory to us. We are also subject to numerous Risk Factors relating to
manufacturing, regulatory, financial resources and personnel as described in the
Company's Form SB-2 (File No. 333-124096) dated April 15, 2005 as filed with the
Securities and Exchange Commission. We disclaim any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
RISK FACTORS
The medical infectious waste disposal industry is subject to extensive
federal, state and local laws and regulations, both in the US and overseas. Our
business requires us to obtain many different approvals and permits or other
types of governmental authorizations for each jurisdiction in which we operate.
Other risks that we face are more specifically defined as follows:
MANUFACTURING
-------------
Presently, we manufacture the SteriMed at our facility in Moshav Moledet,
Israel. The SteriMed Junior is currently manufactured by a third party
manufacturer in Israel. The Company continues to seek sub-assembly manufacturers
to enable us to reduce the cost of the SteriMed Junior as well as alternative
locations in North America for the manufacture of our SteriMed Junior. If we
fail to effectively manufacture or fail to develop a market for our SteriMed
Systems, we will likely be unable to recover the losses we will have incurred in
attempting to produce and market these products and technologies and may be
unable to make sales or become profitable.
The Company is dependent on third party suppliers for the components of our
SteriMed and SteriMed Junior Systems and also for the Ster-Cid(R) disinfectant.
At present there are no supply contracts in place and our requirements are
fulfilled against purchase orders. There can be no assurances that we will have
adequate supplies of materials. Although we believe that the required components
are readily available and can be provided by other suppliers, delays may be
incurred in establishing relationships or in waiting for quality control
assurance with other manufacturers for substitute components.
16
REGULATORY
----------
The medical waste management industry is subject to extensive U.S. EPA,
state and local laws and regulations relating to the collection, packaging,
labeling, handling, documentation, reporting, treatment and disposal of
regulated medical waste. The use of the Ster-Cid(R) disinfectant in the SteriMed
Systems is registered with the U.S. EPA under FIFRA, however, the SteriMed
Systems are 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 Systems. The SteriMed has been cleared for marketing in 47 states
and the SteriMed Junior in 42 states. It is our objective to obtain approvals
from the remaining states. The Ster-Cid(R) has been registered in 49 states. Our
ability to obtain such approvals in the remaining states and the timing and cost
to do so, if successful, cannot be easily determined nor can the receipt of
ultimate approval be assumed.
In markets outside the U.S., our ability to market the SteriMed Systems is
governed by the regulations of the specific country. In foreign countries where
we market through distributors, we rely on them 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 Systems. We might be unable to obtain the new approvals or permits that
we require, and the cost of compliance with new or changed regulations could be
significant. In the event we are not in compliance, we can be subject to fines
and administrative, civil or criminal sanctions or suspension of our business.
The approvals or permits that we require in foreign countries may be
difficult and time-consuming to obtain. They may also contain conditions or
restrictions that limit our ability to operate efficiently, and they may not be
issued as quickly as we need (or at all). If we cannot obtain the approval or
permits that we need when we need them, or if they contain unfavorable
conditions, it could substantially impair our ability to sell the SteriMed
System in certain jurisdictions.
INTELLECTUAL PROPERTY
---------------------
We regard certain aspects of our products, processes, services and
technology as proprietary, and we have trademarks and patents for certain
aspects of the SteriMed System. Our ability to compete successfully will depend
in part on our ability to protect our proprietary rights and to operate without
infringing on the proprietary right of others, both in the United States and
abroad. Our proprietary rights to Ster-Cid(R) relate to an exclusive worldwide
license that we had obtained from a third party manufacturer in Europe to
purchase the Ster-Cid(R) disinfectant. The patent positions of medical waste
technology companies generally involve complex legal and factual questions.
While patents are important to our business, the regulatory approvals are more
critical in permitting us to market our products. We may also apply in the
future for patent protection for uses, processes, products and systems that we
develop. There can be no assurance that any future patent that we apply for will
be issued, or that any existing patents issued will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
any competitive advantage, or that third parties will not infringe or
misappropriate our proprietary rights or that third parties will not
independently develop similar products, services and technology. We may incur
substantial costs in defending any patent or license infringement suits or in
asserting any patent or license rights, including those granted by third
parties, the expenditure of which we might not be able to afford. An adverse
determination could subject us to significant liabilities to third parties,
require us to seek licenses from or pay royalties to third parties or require us
to develop appropriate alternative technology. There can be no assurance that
any such licenses would be available on acceptable terms or at all, or that we
17
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.
Developing products based upon new technologies can result in litigation
based on allegations of patent and other intellectual property infringement.
While no infringement claims have been made or threatened against us, we cannot
assure you that third parties will not assert infringement claims against us in
the future, that assertions by such parties will not result in costly
litigation, or that they will not prevail in any such litigation. In addition,
we cannot assure you that we will be able to license any valid and infringed
patents from third parties on commercially reasonable terms or, alternatively,
be able to redesign products on a cost-effective basis to avoid infringement.
MARKETING
---------
Our future growth and profitability depend in part on our ability to
respond to technological changes and successfully develop and market new
products that achieve significant market acceptance. This industry has been
historically marked by very rapid technological change and the frequent
introductions of new products. There is no assurance that we will be able to
develop new products that will realize broad market acceptance.
COMPETITION
-----------
There are numerous methods of handling and disposing of RMW, of which our
technology is one of the available systems. We are not aware of any competitive
product that is similar to the SteriMed Systems with respect to its design and
compactness. We believe that our SteriMed Systems, due to its ability to be used
on site, the cost basis and ease of use, offers a significant advantage over RMW
systems offered by our competitors. We realize, however, there can be no
assurance that a different or new technology may not supplant us in the market.
Further, we cannot guarantee that in the event that we are successful in the
deployment of our systems in the marketplace, the predominant companies in the
field, which have substantially greater resources and market visibility than us,
will not try to develop similar systems.
FINANCIAL
---------
The malfunction or misuse of our SteriMed Systems may result in damage to
property or persons, as well as violation of various health and safety
regulations, thereby subjecting us to possible liability. Although our insurance
coverage is in amounts and deductibles customary in the industry, there can be
no assurance that such insurance will be sufficient to cover any potential
liability. The Company currently retains a claims made worldwide product
liability insurance policy. Further, in the event of either adverse claim
experience or insurance industry trends, we may in the future have difficulty in
obtaining product liability insurance or be forced to pay very high premiums,
and there can be no assurance that insurance coverage will continue to be
available on commercially reasonable terms or at all. In addition, there can be
no assurance that insurance will adequately cover any product liability claim
against us. A successful product liability, environmental or other claim with
respect to uninsured liabilities or in excess of insured liabilities could have
a material adverse effect on our business, financial condition and operations.
To date, no claims have been made against us. We believe that our insurance
coverage is adequate to cover any claims made, and we review our insurance
requirement with our insurance broker on an annual basis.
The Company raised gross proceeds of $1.5 million in a placement of
convertible secured notes in the third quarter of fiscal 2004 and gross proceeds
of $4.5 million in a placement of Series C Preferred Stock and warrants in the
second quarter of fiscal 2005. The net proceeds from these placements should
fulfill our capital needs through March 31, 2006 based upon our present business
plan. We will expect to require additional working capital or other funds in the
18
near future should we need to modify our business plan. 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. No assurance can be
given that we will be successful in obtaining additional funds, whether publicly
or privately or through equity or debt. Any such financing could be highly
dilutive to stockholders.
In the past, we have experienced significant losses and negative cash flows
from operations. If these trends continue in the future, it could adversely
effect our financial condition. For the years ended September 30, 2005 and
September 30, 2004, we experienced net losses of approximately $2.5 and $3.2
million from continuing operations respectively. Further, the Company has
incurred negative cash flows from operations of approximately $2.9 million and
$2.8 million for the years ended September 30, 2005 and 2004 respectively. These
results have had a negative impact on our financial condition. There can be no
assurance that our business will become profitable in the future and that
additional losses and negative cash flows from operations will not be incurred.
If these trends continue in the future, it could have a material adverse effect
on our financial condition
Although the Company's working capital balance increased to $1,705,187 at
September 30, 2005 as compared to a deficit of ($2,330,190) as of September 30,
2004, this balance is still lower than the Company's optimal requirements. This
low working capital balance while improving may continue to impact the ability
of the Company to attract new customers and could have a material adverse effect
on our business.
PERSONNEL
---------
Our success is highly dependent on the continued efforts of a small
management team. Should operations expand, we will need to hire persons with a
variety of skills. Competition for these skilled individuals could be intense,
and there can be no assurance that we will be successful in attracting and
retaining key personnel in the future. Our failure to do so could adversely
affect our business and financial condition. We do not have employment
agreements with or carry any "key-man" insurance on the lives of any of our
officers or employees.
ITEM 7. FINANCIAL STATEMENTS
PAGE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS NUMBER
------------------------------------------ ------
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheet as of September 30, 2005 F-3
Consolidated Statements of Operations for the years ended
September 30, 2005 and 2004 F-4
Consolidated Statements of Stockholders' (Deficiency) Equity
for the years ended September 30, 2005 and 2004 F-5
Consolidated Statements of Cash Flows for the years ended
September 30, 2005 and 2004 F-6
Notes to Consolidated Financial Statements F-7 to F-19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
19
ITEM 8A. CONTROLS & PROCEDURES
The Company's principal executive officer and principal financial officer,
based on their evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-14 (c) and 15d-14 (c) of the Securities Exchange Act of
1934) as of September 30, 2005 have concluded that the Company's disclosure
controls and procedures are effective to ensure that material information
relating to the Company and its consolidated subsidiaries are recorded,
processed, summarized and reported within the time periods specified by the
SEC's rules and forms, particularly during the period in which this annual
report has been prepared.
The Company's principal executive officer and principal financial officer
have concluded that there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
during the fourth quarter ended September 30, 2005.
ITEM 8B. OTHER INFORMATION
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
As of December 9, 2005, the directors and executive officers of the Company
were:
Name Age Position
---- --- --------
George Aaron 53 Chairman of the Board,
President and Chief Executive Officer
Jonathan Joels 49 Chief Financial Officer, Treasurer,
Secretary and Director
Elliott Koppel 61 VP Sales and Marketing
Sol Triebwasser, Ph.D. (1)(2) 84 Director
Jeffrey L. Hymes, M.D. (1)(2) 53 Director
----------
(1) Member of the Audit Committee
(2) Member of the Compensation/Option Committee
The principal occupations and brief summary of the background of each
Director and executive officer of Caprius during the past five years is as
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.
20
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, and until its acquisition by Renal Care Group
in April 2004 he had served as NNA's President and Chief Medical Officer. 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 his retirement in 1996, Dr. Triebwasser was Director of
Technical Journals and Professional Relations for the IBM Corporation in
Yorktown Heights New York, which he joined after receiving his Ph.D. in physics
from Columbia in 1952. He had managed various projects in device research and
applications at IBM, where he is currently a Research Staff member emeritus. Dr.
Triebwasser is a fellow of the Institute for Electrical and Electronic
Engineers, the American Physical Society and the American Association for the
Advancement of Science.
Mr. Aaron and Mr. Joels are brothers-in-law.
The Board of Directors met either in person or telephonically 5 times in
fiscal 2005. Each of the Directors attended at least 75% of the meetings.
The Board of Directors has standing Audit and Compensation/Option
Committees.
The Audit Committee reviews with the Company's independent public
accountants the scope and timing of the accountants' audit services and any
other services they are asked to perform, their report on the Company's
financial statements following completion of their audit and the Company's
policies and procedures with respect to internal accounting and financial
controls. In addition, the Audit Committee reviews the independence of the
independent public accountants and makes annual recommendations to the Board of
Directors for the appointment of independent public accountants for the ensuing
year. The Audit Committee was involved in the selection of new auditors for
Fiscal 2004. The Audit Committee met 5 times during Fiscal 2004.
The Compensation/Option Committee reviews and recommends to the Board of
Directors the compensation and benefits of all officers of the Company, reviews
general policy matters relating to compensation and benefits of employees of the
Company and administers the Company's Stock Option Plans.
21
COMPENSATION OF DIRECTORS
Directors who are also employees are not paid any fees or additional
compensation for services as members of our Board of Directors or any committee
thereof. In October 2002, Dr. Triebwasser was granted options under our 2002
Stock Option Plan to purchase 5,000 shares of common stock at a price of $3.00
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 3,750 options under our 2002
Stock Option plan. Upon his appointment to the Board, Dr. Jeffrey Hymes received
the non-employees director fee of $5,000, payable quarterly, and was granted
options to purchase 3,750 shares of common stock exercisable at $4.00 per share,
vesting one third on the grant date and the balance vesting over a two year
period in equal installments.
COMPLIANCE WITH SECTION 16(a)
Based solely in its review of copies of Forms 3 and 4 received by it or
representations from certain reporting persons, the Company believes that,
during the fiscal year ended September 30, 2005, there was compliance with
Section 16 (a) filing requirements applicable to its officers, directors and 10%
stockholders.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid by the
Company to (i) its Chief Executive Officer and (ii) its most highly compensated
officers whose cash compensation exceeded $100,000 for services performed during
the year ended September 30, 2004.
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
Awards Payouts
------ -------
Securities
Other Restricted Underlying
Name and Annual Stock Options LTIP All Other
Principal Salary Bonus Compensation Award(s) SARs Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) ($)
--------------------------------------------------------------------------------------------------------------
George Aaron 2005 240,000 -0- -0- -0- -0- -0- -0-
President/CEO 2004 240,000 -0- -0- -0- -0- -0- -0-
2003 240,000 160,000 -0- -0- -0- -0- -0-
--------------------------------------------------------------------------------------------------------------
Jonathan Joels 2005 176,000 -0- -0- -0- -0- -0- -0-
CFO 2004 176,000 -0- -0- -0- -0- -0- -0-
2003 176,000 112,000 -0- -0- -0- -0-
--------------------------------------------------------------------------------------------------------------
Elliott Koppel, VP 2005 92,000 -0- -0- -0- -0- -0- -0-
Sales & Marketing 2004 92,000 -0- -0- -0- -0- -0- -0-
2003 92,000 28,000 -0- -0- -0- -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 we lease
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 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 $28,000.
The Company does not have any annuity, retirement, pension or deferred
compensation plan or other arrangements under which any executive officers are
entitled to participate without similar participation by other employees. As of
September 30, 2005, under the Company's 401(k) plan there was no matching
contribution by the Company.
22
Individual
Grants
(a) (b) (c) (d) (e)
% of
Number of Total
Securities Options/
Name Underlying SARS Exercise
Options/ Granted to on Base Expiration
SARs Employee(s) Price Date
Granted (#) in Fiscal ($/Sh)
Year
--------------------------------------------------------------------------
George Aaron -0- -0- -0- -0-
Jonathan Joels -0- -0- -0- -0-
Elliott Koppel -0- -0- -0- -0-
--------------------------------------------------------------------------
FISCAL YEAR END OPTION VALUE
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT SEPT. 30, 2005 AT SEPT. 30, 2005
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE ($)
---- ------------------------- ---------------
George Aaron 20,000/0 $-0-
Jonathan Joels 20,000/0 $-0-
Elliott Koppel 20,000/0 $-0-
STOCK OPTION PLAN
Due to the pending expiration of both the 1993 Employee Stock Option Plan
and 1993 Non-Employee Stock Option Plan, in May 2002 our Board of Directors
adopted the 2002 Stock Option Plan ("2002 Plan") which was ratified at our
stockholder meeting of June 26, 2002. As of December 28, 2005, the 2002 Plan
will consist of 700,000 shares, having been increased from 75,000 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 48,050 options to our officers,
directors, and employees under the 2002 Plan for an aggregate of 48,050 shares
of Common Stock. Of these, 15,000 options each were granted to Messrs. Aaron and
Joels, 5,000 to Mr. Koppel and 5,000 to Dr. Triebwasser. All of these options
were priced at $3.00 per share, vested one third on the grant date and the
balance vests over a two year period in equal installments. During May 2004,
3,750 options priced at $4.00 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 50,000 shares of common stock. The
23
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
10,000 shares of common stock. The exercise price for shares granted under the
Directors' plan cannot be less than the fair market value of the stock on the
date of the grant. Both plans expired May 25, 2003.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During Fiscal 2005 members of the Company's Compensation/Option Committee
were Sol Triebwasser, Ph.D. and Jeffrey Hymes, M.D., neither is an executive
officer or employee of the Company or its subsidiaries.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of December 9, 2005, certain information
regarding the beneficial ownership of Common Stock by (i) each person who is
known by the Company to own beneficially more than five percent of the
outstanding Common Stock, (ii) each director and executive officer of the
Company, and (iii) all directors and executive officers as a group:
Amount of
Amount and Nature Nature and
of Beneficial Beneficial
Name of Position with Ownership (1) of Ownership (1) of Percentage of
Beneficial Owner* Company Common Stock Preferred Stock Securities ***
Special Situations Private Holder of over five 1,448,274(2) - 38.8%
Equity Fund, L.P. percent
153 E. 53rd Street
55th Floor
New York, NY 10022
Special Situations Fund III, Holder of over five 482,757(3) - 14.0%
L.P. percent
153 E. 53rd Street
55th Floor
New York, NY 10022
General Electric Company None 57,989(4) 27,000 1.3%
Medical Services Division
3000 No. Grandview Blvd.
Waukesha WI 53188
Shrikant Mehta Holder of over five 245,894(5) - 7.3%
Combine International percent
354 Indusco Court
Troy, Michigan 48083
George Aaron Chairman of the 260,887(6) - 7.8%
Board;
Chief Executive
Officer; President
24
Jonathan Joels Director; Chief 255,226(7) - 7.6%
Financial Officer;
Vice President;
Treasurer;
Secretary
Elliott Koppel VP Sales & Marketing 25,194(8) - **
Sol Triebwasser, Ph.D. Director 5,545(9) - **
Jeffrey L. Hymes, M.D. Director 2,500(10) - **
All executive officers and 549,352(11) - 16.2%
Directors as a group
(5 persons)
-------------
* Address of all holders except Special Situations Private Equity Fund, L.P.,
Special Situations Fund III, L.P. and Mr. Mehta 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, 2005
pursuant to stock options, warrants and convertible securities.
(2) Includes 413,792 shares underlying warrants presently exercisable. Special
Situations Private Equity Fund, L.P. disclaims beneficial ownership of the
shares and warrants held by Special Situations Fund III L.P.
(3) Includes 137,930 shares underlying warrants presently exercisable. Special
Situations Fund III L.P. disclaims beneficial ownership of the shares and
warrants held by Special Situations Private Equity Fund, L.P.
(4) Includes 57,989 shares underlying 27,000 shares of Series B Preferred
Stock.
(5) Includes 10,000 shares underlying warrants presently exercisable and 25,000
shares underlying options presently exercisable.
(6) Includes (i) 353 shares in retirement accounts, (ii) 9,075 shares
underlying warrants presently exercisable, (iii) 5 shares jointly owned
with his wife and (iv) 20,000 shares underlying options presently
exercisable.
(7) Includes (i) 48,000 shares as trustee for his children, (ii) 8,618 shares
underlying warrants presently exercisable, (iii) 875 shares underlying
warrants owned by his wife for which he disclaims beneficial ownership,
(iv) 20,000 shares underlying options presently exercisable and (v) 17,241
shares in a retirement account.
(8) Includes (i) 4,644 shares underlying warrants and (ii) 20,000 shares
underlying options presently exercisable.
25
(9) Includes 5,475 shares underlying options presently exercisable.
(10) Includes 2,500 shares underlying options presently exercisable and excludes
1,250 shares underlying options which are currently not exercisable.
(11) Includes (i) 22,337 shares underlying warrants and (ii) 67,975 shares
underlying options presently exercisable.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the first two quarters of fiscal 2005, the Company was advanced the
principal amount of $145,923 through short term loans until additional equity
funding was secured. The terms of the loans are identical to the terms of the
$100,000 8% Senior Secured Convertible Promissory Note outlined above. The
lenders also received warrants to purchase 7,295 shares of the Company's common
stock exercisable at $5.60 per share for a period of five years. The allocated
fair value of the warrants associated with this advance are deemed to be
immaterial. These short-term loans were provided by executive officers, Messrs.
Aaron, Joels and Koppel who advanced $64,000, $62,357 and $19,566, respectively.
As a condition of this financing the holders of the Notes exchanged 50% of the
Company's indebtedness for 728 shares of Series C Mandatory Convertible
Preferred Stock and on February 15, 2005 were paid the balance of their notes
inclusive of interest.
During the second quarter of fiscal 2004, we authorized a 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. These
funds were provided by Mr. Aaron ($150,000), Mr. Joels ($150,000), Mr. Koppel
($65,000), Mr. Joels' brother ($85,000) and others. The loan notes bore interest
at a rate of 11% per annum and were secured by a first lien on the royalties due
to Opus from Seradyn, in accordance with their Royalty Agreement. For every
sixty dollars ($60.00) loaned, the lender received two warrants to purchase one
share of our common stock, exercisable at $5.00 per share for a period of five
years. The exercise price was in excess of the then market price. Pursuant to
the preferred stock placement, these notes were exchanged for 5,000 shares of
Series C Preferred Stock, and the security interest was released. Upon the
Reverse Split, these shares of Series C Preferred Stock converted into 172,414
shares of our common stock.
We believe that each of the above referenced transactions was made on terms
no less favorable to us than could have been obtained from an unaffiliated third
party. Furthermore, any future transactions or loans between us and our
officers, directors, principal stockholders or affiliates will be on terms no
less favorable to us than could be obtained from an unaffiliated third party,
and will be approved by a majority of disinterested directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
All references to Registrant's Forms 8-K, 10-K, 10-QSB and 10-KSB include
reference to File No. 0-11914.
2.1 Agreement and Plan of Merger, dated January 20, 1997, by and among
Registrant, Medial Diagnostics, Inc. ("Strax"), Strax Acquisition
Corporation and US Diagnostic Inc. (incorporated by reference to Exhibit
1 to Registrant's Form 8-K filed January 23, 1997).
2.2 Agreement and Plan of Merger dated as of June 28, 1999 among Registrant,
Caprius Merger Sub, Opus Diagnostics Inc. ("Opus"), George Aaron and
Jonathan Joels (incorporated by reference to Exhibit 2.1 to Registrant's
Form 8-K, filed July 1, 1999 (the "July 1999 Form 8-K")).
3.1 Certificate of Incorporation of Registrant. (incorporated by reference
to Exhibit 3 filed with Registrant's Registration Statement on Form S-2,
and amendments thereto, declared effective August 18, 1993 (File No.
033-40201) ("Registrant's Form S-2")).
26
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 Designations, Preferences and Rights of Series C
Mandatory Convertible Preferred Stock (incorporated by reference to
Exhibit 3.1 to Registrant's Form 8-K, filed for an event of February
145, 2005 (the "February 2005 Form 8-K")).
3.8 Certificate of Merger, filed on June 28, 1999 with the Secretary of
State of the State of Delaware (incorporated by reference to Exhibit 3.1
of Form 8-K dated June 28, 1999).
3.9 Certificate of Amendment to Certificate of Incorporation, Filed April 1,
2005 (incorporated by reference to Exhibit 3.1 to Registrant's Form 8-K,
filed April 5, 2005 (the "April 2005 Form 8-K")
3.10 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 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).
4.5 Form of 2005 Series A Warrant (granted February 15, 2005) (incorporated
by reference to Exhibit 4.1 to Registrant's February 2005 Form 8-K).
4.6 Form of 2005 Series B Warrant (granted February 15, 2005) (incorporated
by reference to Exhibit 4.2 to Registrant's February 2005 Form 8-K).
4.7 Form of Dealer Warrant (granted February 15, 2005) (incorporated by
reference to Exhibit 4.3 to Registrant's February 2005 Form 8-K).
4.8 Form of Lock-Up Agreement with George Aaron and Jonathan Joels
(incorporated by reference to Exhibit 4.4 to Registrant's February 2005
Form 8-K).
27
5 Opinion of Thelen Reid & Priest LLP (incorporated by reference to
Exhibit 5 to Registrant's April 15, 2005 Form SB-2(File No.
333-124096)).
10.1.1 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 (the
"September 1997 Form 8-K")).
10.1.2 Stockholders Agreement, dated August 18, 1997, between Registrant and GE
(incorporated by reference to Exhibit 10.3 to Registrant's September
1997 Form 8-K).
10.1.3 Settlement and Release Agreement, dated August 18, 1997, between the
Registrant and GE (incorporated by reference to Exhibit 10.4 to
Registrant's September 1997 Form 8-K).
10.1.4 License Agreement, dated August 18, 1997, between Registrant and GE
(incorporated by reference to Exhibit 10.4 to Registrant's September
1997 Form 8-K).
10.2.1 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).
10.2.2 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).
10.2.3 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).
10.2.4 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).
10.3.1 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")).
10.3.2 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).
10.3.3 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).
10.3.4 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).
10.4.1 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").
10.4.2 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).
10.4.3 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.)
10.4.4 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).
28
10.4.5 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).
10.5 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).
10.6.1 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")).
10.6.2 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).
10.6.3 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).
10.6.4 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).
10.6.5 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).
10.7.1 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")).
10.7.2 Form of 8% Senior Secured Convertible Promissory Note (incorporated by
reference to Exhibit 10.2 to Registrant's April 2004 Form 8-K).
10.7.3 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).
10.7.4 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).
10.7.5 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).
10.7.6 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).
10.8.1 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")).
10.8.2 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).
10.8.3 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).
29
10.9 License and Manufacturing Agreement between M.C.M. Environmental
Technologies Inc. and CID Lines, dated November 26, 2002 (incorporated
by reference to Exhibit 10.14 to Amendment No. 1 to Registrant's
September 2004 Form SB-2, filed November 5, 2004 (File No. 333-118869)
("November 2004 Form SB-2/A-1")).
10.10 Distribution Agreement between M.C.M. Environmental Technologies, LTD
and Euromedic Group, dated November 1, 2002 (incorporated by reference
to Exhibit 10.15 to Registrant's November 2004 Form SB-2/A-1).
10.11 Distribution Agreement between M.C.M. Environmental Technologies, LTD
and Lysmed, L.L.C., dated January 12, 2001 (incorporated by reference to
Exhibit 10.16 to Registrant's November 2004 Form SB-2/A-1).
10.12.1 Purchase Agreement for the sale of 45,000 shares of Series C Mandatory
Convertible Preferred Stock and Series A and Series B warrants
(incorporated by reference to Exhibit 10.1 to Registrant's February 2005
Form 8-K).
10.12.2 Registration Rights Agreement, dated February 15, 2005, by and among the
Registrant and investors (incorporated by reference to Exhibit 10.2 to
Registrant's February 2005 Form 8-K).
10.12.3 Amendment and Conversion Agreement, dated February 15, 2005, by and
among the Registrant and note holders (incorporated by reference to
Exhibit 10.3 to Registrant's February 2005 Form 8-K).
10.12.4 Exchange Agreement, dated February 15, 2005, by and among the Registrant
and certain lenders (incorporated by reference to Exhibit 10.4 to
Registrant's February 2005 Form 8-K).
10.12.5 Registration Rights Agreement, dated February 15, 2005, by and among the
Registrant and note holders (incorporated by reference to Exhibit 10.5
to Registrant's February 2005 Form 8-K).
10.13.1 Financial Advisory Agreement, dated January 11, 2005, between the
Registrant and Laidlaw & Company (UK) Ltd. (incorporated by reference to
Exhibit 10.6.1 to Registrant's February 2005 Form 8-K).
10.13.2 Amendment to Financial Advisory Agreement, dated February 9, 2005
(incorporated by reference to Exhibit 10.6.2 to Registrant's February
2005 Form 8-K).
10.14 Settlement Agreement and Policies Release by and among Admiral Insurance
Company and Registrant and certain Caprius directors and officers
including George Aaron, Jonathan Joels, Shrikant Mehta and Sanjay Mody
(incorporated by reference to Exhibit 10.1 to Registrant's June 30, 2005
Form 10-QSB).
14 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 for an event of March 15, 2004).
21* List of Company's subsidiaries
31.1* Rule 13a-14(a)/15d-14(a) Certification
31.2* Rule 13a-14(a)/15d-14(a) Certification
32.1* Section 1350 - Certification
32.2* Section 1350 - Certification
----------
* Filed herewith
(b) Reports on Form 8-K:
None
30
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
September 30,
2005 2004
---- ----
AUDIT FEES $ 103,560 $ 116,518
TAX FEES -0- -0-
AUDIT RELATED FEES -0- -0-
--------- ---------
TOTAL FEES $ 103,560 $ 116,518
========= =========
The Audit Fees as stated above represent professional services rendered in
regards to the Company's Form10-KSB, Form 10-QSB filings and the SB-2
Registration Statement.
31
SIGNATURES
----------
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 19th day of
December 2005.
CAPRIUS, INC.
By: /s/ Jonathan Joels
------------------
Jonathan Joels, CFO and
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ George Aaron Chairman of the Board, December 21, 2005
-------------------------- President and CEO
George Aaron
/s/ Jonathan Joels Director, CFO and Treasurer December 21, 2005
--------------------------
Jonathan Joels
/s/ Jeffrey L. Hymes Director December 21, 2005
--------------------------
Jeffrey L. Hymes, M.D.
/s/ Sol Triebwasser Director December 21, 2005
--------------------------
Sol Triebwasser, Ph.D.
32
CAPRIUS, INC. AND SUBSIDIARIES
I N D E X
-----------------------------------------------------------------------
PAGE
-----------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm F-2
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Consolidated Balance Sheet as of September 30, 2005 F-3
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Consolidated Statements of Operations for the years ended F-4
September 30, 2005 and 2004.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Consolidated Statements of Stockholders' (Deficiency) Equity F-5
for the years ended September 30, 2005 and 2004.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Consolidated Statements of Cash Flows for the years ended F-6
September 30, 2005 and 2004.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Notes to the Consolidated Financial Statements. F-7 - F19
-----------------------------------------------------------------------
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Caprius, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Caprius, Inc. and
Subsidiaries (the "Company") as of September 30, 2005, and the related
consolidated statements of operations, stockholders'(deficiency) equity, and
cash flows for the year then ended September 30, 2005 and 2004. 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 consolidated financial position of
Caprius, Inc. and Subsidiaries as of September 30, 2005, and the consolidated
results of their operations and their cash flows for the year then ended
September 30, 2005 and 2004 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 will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company has suffered recurring losses
from operations which raises substantial doubt about its ability to continue as
a going concern. Management's plans in regard to this matter are also described
in Note A. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Marcum & Kleigman LLP
New York, New York
November 18, 2005
F-2
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,257,158
Accounts receivable, net of reserve for bad debts of $ 7,841 127,252
Inventories, net 668,616
Other current assets 29,758
-------------
Total current assets 2,082,784
-------------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 197,924
Equipment for lease 23,500
Leasehold improvements 19,536
-------------
240,960
Less: accumulated depreciation 168,944
-------------
Property and equipment, net 72,016
-------------
OTHER ASSETS:
Goodwill 737,010
Intangible assets,net 263,917
Other 17,410
-------------
Total other assets 1,018,337
-------------
TOTAL ASSETS $ 3,173,137
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 209,152
Accrued expenses 63,663
Accrued compensation 104,782
-------------
Total current liabilities 377,597
-------------
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - Series A, none; Series B, convertible,
27,000 shares. Liquidation preference $2,700,000 2,700,000
Common stock, $.01 par value
Authorized - 50,000,000 shares, issued 3,322,798 shares
and outstanding 3,321,673 shares 33,228
Additional paid-in capital 74,241,755
Accumulated deficit (74,177,193)
Treasury stock (1,125 common shares, at cost) (2,250)
-------------
Total stockholders' equity 2,795,540
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,173,137
=============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended
---------------------------------------
September 30, 2005 September 30, 2004
------------------ ------------------
REVENUES:
Product sales $ 727,491 $ 766,119
Equipment rental income 13,305 69,342
Consulting & royalty fees 108,006 50,000
------------- -------------
Total revenues 848,802 885,461
------------- -------------
OPERATING EXPENSES:
Cost of product sales and equipment rental income 490,827 618,944
Research and development 325,486 283,697
Selling, general and administrative 2,730,071 3,020,212
------------- -------------
Total operating expenses 3,546,384 3,922,853
------------- -------------
Operating loss (2,697,582) (3,037,392)
Other income 482,200 -
Interest expense, net (323,026) (212,571)
------------- -------------
Loss from continuing operations (2,538,408) (3,249,963)
Loss from operations of discontinued Strax Business - (105,806)
------------- -------------
Net loss $ (2,538,408) $ (3,355,769)
Beneficial Conversion feature - Series C Mandatory
Convertible Preferred Stock $ (124,528) $ -
------------- -------------
Net loss attributable to common stockholders $ (2,662,936) $ (3,355,769)
============= =============
Net loss per basic and diluted common share
Continuing operations $ (1.16) $ (3.18)
Discontinued operations - (0.10)
------------- -------------
Net loss per basic and diluted common share $ (1.16) $ (3.28)
============= =============
Weighted average number of common shares outstanding,
basic and diluted 2,288,543 1,022,328
============= ==============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
Series C
Series B Convertible Mandatory Convertible
Preferred Stock Preferred Stock Common Stock
----------------------------------------------------------------------
Number Number Number
of Shares Amount of Shares Amount of Shares Amount
----------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 27,000 $ 2,700,000 - $ - 1,023,453 $ 10,235
Fair value of warrants issued
in connection with bridge
financing - related parties
Fair value of warrants issued
in connection with secured
convertible notes
Beneficial conversion feature
in connection with secured
convertible notes
Net loss
----------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004 27,000 2,700,000 - $ - 1,023,453 $ 10,235
Issuance Series C Mandatory 45,000 4,500,000
Convertible Preferred Stock
Conversion of secured 21,681 2,168,100
convertible notes and bridge
financing into Series C
Mandatory Convertible
Preferred Stock
Conversion of Series C (66,681) (6,668,100) 2,299,345 22,993
Preferred into common stock
NET LOSS
----------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2005 27,000 $ 2,700,000 - $ - 3,322,798 $ 33,228
======================================================================
[TABLE CONTINUED]
Treasury Stock
--------------------
Additional Total
Paid-in Accumulated Number Stockholders'
Capital Deficit of Shares Amount (Deficiency)Equity
-----------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 $ 67,775,714 $ (68,283,016) 1,125 $ (2,250) $ 2,200,683
Fair value of warrants issued 27,400 27,400
in connection with bridge
financing - related parties
Fair value of warrants issued 28,500 28,500
in connection with secured
convertible notes
Beneficial conversion feature 200,000 200,000
in connection with secured
convertible notes
Net loss (3,355,769) (3,355,769)
-----------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004 $ 68,031,614 $ (71,638,785) 1,125 $ (2,250) $ (899,186)
Issuance Series C Mandatory (434,966) 4,065,034
Convertible Preferred Stock
Conversion of secured 2,168,100
convertible notes and bridge
financing into Series C
Mandatory Convertible
Preferred Stock
Conversion of Series C 6,645,107 -
Preferred into common stock
NET LOSS (2,538,408) (2,538,408)
-----------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2005 $ 74,241,755 $ (74,177,193) 1,125 $ (2,250) $ 2,795,540
=======================================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
2005 2004
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,538,408) $ (3,355,769)
Adjustments to reconcile net loss to net cash used in
operating activities:
Bad debt expense - 77,381
Amortization of debt discount 165,220 73,617
Amortization of deferred financing cost 89,542 63,958
Depreciation and amortization 310,693 350,181
Write-off of other receivable - 101,992
Interest on secured convertible notes 95,300 -
Changes in operating assets and liabilities:
Accounts receivable, net (53,769) 6,177
Inventories 108,079 109,966
Other assets (14,536) (38,580)
Accounts payable and accrued expenses (1,100,161) (231,286)
--------------- ---------------
Net cash used in operating activities (2,938,040) (2,842,363)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Strax business 66,000 268,629
Increase of security deposits (4,080)
Acquisition of property and equipment (32,139) (48,502)
--------------- ---------------
Net cash provided by investing activities 29,781 220,127
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable - related party - 500,000
Proceeds from issuance of secured convertible notes - 1,500,000
Financing fees in connection with secured convertible notes - (125,000)
Proceeds from short term loan 100,000 -
Repayment of short term loan (100,000) -
Proceeds from short term loans - related party 145,923 -
Repayment of short term loans - related party (73,123) -
Net proceeds from issuance of Series C Mandatory Preferred Stock 4,065,034 -
--------------- ---------------
Net cash provided by financing activities 4,137,834 1,875,000
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,229,575 (747,236)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 27,583 774,819
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,257,158 $ 27,583
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 49,541 $ 25,697
=============== ===============
Cash paid for income taxes $ 192,672
=============== ===============
NON CASH TRANSACTIONS:
Issuance of warrants attached with debt issuance $ - $ 55,900
=============== ===============
Beneficial conversion feature in connection with debt issuance $ - $ 200,000
=================================
Transfer of net book value of certain equipment for leases to inventory $ 66,177 $ -
=================================
Conversion of secured convertible notes and interest into equity $ 1,595,300 $ -
=================================
Conversion of notes payable - related party into equity $ 500,000 $ -
=================================
Conversion of short-term loans payable - related party into equity $ 72,800 $ -
=================================
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(NOTE A) - Business and Basis of Presentation
---------------------------------------------
Caprius, Inc. and Subsidiaries ("Caprius" or the "Company") was founded in
1983 and through June 1999 essentially operated in the business of medical
imaging systems as well as healthcare imaging and rehabilitation services. On
June 28, 1999, the Company acquired Opus Diagnostics Inc. ("Opus") and began
manufacturing and selling medical diagnostic assays constituting the Therapeutic
Drug Monitoring ("TDM") Business. After the close of the 2002 fiscal year, the
Company made major changes in its business through the sale of the TDM Business
and the purchase of a majority interest in M.C.M. Environmental Technologies,
Inc. ("MCM") which developed, markets and sells the SteriMed and SteriMed Junior
compact systems that simultaneously shred and disinfect Regulated Medical Waste.
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, 2005, and September 30, 2004 the Company's
operations were in the infectious medical waste disposal business.
The Company has business operations located in Israel. Although the region
is considered to be economically stable, it is always possible that
unanticipated events in foreign countries could disrupt the Company's
operations.
During the fiscal year ended September 30, 2005, an agreement was reached
between the Company and the 20% minority ownership of an MCM subsidiary which
had been dormant since inception. The minority shareholders shall be repaid
their initial investment, by the use of a credit towards the site installation
expense of SteriMed units that they are purchasing for their dialysis centers.
This subsidiary was dissolved on February 9, 2005.
This annual report gives retroactive effect to the Company's 1 for 20
reverse common stock split of April 5, 2005.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization and satisfaction of liabilities and commitments in the normal
course of business. The Company has incurred substantial recurring losses, which
raises 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 has available cash and
cash equivalents of $1,257,158 at September 30, 2005. The Company intends to
utilize these funds for working capital purposes to continue developing the
business of MCM. Based upon the Company's present business plan, management
anticipates that the Company should have sufficient cash reserves through March
31, 2006. In order to fund the cash requirements of the Company beyond such
date, the Company continues to pursue efforts to identify additional funds
through various funding options, including banking facilities and equity
offerings. There can be no assurance that such funding initiatives will be
successful and any equity placement could result in substantial dilution to
current stockholders.
(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
Revenues from the MCM medical waste business are recognized when SteriMed
units are either sold or rented to customers. 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.
[3] Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
F-7
[4] Accounts Receivable and Allowance for Doubtful Accounts:
The Company recognizes an allowance for doubtful accounts to ensure that
accounts receivable are not overstated due to uncollectibility. Bad debt
reserves are maintained for all customers based on a variety of factors,
including the length of time the receivables are past due, significant one-time
events and historical experience. An additional reserve for individual accounts
is recorded when the Company becomes aware of a customer's inability to meet its
financial obligation, such as in the case of bankruptcy filings or deterioration
in the customer's operating results or financial position. If the circumstances
related to customers change, estimates of the recoverability of receivables
would be further adjusted.
[5] Product Warranties
The estimated future warranty obligations related to the product sales are
provided by charges to operations in the period in which the related revenue is
recognized. The basic warranty covers parts and labor for one year, thereafter
extended warranties are available. These charges were deemed to be immaterial in
each of the years ended September 30, 2005 and 2004.
[6] Shipping and Handling Costs
The Company includes shipping and handling costs in the statement of
operations as part of cost of sales. These costs were deemed immaterial for the
years ended September 30, 2005 and 2004.
[7] Inventories
Inventories are accounted for at the lower of cost or market using the
first-in, first-out ("FIFO") method. The Company's policy is to reserve or write
-off surplus or obsolete inventory. Inventory is comprised of materials, labor
and manufacturing overhead costs.
[8] Equipment, Furniture and Leasehold Improvements
Equipment, furniture and leasehold improvements are recorded at cost.
Depreciation and amortization are computed by the straight-line method over the
estimated lives of the applicable assets, or term of the lease, if applicable.
Expenditures for maintenance and repairs that do not improve or extend the life
of the expected assets are expensed to operations, while expenditures for major
upgrades to existing inventory are capitalized.
Asset Classification Useful Lives
-------------------- ------------
Office furniture and equipment 3-5 years
Leasehold improvements Term of Lease
Equipment for lease 5 years
[9] Impairment of Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," the Company and its subsidiaries review the carrying
values of their long-lived assets (other than goodwill) for possible impairment
whenever events or changes in circumstances indicate that the carrying amounts
of the assets may not be recoverable. Any long-lived assets held for disposal
are reported at the lower of their carrying amounts or fair values less costs to
sell.
[10] Goodwill and Other Intangibles
At September 30, 2005, goodwill results from the excess of cost over the
fair value of net assets acquired related to the MCM business. SFAS No. 142
provides, among other things, that goodwill and intangible assets with
indeterminate lives shall not be amortized. Goodwill shall be assigned to a
reporting unit and annually tested for impairment. Intangible assets with
determinate lives shall be amortized over their estimated useful lives, with the
useful lives reassessed continuously, and shall be assessed for impairment under
the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". Goodwill is also assessed
for impairment on an interim basis when events and circumstances warrant. The
Company assesses whether an impairment loss should be recognized and measured by
comparing the fair value of the "reporting unit" to the carrying value,
including goodwill. If the carrying value exceeds fair value, then the Company
will compare the implied fair value of the goodwill (as defined in SFAS No. 142)
to the carrying amount of the goodwill. If the carrying amount of the goodwill
exceeds the implied fair value, then the goodwill will be adjusted to the
implied fair value.
F-8
[11] Net Loss Per Share
Net loss per share is computed in accordance with Statement of Financial
Standards No. 128, "Earning Per Share" ("SFAS No. 128"). SFAS No. 128 requires
the presentation of both basic and diluted earnings per share.
Basic net loss per common share was computed using the weighted average
common shares outstanding during the period. Diluted loss per share reflects the
potential dilution that could occur through the effect of common shares issuable
upon the exercise of stock options, warrants and convertible securities. For the
year ended September 30, 2005, potential common shares amount to 1,020,660
shares, as compared to 909,311 for the year ended September 30, 2004 and have
not been included in the computation of diluted loss per share since the effect
would be antidilutive.
[12] Income Taxes
The Company provides for federal and state income taxes currently payable,
as well as for those deferred because of timing differences between reporting
income and expenses for financial statement purposes versus tax purposes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recoverable or settled. The effect of a
change in tax rates is recognized as income or expense in the period of the
change. A valuation allowance is established, when necessary, to reduce deferred
income tax assets to the amount that is more likely than not to be realized.
[13] Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
[14] Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses are reasonable estimates of their fair
values because of the short-term nature of those instruments.
[15] Reclassifications
Certain reclassifications have been made to prior period amounts to conform
to the current year presentation.
[16] Foreign Currency
The Company follows the provisions of SFAS No. 52, "Foreign Currency
Translation." The functional currency of the Company's foreign subsidiary is the
U.S. dollar. All foreign currency asset and liability amounts are re-measured
into U.S. dollars at end-of-period exchange rates, except for certain assets,
which are measured at historical rates. Foreign currency income and expense are
re-measured at average exchange rates in effect during the year, except for
expenses related to balance sheet amounts re-measured at historical exchange
rates. Exchange gains and losses arising from re-measurement of foreign
currency-denominated monetary assets and liabilities are included in operations
in the period in which they occur. Exchange gains and losses included in the
accompanying consolidated statements of operations are deemed immaterial for the
years ended September 30, 2005 and 2004.
[17] Research and Development Costs
All research and development costs are charged to operations as incurred.
Research and development expenditures were approximately $325,000 and $284,000
for fiscal 2005 and 2004, respectively.
F-9
[18] Recent Accounting Pronouncements
In September 2005, the Financial Accounting Standards Board ("FASB")
ratified the Emerging Issues Task Force's ("EITF") Issue No. 05-7. "Accounting
for Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues", which addresses whether a modification to a conversion option that
changes its fair value affects the recognition of interest expense for the
associated debt instrument after the modification, and whether a borrower should
recognize a beneficial conversion feature, not a debt extinguishments, if a debt
modification increases the intrinsic value of the debt. In September 2005, the
FASB ratified the following consensus reached in EITF Issue 05-08 (" Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature"):
a) the issuance of convertible debt with a beneficial conversion feature results
in a basis difference in applying FASB Statement of Financial Accounting
Standards SFAS No. 109, Accounting for Income Taxes. Recognition of such a
feature effectively creates a debt instrument and a separate equity instrument
for book purposes, whereas the convertible debt is treated entirely as a debt
instrument for income tax purposes; b) The resulting basis difference should be
deemed a temporary difference because it will result in a taxable amount when
the recorded amount of the liability is recovered or settled; and c) Recognition
of deferred taxes for the temporary difference should be reported as an
adjustment to additional paid-in capital. Both of these issues are effective in
the first interim or annual reporting period commencing after December 15, 2005,
with early application permitted. The effect of applying the consensus should be
accounted for retroactively to all debt instruments containing a beneficial
conversion feature that are subject to EITF Issue 00-27, "Application of Issue
No. 98-5 to Certain Convertible Debt Instruments" (and thus is applicable to
debt instruments converted or extinguished in prior periods but which are still
presented in the financial statements). Management does not believe these
pronouncements will have a material impact on the Company's consolidated
financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Correction." This Statement replaces APB Opinion No. 20, Accounting Changes, and
FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principal. The statements applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting changes and corrections of errors made in the fiscal
years beginning after December 15, 2005. Management does not believe this
pronouncement will have a material impact on the Company's consolidated
financial statements.
In December 2004, the FASB issued its final standard on accounting for
share-based payments ("SBP"), FASB Statement No. 123(R) (revised 2004)
"Share-Based Payment." This statement requires companies to expense the value of
employee stock options and similar awards. Under FASB No. 123(R), SBP awards
result in a cost that will be measured at fair value of the awards' grant date,
based on the estimated number of awards that are expected to vest. Compensation
cost for awards that vest would not be reversed if the awards expire without
being exercised. Public entities that are small business issuers will be
required to apply Statements 123(R) as of the first annual reporting period that
begins after December 15, 2005. Although the adoption of FASB No. 123 (R) will
have no adverse impact on the Company's balance sheet or total cash flows, it
will affect the Company's net income and earning per share. The actual effects
of adopting FASB No. 123 (R) will depend on numerous factors, including the
amount of share-based payments granted in the future, the Company's future stock
price volatility, estimated forfeiture rates and employee stock option exercise
behavior.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." The amendments made by Statement 151
clarify that abnormal amounts of idle facility expense, freight, handling costs,
and wasted materials (spoilage) should be recognized as current-period charges
and require the allocation of fixed production overheads to inventory based on
the normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company does not believe the adoption of SFAS 151 will have a significant impact
on the Company's overall results of operations or financial position.
In October 2004, the FASB ratified the consensus reached in EITF Issue No.
04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings
Per Share." The EITF reached a consensus that contingently convertible
instruments, such as contingently convertible debt, contingently convertible
F-10
preferred stock, and other such securities should be included in diluted
earnings per share (if dilutive) regardless of whether the market trigger price
has been met. The consensus became effective for reporting periods ending after
December 15, 2004. The adoption of this statement did not have a significant
impact on the Company's consolidated financial statements.
[19] 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.
The 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 records its stock-based compensation under the Accounting Principles
Board (APB) No. 25 and elected 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, 2005 and 2004. The assumptions used during the
years ended September 30, 2005 and 2004 were as follows:
------------------------------------------------- -------------------------------
SEPTEMBER 30,
------------------------------------------------- ---------------- --------------
2005 2004
------------------------------------------------- ---------------- --------------
Risk free interest rate 4.00- 5.00% 4.00 -5.00%
------------------------------------------------- ---------------- --------------
Expected dividend yield -- --
------------------------------------------------- ---------------- --------------
Expected lives 10 years 10 years
------------------------------------------------- ---------------- --------------
Expected volatility 29- 80% 29 - 80%
------------------------------------------------- ---------------- --------------
Weighted average value of grants per share $3.32 $1.80
------------------------------------------------- ---------------- --------------
Weighted average remaining contractual life of 6.35 7.3
options outstanding (years)
------------------------------------------------- ---------------- --------------
The pro forma effect of applying FAS No. 148 is as follows:
------------------------------------------------- --------------------------------
FOR THE YEARS ENDED
------------------------------------------------- --------------------------------
SEPTEMBER 30,
------------------------------------------------- --------------------------------
2005 2004
------------------------------------------------- ---------------- ---------------
Net loss attributable to common stockholders as $(2,662,936) $(3,355,769)
reported
------------------------------------------------- ---------------- ---------------
Add: Stock based employee compensation
expense, included in reported loss. -- --
------------------------------------------------- ---------------- ---------------
Less: Stock-based employee compensation as
determined under fair value based method for
all awards. (2,991) (56,371)
------------------------------------------------- ---------------- ---------------
F-11
Pro forma net loss $(2,665,927) $(3,412,140)
------------------------------------------------- ================ ===============
Net Loss per share:
------------------------------------------------- ---------------- ---------------
Basic and diluted loss attributable to common $ (1.16) $ (3.28)
stockholders - as reported
------------------------------------------------- ---------------- ---------------
Basic and diluted loss attributable to common $ (1.17) $ (3.33)
stockholders - pro forma
------------------------------------------------- ---------------- ---------------
[20] 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
F-11
business risk. The Company does not anticipate non-performance by the counter
parties and, accordingly, does not require collateral. The Company maintains
reserves for potential credit losses and historically such losses, in the
aggregate, have not exceeded management's expectations. The Company purchases a
substantial amount of its inventory products from one principal supplier. If in
the future the supplier were to cease to supply these inventory products,
management believes there are alternative vendors available to meet its needs.
For the year ended September 30, 2005, three customers accounted for $231,000,
$108,000 and $91,000 of the consolidated total revenue, which represented
approximately 51% of the total revenue. For the year ended September 30, 2004,
two customers, other than those in Fiscal 2005, accounted for approximately 72%
of the consolidated total revenue.
The Company maintains cash deposits with financial institutions, which from
time to time may exceed Federally insured limits. The Company has not
experienced any losses and believes it is not exposed to any significant credit
risk from cash. At September 30, 2005, the Company has cash balances on deposit
in two accounts with a financial institution in excess of the Federally insured
limits by a combined total of $437,235.
[21] Intangible Assets
Intangible assets consist of technology, customer relationships and
permits, and are amortized on a straight-line basis over their estimated useful
lives of three to five years. The carrying value of intangible assets will be
reviewed annually by the Company to ensure that impairments are recognized when
the future operating cash flows expected to be derived from such intangible
assets are less than carrying value. Total amortization expense related to the
other intangible assets was approximately $281,000 for each of the years ended
September 30, 2005 and 2004. Intangible assets are summarized as follows:
------------------------------ ----------------- ------------------- ------------------
ACCUMULATED SEPT 30,2005
ASSET TYPE COST AMORTIZATION NET BOOK VALUE
------------------------------ ----------------- ------------------- ------------------
Technology $550,000 $504,166 $45,834
------------------------------ ----------------- ------------------- ------------------
Permits 290,000 161,917 128,083
------------------------------ ----------------- ------------------- ------------------
Customer Relationships 200,000 110,000 90,000
------------------------------ ----------------- ------------------- ------------------
$1,040,000 $776,084 $263,917
================= =================== ==================
Expected amortization over the next three years is as follows:
FISCAL PERIOD AMORTIZATION
2006 $143,834
2007 98,000
2008 22,083
----------
$263,917
==========
F-12
(NOTE C) -Inventories
---------------------
Inventories consist of the following, net of reserve of approximately
$12,000 as of September 30, 2005:
Raw materials $314,850
Finished goods 353,766
--------
$668,616
========
(NOTE D) - Notes Payable
------------------------
On February 2, 2005, the Company raised $100,000 through the issuance of 8%
Senior Secured Convertible Promissory Notes, repayable, together with interest
to April 3, 2005, subject to prepayment in the event of an equity financing in
excess of $2 million, or conversion by the investors into shares of the
Company's common stock at a conversion price of $3.00 per share. The lenders
also received warrants to purchase 5,000 shares of the Company's common stock
F-12
exercisable at $5.60 per share for a period of five years. The allocated fair
value of these warrants are deemed to be immaterial. On February 17, 2005 the
Company repaid this loan together with interest.
During the third quarter of fiscal 2004, the Company raised an aggregate of
$1.5 million through the issuance of 8% Senior Secured Convertible Promissory
Notes ("the Notes"), prior to underwriting fees and expenses. The Company
granted a security interest in substantially all of the assets of the Company.
The Notes were to mature in one year and convert into shares of common stock at
the election of the investor at any time using a conversion price of $4.00 per
share, subject to reduction if certain conditions were not met as of September
30, 2004. The conditions were not met and the conversion price was reduced to
$3.00 per share. The beneficial conversion feature of the Notes, amounted to
$200,000 and as such the amount was recorded as a debt discount and a
corresponding increase to paid-in capital. This amount was being amortized over
the life of the loan (which was accelerated to February 15, 2005). Amortization
for the year ended September 30, 2005 amounted to $150,000, and such amount is
included in interest expense, net in the statement of operations. The financing
was arranged through Sands Brothers International Ltd. ("Sands") which has been
retained by the Company to act as selected dealer for the sale and issuance of
the Notes. Based upon the funds raised, Sands received a six percent fee and an
expense allowance of one percent of the gross proceeds and warrants were valued
at $28,500 using the Black Scholes Model to purchase 71,250 shares of the
Company's common stock at an exercise price of $5.60 per share for a period of
five years. The total fees for the offering were $125,000. The debt issuance
costs were being amortized over the term of the loan(which was accelerated to
February 15, 2005). Amortization for the year ended September 30, 2005 amounted
to $89,542, and such amount is included in interest expense, net in the
statement of operations. On February 15, 2205 the Company closed on a $4.5
million preferred stock equity financing (see Note E). As a condition of this
financing, the holders of the Notes amended and converted their Notes together
with accrued interest, into an aggregate of 15,953 shares of Series C Mandatory
Convertible Preferred Stock and the security interest was terminated.
Notes Payable - Related Party
During the first two quarters of fiscal 2005, the Company was advanced
the principal amount of $145,923 through short term loans until additional
equity funding was secured. The terms of the loans are identical to the terms of
the $100,000 8% Senior Secured Convertible Promissory Note outlined above. The
lenders also received warrants to purchase 7,295 shares of the Company's common
stock exercisable at $5.60 per share for a period of five years. The allocated
fair value of the warrants associated with this advance are deemed to be
immaterial. These short-term loans were provided by executive officers, Messrs.
Aaron, Joels and Koppel who advanced $64,000, $62,357 and $19,566, respectively.
As a condition of this financing the holders of the Notes exchanged 50% of the
Company's indebtedness for 728 shares of Series C Mandatory Convertible
Preferred Stock and on February 15, 2005 were paid the balance of their notes
inclusive of interest.
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 were
secured by a first lien on any royalties received by Opus Diagnostics Inc. from
Seradyn, Inc. in accordance with their Royalty Agreement. For every sixty
dollars ($60.00) loaned, the lender received two warrants to purchase one share
of Common Stock, exercisable at $5.00 per share for a period of five years. The
warrants were valued at $27,400 using the Black Scholes Model and such amount
was recorded as a debt discount and a corresponding increase to paid in-capital.
The discount was being amortized over the life of the loan(which was accelerated
to February 15, 2005). For the year ended September 30, 2005, the Company
recorded an additional interest expense related to this discount of
approximately $15,200, and that amount is included in interest expense, net in
the statement of operations. On February 15, 2005 the Company closed on a $4.5
million preferred stock equity financing ( see Note E). As a condition of this
financing, the holders of the Notes converted their notes into an aggregate of
5,000 shares of Series C Mandatory Convertible Preferred Stock and the security
interest was terminated.
(NOTE E) - Equity Financing
---------------------------
On February 15, 2005 the Company closed on a $4.5 million preferred stock
equity financing transaction before financing fees and expenses of approximately
$435,000. As part of this financing transaction, the Company issued 45,000
shares of Series C Mandatory Convertible Preferred Stock ("Series C Stock") at a
stated value of $100 per share. The Company also issued Series A Warrants to
purchase an aggregate of 465,517 shares of common stock at an exercise price of
$5.60 per share for a period of five years. In addition, the Company issued
Series B Warrants to purchase an aggregate of 155,172 shares of common stock at
an exercise price of $2.90 per share for a period of five years exercisable
after nine months, subject to a termination condition as defined in the warrant
agreement. The conversion of the Series C Stock was subject to the effectiveness
of a 1:20 reverse split of the Company's common stock. The Company determined
F-13
that the preferred stock was issued with an effective beneficial conversion
feature of approximately $125,000 based upon the relative fair values of the
preferred stock and warrants. The Company calculated the fair value of the
warrants using the Black Scholes valuation method. Upon conversion of the Series
C stock to common shares on April 5, 2005 the Company recorded a deemed
preferred stock dividend of approximately $125,000; which represents the
beneficial conversion feature of the Series C Stock (see Note F).
Simultaneously, the Company converted the short-term secured debt
outstanding in the aggregate of approximately $2.1 million inclusive of
interest, together with $72,962 of unsecured indebtedness, into 21,681 shares of
Series C Stock. As part of the condition for raising the equity financing,
holders of a majority of the outstanding shares irrevocably undertook to effect
a 1:20 reverse stock split of any outstanding shares of common stock ("the
Reverse Split"). Upon the effectiveness of the Reverse Split ("the Mandatory
Conversion Date"), the new equity investors and the debt holders who converted
their debt agreed to automatically convert their Series C Stock into common
shares at a conversion price of $2.90 per share and/or 2,299,345 shares of the
Company's common stock (post reverse split), subject to adjustment in certain
circumstances, (see Note F). The Company also agreed to increase the number of
independent directors by one additional director.
(NOTE F) - Reverse Split
------------------------
On April 5, 2005, the Company effected the Reverse Split. On such date, the
66,681 outstanding shares of Series C Stock automatically converted into
2,299,345 shares of the Company's common stock. As a result of the Reverse
Split, the Company has outstanding 3,321,673 shares of common stock. The reverse
split did not change the number of authorized shares of common and preferred
stock. All share and per share information in the accompanying financial
statements have been restated to reflect the 1 for 20 reverse stock split.
(NOTE G) - Employee Benefits
----------------------------
The Company sponsors a Qualified Retirement Plan under section 401(k) of
the Internal Revenue Code. Caprius employees become eligible for participation
after completing 3 months of service and attaining the age of twenty-one. For
the years ended September 30, 2005 and 2004 the Company has not adopted a
matching option to the plan.
(NOTE H) - Income Taxes
-----------------------
At September 30, 2005 the Company had a deferred tax asset totaling
approximately $13,670,000 due primarily to net operating loss carryovers in the
United States. A valuation allowance was recorded in 2005 for the full amount of
this asset due to uncertainty as to the realization of the benefit. The change
in the valuation allowance in 2005 increased by approximately $570,000.
The Company does not file its tax return on a consolidated basis, United
States tax rules prohibit the consolidation of its foreign subsidiary. The
Company's Israeli subsidiary had carried forward net operating losses for tax
purposes in the amount of approximately $7,400,000. The Company recorded a full
valuation allowance for these carryforward losses.
At September 30, 2005 the Company had available net operating loss
carryforwards for United States tax purposes, expiring through 2024 of
approximately $40.0 million. The Internal Revenue Code contains provisions which
will limit the net operating loss carry forward available for further use if
significant changes in ownership interest of the Company occurs. Due to the
significance of the Company's historical losses it has not undertaken an
evaluation to determine whether the Company has triggered any limitations on the
use of the net operating loss carryforwards.
As a result of the Company's significant operating loss carryforward and
the corresponding valuation allowance, no income tax benefit has been recorded
at September 30, 2005 and 2004. The provision for income taxes using the
statutory Federal tax rate as compared to the Company's effective tax rate is
summarized as follows:
September 30,
2005 2004
---- ----
Tax benefit at statutory rate (34.0%) (34.0%)
Adjustments for change in valuation allowance 34.0% 34.0%
----- -----
- -
===== =====
(NOTE I) - Commitments and Contingencies
----------------------------------------
[1] Operating leases
The Company leases facilities under non-cancelable operating leases
expiring at various dates through fiscal 2006. Facility leases require the
Company to pay certain insurance, maintenance and real estate taxes. Lease
expense for all facility leases totaled approximately $126,175 and $122,843 for
the years ended September 30, 2005 and 2004, respectively, and was recorded as
part of selling, general and administrative expenses within the statement of
operations.
F-14
Future minimum rental commitments under operating leases are as follows:
Fiscal Year Amount
----------- --------
2006 $ 43,100
========
On April 18, 2005 the Company entered into an agreement, commencing May 1,
2005 for certain services related to investor relations and financial media
program for a one year period. The agreement is renewable unless terminated by
either party. According to the agreement, the Company agreed to pay fees of
$96,000 per annum in equal monthly installments of $8,000. Investor relations
and financial media expense totaled approximately $45,000 and $ 13,000 for the
years ended September 30, 2005 and 2004 respectively, and were recorded as part
of selling, general and administrative expenses within the statement of
operations.
2] Legal proceedings
In June 2002, Jack Nelson, a former Caprius executive officer and director,
commenced two legal proceedings against the Company, 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, the Company resolved the State
Court Action by making an Offer of Judgment which was accepted by the plaintiff.
Under the terms of the Offer of Judgment, which was made without any admission
or finding of liability on part of the defendants, the Company 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 the Company 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, the Company was served with a complaint naming the
Company and its principal officers and directors in the Federal District Court
of New Jersey as a purported class action (the "Class Action"). The allegations
in the complaint cover the period between February 14, 2000 and June 20, 2002.
The initial plaintiff is a relative of the wife of the plaintiff in the State
Court Action and Federal Derivative Action. The allegations in the purported
Class Action were substantially similar to those in the other two Actions. The
complaint sought an unspecified amount of monetary damages, as well as the
removal of the defendant officers as shareholders.
On May 3, 2004, in a decision separate from the decision in the Federal
Derivative Action, the Court granted the defendants' motion and dismissed the
Class Action. The Federal securities claims asserted by the plaintiffs were
dismissed with prejudice, and having dismissed all Federal law claims, the Court
declined to exercise jurisdiction over the remaining state law claims and
dismissed those claims without prejudice. On May 14, 2004, the plaintiffs filed
a motion for reconsideration, which defendants opposed and subsequently this
motion for reargument was denied. The plaintiff did not file a notice of appeal
during the statutory time period.
In July 2005, the Company entered into a Settlement Agreement and Polices
Release with the carrier of the Company's Directors and Company Reimbursement
Polices and received a payment of $350,000 under such Policies as a settlement
of the Company's claim for expenses incurred in the litigations described above.
The settlement fee received in July 2005 from the insurance company has been
recorded as part of other income in the statement of operations. At that time,
the independent directors determined that the Company will not seek contribution
from Messrs. Aaron and Joels for any portion of our net costs in defending those
litigations. The Company did not advance any amounts to such individuals in
connection with the litigations.
F-15
(NOTE J) - 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 57,989 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] Stock options
During 2002, the Company adopted a stock option plan for both employees and
non-employee directors. The employee and non-employee Directors stock option
plan provides for the granting of options to purchase not more than 75,000
shares of common stock. The options issued under the plan may be incentive or
nonqualified options. The exercise price for any options will be determined by
the option committee. The plan expires May 15, 2012. During October 2002, the
Company granted a total of 48,050 options to officers, directors, and employees
under the 2002 plan. During May 2004, 3,750 options priced at $4.00 were granted
to a director of the Company. 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 the time of grant. All options are exercisable at
$3.00 per share vesting one third immediately and the balance equally over a two
year period. As of September 30, 2005, there were 51,800 options outstanding
under the 2002 plan, exercisable at prices from $3.00 to $4.00 per share.
During 1993, the Company adopted a employee stock option plan and a stock
option plan for non-employee directors. The employee stock option plan provides
for the granting of options to purchase not more than 50,000 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 10,000 shares of common stock. In accordance with the Plan, 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.
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, 2003 48,050 $3.00 $3.00
Granted in 2004 3,750 $4.00 $4.00
----- ----- -----
Balance, September 30, 2004 51,800 $3.00 - $4.00 $3.07
Granted in 2005 0 - -
---------------------------------------------
Balance, September 30, 2005 51,800 $3.00 - $4.00 $3.07
=========================== ====== ============= =====
F-16
Stock option transactions not covered under the years 2002 and 1993 option
plans in the fiscal year 2004 and 2005 are as follows:
Weighted Average
Number of Option Price Exercise Price
Shares Per Share Per Share
------ --------- ---------
Balance, September 30, 2003 102,628 $2.00-$402.00 $10.40
Cancelled in 2004 (50,064) $15.00-316.00 $18.00
-------- ------------- ------
Balance, September 30, 2004 52,654 $2.00-$402.00 $3.40
Cancelled in 2005 (64) $402.00 $402.00
---- ------- -------
Balance, September 30, 2005 52,500 $2.00 - $3.00 $2.95
=========================== ====== ============= =====
Stock option transactions under the 1993 plan:
Weighted Average
Number of Option Price Exercise Price
Shares Per Share Per Share
------ --------- ---------
Balance, September 30, 2003 36,475 $3.00 -$100.00 $4.80
Cancelled in 2004 (125) $58.60 -$100.00 $83.40
----- --------------- ------
Balance, September 30, 2004 36,350 $3.00 -$100.00 $4.60
Cancelled in 2005 (1,375) $3.00 -$100.00 $10.32
------- -------------- ------
Balance, September 30, 2005 34,975 $3.00 -$100.00 $4.27
=========================== ====== ============== =====
The following table summarizes information about stock options outstanding
at September 30, 2005:
Outstanding Options
---------------------------------------------------
Weighted-
Number Average Weighted-
Range of Outstanding at Remaining Average
Exercise September 30, Contractual Exercise
Prices 2005 Life (years) Price
---------------------------------------------------------------------------
$2.00 - $5.00 138,800 6.37 3.12
58.60 400 .85 58.60
100.00 75 .70 100.00
---------------------------------------------------------------------------
$2.00 - $100.00 139,275 6.35 3.32
===========================================================================
F-17
Exercisable Options
---------------------------------------------------
Weighted-
Number Average Weighted-
Range of Outstanding at Remaining Average
Exercise September 30, Contractual Exercise
Prices 2005 Life (years) Price
---------------------------------------------------------------------------
$2.00 - $5.00 137,550 6.35 3.11
58.60 400 .85 58.60
100.00 75 .70 100.00
---------------------------------------------------------------------------
$2.00 - $100.00 138,025 6.33 3.32
===========================================================================
Range of Weighted
Total Stock options vested Exercise Average Exercise
and exercisable at Number of Price Per Price
September 30, 2005 Share Per Share
-----------------------------------------------------------------------------
Plan shares 85,525 $3.00-$100.00 $3.54
Non-plan shares 52,500 $2.00- $3.00 $2.95
------ ------------- -----
138,025 $2.00-$100.00 $3.32
======= ============= -----
(NOTE K) - Acquisition of majority interest in MCM Environmental Technologies,
------------------------------------------------------------------------------
Inc.
----
In December 2002, the Company closed the acquisition of its initial
investment of 57.53% of the capital stock of MCM Environmental Technologies Inc
("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, the Company 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. As part of the
Stockholders Agreement dated December 17, 2002, there were certain provisions
relating to performance adjustments for the twenty four month period post
closing. As a consequence, the Company's ownership interest increased by 5% in
the fiscal year 2004 and by an additional 5% in the fiscal year 2005.
Furthermore, the Company's equity ownership increased with the conversion of
various loans made to MCM and cash calls made by MCM during fiscal 2005. As of
September 30, 2005, the Company's interest in MCM increased to 96.66%.
(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 the Company, EMT and the other parties thereto. The
purchase price was $412,000. In addition, the Company was required to provide
certain specified transitional services for up to 180 days pursuant to a
Management Services Agreement. During the first quarter of fiscal year 2005, the
parties agreed to settle the net outstanding balance in a lump sum payment of
$66,000 which was paid in two equal installments in December 2004 and January
2005. The sale of the Strax business has been reflected as discontinued
operations in the accompanying consolidated financial statements.
(NOTE M) -Geographic Information
--------------------------------
The Company does not have reportable operating Segments as defined in the
Statements of Financial Accounting No.131 "Disclosures about Segments of an
Enterprise and related information" The method for attributing revenues to
individual customers is based as to the destination to which finished goods are
shipped.
F-18
The Company operates facilities in the United States of America and Israel.
The following is a summary of information by area for the years ended September
30, 2005 and 2004.
FOR THE YEARS ENDED SEPTEMBER 30, 2005 2004
---- ----
Net Revenues:
Israel $398,215 $766,119
United States 450,587 119,342
----------- -----------
Revenues as reported in the accompanying financial $848,802 $885,461
statements =========== ===========
Loss from continuing operations:
Israel $(322,161) $(414,890)
United States (2,216,247) (2,835,073)
------------ ------------
Loss from continuing operations as reported in the $(2,538,408) $(3,249,963)
accompanying financial statements ============ ============
September 30, 2005
Identifiable Assets:
Israel $ 471,865
United States 2,701,272
----------
Total Assets as reported in the accompanying $3,173,137
financial statements ==========
F-19