ITEM 2. PROPERTIES
The Company leases a facility in Wilmington, Massachusetts consisting of approximately 61,000 square feet of office, research and development, manufacturing and warehouse space. The Company has exercised its option to renew its lease as of May 1996 for another 5-year term at a base monthly rental of approximately $37,000. The Company currently subleases approximately 25,000 square feet to a third party for $16,270 per month and subleases approximately 9,400 square feet to MDI, its former subsidiary, for $6,928 per month. The Company believes that the space it currently occupies is adequate for the Company's needs for the foreseeable future.
The Company leases 1,290 square feet of office space in Fort Lee, New Jersey for certain administrative and investor relations personnel pursuant to a lease expiring March 31, 1999, at a base monthly rental of approximately $2,300.
The Company leases space for its breast imaging center at the Faulkner Hospital pursuant to a lease with monthly rental payments of $1,439 expiring in August, 2004, with a five-year renewal option.
The Company leases 8,400 square feet for its comprehensive breast imaging center in Lauderhill, Florida, pursuant to a lease with a monthly rental payment of $9,250. The lease expires on January 31, 1999 and the Company is negotiating for a lease renewal.
The Company leases facilities for its rehabilitation operations in Springfield, and Holyoke, Massachusetts. These facilities include approximately 7,400, and 3,100 square feet, respectively, over lease terms that expire on June 30, 2001 and June 1, 2001, respectively. The current rent for these facilities are $142,000 and $19,000 per annum, respectively, plus operating expenses. In September 1997, a Malden facility was closed and in August, 1998, the Company entered into a lease termination agreement with the landlord which consisted of a termination payment of $34,000 as well as rent and outstanding charges through November 1998.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On January 7, 1998, the Company and Jack Nelson, the Company's Chairman and Chief Executive Officer were served with a complaint in connection with a purported class action brought against them by Dorothy L. Lumsden in the United States District Court of the District of Massachusetts. The complaint contains claimed for alleged violations of Sections 10(b) and 20(a) under the Securities Exchange Act and for common law. Ms. Lumsden purported to bring her action "on behalf of herself and all other persons who purchased or otherwise acquired the common stock of the Company during the period August 10, 1994 through and including December 12, 1997". On February 2, 1998, the Company and Mr. Nelson were served with a second class action complaint naming them as defendants in connection with another action brought in the United States District Court for the District of Massachusetts. This action was brought by Robert Curry and the complaint alleged the same purported class and contained similar allegations and claims as the class action complaint discussed above. On April 24, 1998, the District Court consolidated the two class actions claims into one for pre-trial purposes. On January 7, 1999, the Company announced that it has reached a preliminary settlement in the
shareholder class action in Federal Court in Boston. Under the terms of the settlement, Caprius will make a cash payment of $150,000 and issue 325,000 shares of common stock to Plaintiffs. Caprius' insurance carrier will contribute $100,000 of the cash payment. The settlement also stipulates that in the event Caprius sells all or part of its business within 12 months an additional payment of $75,000 and issuance of 100,000 additional shares will be made by Caprius to plaintiffs. The agreement is subject to final court approval.
In December 1998, the Company filed a complaint against Eric T. Shebar, M.D. ("Shebar"), the former Chief Operating Officer and Medical Director for the Company's motor vehicle accident rehabilitation ("MVA") business, and MVA Center for Rehabilitation, Inc. ("MVA, Inc.") whereby the Company alleges breach of contract and certain misrepresentations and seeks damages in an amount to be determined at trial. The Company filed a preliminary injunction to reach and apply a secured promissory note to MVA, Inc. against damages sought from Shebar and to enjoin against any remedies under default of the Note. The final Note payment of $347,000 was due October 15, 1998. The ruling on the injunction is pending.
Effective November 28, 1995, the Company terminated the Key Employment Agreement, dated May 2, 1995, of John A. Lynch, Chief Executive Officer of MDI ("Lynch Employment Agreement"). In March 1996, Mr. Lynch filed a demand for arbitration seeking a declaratory ruling, equitable relief, monetary damages of approximately $2.0 million and legal fees related to claims arising out of the Lynch Employment Agreement. On September 23, 1997, the arbitration panel ruled in favor of the Company and MDI on substantially all of Mr. Lynch's claims such that the only issues remaining in the Lynch arbitration were for performance unit payments defined in the Lynch Employment Agreement and reasonable attorneys' fees. In July 1998, the arbitration panel ruled in favor of the Company and MRI on the final two issues and a final payment of approximately $200,000 was made to Lynch.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since November 10, 1997, upon the Merger with AMS, the Company's common stock has traded on the NASDAQ Small Cap Market under the symbol ("CAPR"). From May 17, 1996, the Company's common stock traded on the NASDAQ Small Cap Market under the symbol ("ANMR"), from February 1994 to May 16, 1996, it traded on the NASDAQ National Market System and since its inception through February 1994 traded on the over-the-counter market and was listed on the Boston and Pacific Stock Exchanges. Trading in the Warrants (NASDAQ: CAPRW) commenced on August 31, 1995, after the closing of the MDI merger. Prior to the AMS Merger, the Warrants traded under the symbol ("ANMRW").
The following table sets forth, for the calendar quarters indicated, the reported high and low bid quotations per share, as reported on the NASDAQ Small Cap Market Market and NASDAQ National Market System. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. The prices shown below give effect to a reverse stock split of 1:10 that occurred on November 10, 1997.
Common Stock High Low ------------ ---- ---
----
Fourth Quarter 1.729 1.063 Third Quarter 1.542 1.042 Second Quarter 1.709 0.896 First Quarter 2.380 1.272
----
Fourth Quarter 4.38 1.56 Third Quarter 4.10 2.20 Second Quarter 6.56 2.19 First Quarter 6.88 2.19
The Company has paid no dividends on its shares of Common Stock since its inception in July 1983 nor does the Company expect to declare any dividends on its common stock in the foreseeable future.
On December 31, 1998, there were approximately 1,081 holders of record of the Common Stock of the Company. 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. On December 31,1998, there were 7,366,790 shares outstanding.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION OF CAPRIUS
The selected historical financial information of Caprius set forth below has been derived from the consolidated financial statements for the fiscal year December 31, 1994, for the nine-month period ended September 30, 1995, and for the twelve-month periods ended September 30, 1998, 1997, 1996 and 1995. The financial statements for each of years presented, except for the twelve-months ended September 30, 1995 have been derived from audited financial statements. The financial statements for the twelve-month period ended September 30, 1995 are unaudited. In the opinion of management, such unaudited information includes all adjustments, consisting only of normal recurring consolidated financial statements and related notes included elsewhere herein; see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, ------------------------------------------
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS 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, 1998, 1997 and 1996.
GENERAL
Due to significant changes in the nature of operations of the Company during the past three years, comparisons of results of operations between years may not be meaningful.
RESULTS OF OPERATIONS
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September 30, 1997
Net patient service revenue totaled $3,764,000 for the year ended September 30, 1998 versus $12,436,000 for the year ended September 30, 1997. Cost of service operations totaled $3,616,000 for the year ended September 30, 1998 versus $8,915,000 for the year ended September 30, 1997. The decrease from 1997 to 1998 was largely the result of the US Diagnostic Merger in February 1997, partially offset by net patient revenue from the Company's Aurora start-up at the Faulkner Centre of $302,000 for the year ended September 30, 1998. This revenue is expected to increase with increased patient volume and with the start-up of Aurora Systems at the University of Arkansas, Englewood Hospital in New Jersey, and Magee Womens Hospital in Pennsylvania.
Management fees and other revenues for the year ended September 30, 1997, included a $70,000 settlement with an equipment manufacturer associated with the delay in delivery of imaging equipment.
Research and development reflects the change in the accounting treatment of AMS from equity to consolidation accounting. Purchased research and development reflects the portion of the AMS purchase price allocated to research and development projects in process.
Selling, general and administrative expenses totaled $5,166,000 for the year ended September 30, 1998 versus $3,870,000 for the year ended September 30, 1997. This increase reflects the effects of the US Diagnostic Merger offset by the increased efforts in marketing, promoting and developing Aurora Systems installations.
Loss on sale of imaging business reflects the accounting for the US Diagnostic Merger in February 1997.
Write down of intangibles in 1998, in the amount of $1,900,000, reflects the reduction in goodwill related to the Company's Rehabilitation Services business based on a review of undiscounted future cash flows.
Other income for the year ended September 30, 1997, includes a gain of $223,000 from the sale of certain equipment.
Minority interests in net income of consolidated entities reflects the share of income allocated to MDI's joint venture partners. Equity in net loss of unconsolidated subsidiary reflects the Company's share of losses in AMS prior to the AMS Merger.
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30,
Net patient service revenue totaled $12,436,000 for the year ended September 30, 1997 versus $25,481,000 for the year ended September 30, 1996. Cost of service operations totaled $8,915,000 for the year ended September 30, 1997 versus $16,206,000 for the year ended September 30, 1996. These decreases were largely the result of the MDI merger in February 1997 partially offset by increased rehabilitation service revenues and expenses associated with the new MVA centers established in the second and third quarters of fiscal 1996.
Selling, general and administrative expenses totaled $3,870,000 for the year ended September 30, 1997 versus $4,255,000 for the year ended September 30, 1996. This decrease is due to the change in the accounting treatment of the Company's investment in AMS from consolidation to equity accounting and due to the MDI merger.
Minority interests in net income of consolidated entities consists of earnings allocated to MDI's joint venture partners. Prior to September 1996, the allocated earnings were offset by losses allocated to the AMS minority shareholders. The equity in net loss of unconsolidated subsidiary reflects the Company's equity share of the AMS loss subsequent to September 1996 and prior to the AMS Merger.
LIQUIDITY AND CAPITAL RESOURCES
The Company had available cash and cash equivalents of $1,791,476 at September 30, 1998. The Company intends to utilize the funds for the continuing development of the Aurora dedicated breast imaging system while the Company continues its efforts to identify a Strategic partner for its Aurora technology and for the opening of breast imaging centers. Unless the Company successfully identifies a Strategic Partner, the Company will have difficulty in pursuing its plans to acquire comprehensive breast care centers. Furthermore, if no Strategic Partner is identified, the Company may be unable to implement its plan to acquire breast care centers and the Company's viability could be threatened. Accordingly, the auditors report on the Company's 1998 financial statements contains an explanatory paragraph expressing substantial doubt about the Company's ability to continue as a going concern.
The significant cash flows used for investing activities for the year ended September 30, 1998 consists primarily of $1,981,000 for medical equipment additions. Cash flows from financing activities include $2,106,000 of proceeds from financing of medical equipment, offset by principal payments on equipment debt. Cash used for operations amounted to $8,378,000.
Since February 1997, the Company has funded its operations principally through the cash obtained from the MDI merger.
INFLATION
To date, inflation has not had a material effect on the Company's business. The Company believes that the effects of future inflation may be minimized by controlling costs and increasing efficiency through an increase in the volume of MRI examinations performed.
YEAR 2000 SYSTEMS
The Company has undertaken a review concerning the ability of its internal information systems to handle date information and to function appropriately from and after January 1, 2000, and does not believe that the total cost to address any changes required as a result of the so-called "Year 2000 Problem" will be material. In addition, the Company has evaluated the impact of possible Year 2000 problems encountered by its suppliers and customers upon the Company and does not believe that any problem would have material effect upon the Company.
The Company is including the following cautionary statement in this Annual Report of Form 10-K to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Certain statements contained herein are forward-looking statements and accordingly involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitations, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectation, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward-looking statements: technological advances by the Company's competitors, changes in health care reform, including reimbursement programs, capital needs to fund any delays or extensions of research programs, delays in product development, lack of market acceptance of technology and the availability of capital on terms satisfactory to the Company. The Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 and the Index therein for a listing of the financial statements and supplementary data as a part of this report.
ITEM 9.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None, except as described in Form 8-K, dated June 3, 1998. (See below)
Effective April 1, 1998 the Boston office of Richard A. Eisner & Company, LLP ("RAE") was merged into the Boston office of BDO Seidman, LLP ("BDO"). This merger resulted in RAE no longer having an office in the Boston area and Caprius, Inc. ("the Company") concluded that it would be appropriate to select a new accounting firm. At a meeting of the Audit Committee of the Company on June 3, 1998, it was approved that the Company would retain BDO to serve as its independent auditors, effective immediately. During the Company's two most recent fiscal years and through June 3, 1998, there were no disagreements between the Company and RAE on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which disagreement, if not resolved to the satisfaction of RAE, would have caused it to make reference to the subject matter of the disagreements in connection with its report on the audited financial statements for such years.
The reports of RAE on the financial statements of the Company for the past two fiscal years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that RAE's report on the Company's financial statements for the fiscal year ended September 30, 1996 contained a statement expressing substantial doubt about the Company's ability to continue as a going concern.
During the two most recent fiscal years and through June 3, 1998 there have been no reportable events (as defined in Regulation S-K item 304(a)(1)(v)).
Prior to the engagement of BDO, there were no discussions with representatives of said firm regarding (i) the applications of any accounting principles to a specific or completed transaction, (ii) the type of audit opinion that might be rendered on the Company's financial statements, or (iii) any matter that was the subject of disagreement with the Company's former auditor on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
The Company requested that RAE furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not RAE agreed with the above statements. A copy of such letter, dated June 8, 1998, is filed as Exhibit 16 to Form 8-K.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are:
Name Age Position - ---- --- --------
Jack Nelson(1) 47 Chairman of the Board, Chief Executive Officer and Treasurer
Robert Spira, MD(1)(3) 49 Vice Chairman of the Board
Enrique Levy (1) 60 President, Chief Operating Officer and Director
Steven J. James 43 Chief Financial Officer and Secretary
Sol Triebwasser, PhD(2) 76 Director
Alison Estabrook, MD(2) 46 Director
Bernard Weiner, MD (3) 50 Director
Susan S. Bailis(2) 53 Director
Daniel E. Straus (3) 41 Director
- -------------------- (1) Member of the Executive Committee. (2) Member of the Audit Committee. (3) 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:
JACK NELSON. Mr. Nelson has been Chairman of the Board since June 1991 and Treasurer since November 1990. From 1976 through 1993, Mr. Nelson had been engaged in the private practice of law as senior partner with the law firm of Zaslowsky, Marx & Nelson in New York, New York. Since January 1994, he has been employed full-time with the Company. Mr. Nelson serves on the Board of Directors of Advanced Machine Vision, Inc., a publicly traded company (NASDAQ: AMVC). Mr. Nelson holds a B.A. degree from Yeshiva University and J.D. degree from Hofstra University School of Law.
ROBERT SPIRA, M.D. Dr. Spira has been a director of the Company since September 1990 and Vice Chairman since February 1994. Since October 1992, he has been the Director of the Department of Gastroenterology at St. Michael's Medical Center in Newark, New Jersey, and for more than five years prior thereto, he served as Chief of Gastrointestinal Endoscopy at St. Michael's Medical Center. Dr. Spira is a graduate of New York University Medical School, a
past president of the New Jersey Society for Gastrointestinal Endoscopy and President-elect of the New Jersey Society of Gastroenterology
ENRIQUE LEVY. Mr. Levy has been President and Chief Operating Officer since October 1995 and a Director since August 31, 1995. From May 1994 to October 1995 he was at Xerox Graphic Systems, Harrison, New York, a venture of Xerox Corporation. From April 1989 to May 1994, he was Executive Vice President of Worldwide Process Technologies, Allendale, New Jersey, a manufacturer of process systems and equipment for the web handling and film and paper coating industries. Prior to 1989, he was President and Chief Executive Officer of Polychrome Corporation, an international manufacturer of supplies to the graphic arts and printing industry. He holds a B.S. in Chemical Engineering from the Louisiana State University.
STEVEN J. JAMES Mr. James has been Chief Financial Officer since February 1997. From December 1993 through February 1997, he served as Chief Financial Officer of MDI. Mr. James joined MDI as controller in 1988 and served as MDI's Vice President of Finance from September 1992 to December 1993. Mr. James is a Certified Public Accountant and a member of the AICPA and the Massachusetts Society of CPAs. He is a graduate of Bentley College with a B.S. in Accounting.
SOL TRIEBWASSER, PH.D. Dr. Triebwasser has been a director of the Company since July 1984. Until recently, Dr. Triebwasser was Director of Technical Journals and Professional Relations for the IBM Corporation in Thornwood, New York. Since receiving his Ph.D. in physics from Columbia in 1952, he had managed various projects in device research and applications at IBM. Dr. Triebwasser is a fellow of the Institute for Electrical and Electronic Engineers, the American Physical Society and the American Association for the Advancement of Science.
ALISON ESTABROOK, M.D. was a director of AMS for the period from August 29, 1996 through November 10, 1997, whereupon she became a director of the Company. Since 1992, she has been an Associate Attending Physician at Columbia Presbyterian Hospital and Associate Professor of Clinical Surgery at Columbia University. From 1985 through 1995, Dr. Estabrook served as Director of the Breast Clinic and since 1991 she has been the Chief of Breast Service at Columbia University. Dr. Estabrook serves on the quality assurance committee of the Division of Breast Surgery at Columbia Presbyterian Hospital. She received the Outstanding Woman Doctor of the Year Award in 1989. Dr. Estabrook holds a B.A. degree from Barnard College and is a graduate of New York University School of Medicine.
BERNARD WEINER, M.D. was a director of AMS for the period from June 29, 1995 through November 10, 1997, whereupon he became a director of the Company. Since 1985, Dr. Weiner has been the Director of Nephrology and Hemodialysis at Westchester Square Medical Center. Since 1980 Dr. Weiner has been Assistant Clinical Professor in the Department of Medicine at Albert Einstein College of Medicine. Dr. Weiner has written articles in several medical publications and is a member of American College of Physicians, the National Kidney Foundation, the American Society of Internal Medicine and the International Society of Nephrology.
SUSAN S. BAILIS was elected a director of the Company on November 10, 1997. Ms. Bailis has served since 1985 as President and Chief Executive Officer of The A-D-S group, a wholly-owned subsidiary of The Multicare Companies, Inc. ("Multicare"), a NYSE listed company that was acquired by Genesis Health Ventures. Prior to her employment with The A-D-S Group, Ms.
Bailis served as Associate Director (1983-1985) and Director of Social Services (1977-1985), of the New England Medical Center. Ms. Bailis serves as President of the Massachusetts Extended Care Federation and a Trustee of Simmons College and also serves as a board member of numerous charitable organizations. She received her B.S. from Brandeis University and her M.S.W. from Simmons College.
DANIEL E. STRAUS was elected a director of the Company on November 10, 1997. Mr. Straus has served as President, Co-Chief Executive Officer and director of Multicare since September 1992. From 1978 to 1984 he was involved in the business of Multicare's predecessors. Mr. Straus received his B.A. degree in 1978 from Columbia University and his J.D. degree in 1981 from New York University Law School.
All directors hold office until the next annual meeting of stockholders of the Company or until their successors are elected and qualified. Executive officers hold office until their successors are chosen and qualified, subject to earlier removal by the Board of Directors. See "Security Ownership of Certain Beneficial Owners and Management."
The Board of Directors met, either in person or telephonically, four times in fiscal 1998. Each of the directors attended or participated in 75% or more of the meetings.
The Board of Directors has standing Executive, Audit and Compensation/Option Committees.
The Executive Committee exercises all the powers and authority of the Board of Directors in the management and affairs of the Company between meetings of the Board of Directors, to the extent permitted by law. The executive committee met on a bi-weekly basis during fiscal 1998.
The Audit Committee reviews with the Company's independent 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 met during fiscal 1998.
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. The Compensation/Option Committee met during fiscal 1998.
ITEM 11.
ITEM 11. 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, 1998. The Company was reimbursed by AMS for a portion of the executive salaries pursuant to the Shared Services Agreement prior to the AMS Merger.
(1) Mr. Nelson became a full-time employee beginning January 1, 1994. (2) Mr. Gaynor became President of MDI beginning December 1, 1995 and terminated his Employment Agreement effective January 31, 1997, whereupon pursuant to the merger of MDI with US Diagnostic, he received $247,500 in severance, plus accrued salary and vacation pay in the amount of $60,380. (3) Paid to Mr. Nelson for the purpose of reimbursing him for transportation and other expenses; and to Messrs. Levy, Gaynor and Kwolyk for the purpose of reimbursing them for transportation. (4) Includes salary, all other compensation and stock options awarded during the year ended September 30, 1997. (5) Mr. Levy became President and COO beginning October 1, 1995. Mr. Levy's salary includes a "signing" bonus of $30,000. (6) Mr. Kwolyk was Vice President, Sales and Marketing until May 1, 1997 when his contract was terminated. (7) Mr. James became Chief Financial Officer on March 31, 1997. Total salary includes $150,000 in satisfaction of severance payments due from the sale of MDI. (8) The Company has committed to issue restricted shares of the Company's common stock
to Mr. Nelson and Mr. Levy in the amount of 125,000 and 100,000 shares, respectively. (See "Employment Agreements" for description). In addition, compensation includes bonus of $150,000 and $125,000, respectively, as approved by the Compensation Committee.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Jack Nelson (the "Nelson Employment Agreement"), employing him as Chairman of the Board, Chief Executive Officer and Treasurer. The Agreement was originally entered into on December 20, 1995, whereby Mr. Nelson was employed by both the Company and AMS. Effective with the AMS Merger, Mr. Nelson became fully employed by the Company. The Nelson Employment Agreement includes an aggregate base salary of $258,500, with any additional increases in base salary thereafter being instituted by the Board of Directors. Effective October 30, 1998, Mr. Nelson took a voluntary 25% salary reduction such that his base salary is $193,875. At Mr. Nelson's discretion, base salary can be restored to $258,500 at any time.
Effective February 19, 1998, the Board of Directors approved an Amended and Restated Employment Agreement for Mr. Nelson whereby the following changes were instituted: 1) Mr. Nelson received 125,000 of an authorized 1,000,000 Units under a Long Term Incentive Plan ("LTIP") established by the Company. The LTIP provides for a bonus award of $15.00 for each Unit granted to the participant and are dependent on the Company achieving earnings of $7.5 million or earnings per share of $0.50 in any of fiscal years 1998, 1999 or 2000; 2) Mr. Nelson was to be granted 125,000 shares of Restricted Common Stock which is restricted as to transferability, pledge or disposition until such time as the shares issued become Vested. Vesting to occur on the earliest of a) January 1, 2007; b) March 1, 2001, provided that Company achieves Net Income or earnings per share goals as set in the LTIP; c) change of control of the Company (as defined in the Agreement); d) termination of Mr. Nelson's employment, unless for "cause", as defined. The restricted shares will be issued in fiscal year 1999; 3) 300,000 stock options were authorized to Mr. Nelson under the 1993 Employee Stock Option Plan, of which 100,000 options have been granted at an exercise price of $1.28 per share expiring February 19, 2008. The balance of 200,000 will be granted when more shares become available under the Plan or the options authorized under the Plan are increased. The options are exercisable immediately into Restricted Common Stock with vesting provisions similar to those outlined in the Restricted Common Stock grant in 2 above. Mr. Nelson will be eligible to receive a bonus of between $125,000 and $200,000 for each fiscal year, as determined by the Compensation Committee based on performance.
The Nelson Employment Agreement further provides that if Mr. Nelson terminates his employment "for cause" or the Company terminates his employment "without cause" (as each such term is defined in the Nelson Employment Agreement), or upon Mr. Nelson's death or disability, Mr. Nelson or his representative shall receive his annual base salary as paid by the Company or AMS, as the case may be, for two full years from the date of his termination, less any amounts received under the Company's insurance policies. In the event that the Company, without the consent of Mr. Nelson, assigns its rights and obligations under either of the Nelson Employment Agreement to any company with or into which the Company may merge or consolidate, or to which the Company may sell or transfer all or substantially all of its assets or of which 50% or more of the equity investment and of the voting control is owned, directly or indirectly, by the Company, and if the assignee was not previously part of a consolidated group with the Company, then Mr. Nelson may terminate the applicable Nelson Employment Agreement within thirty days after notice of assignment, and he shall receive 2.99 times his full annual base salary plus any bonuses, but not to exceed such amount which would result in an excise tax.
The Company has an Employment Agreement with Enrique Levy (the "Levy Employment Agreement"), employing him as President and Chief Operating Officer. The Agreement was originally entered in September 1995 whereby Mr. Levy was employed by both the Company and AMS. Effective with the AMS Merger, Mr. Levy became fully employed by the Company. The Levy Employment Agreement includes a base salary of $247,500, with any additional increases in base salary thereafter being instituted by the Board of Directors. Mr. Levy also received a $30,000 "signing" bonus. Effective October 30, 1998, Mr. Levy took a voluntary 25% salary reduction such that his base salary is $185,625. At Mr. Nelson's discretion, base salary can be restored to $247,500 at any time.
Effective February 19, 1998, the Board of Directors approved an Amended and Restated Employment Agreement for Mr. Levy whereby the following changes were instituted: 1) Mr. Levy received 100,000 of an authorized 1,000,000 Units under a Long Term Incentive Plan ("LTIP") established by the Company. The LTIP provides for a bonus award of $15.00 for each Unit granted to the participant and are dependent on the Company achieving earnings of $7.5 million or earnings per share of $0.50 in any of fiscal years 1998, 1999 or 2000; 2) Mr. Levy was to be granted 100,000 shares of Restricted Common Stock which is restricted as to transferability, pledge or disposition until such time as the shares issued become Vested. Vesting to occur on the earliest of a) January 1, 2007; b) March 1, 2001, provided that Company achieves Net Income or earnings per share goals as set in the LTIP; c) change of control of the Company (as defined in the Agreement); d) termination of Mr. Levy's employment, unless for "cause", as defined. The restricted shares will be issued in fiscal year 1999; 3) 250,000 stock options were authorized to Mr. Levy under the 1993 Employee Stock Option Plan, of which 100,000 options have been granted at an exercise price of $1.28 per share expiring February 19, 2008. The balance of 150,000 will be granted when more shares become available under the Plan or the options authorized under the Plan are increased. The options are exercisable immediately into Restricted Common Stock with vesting provisions similar to those outlined in the Restricted Common Stock grant in 2 above. Mr. Levy will be eligible to receive a bonus of between $100,000 and $200,000 for each fiscal year, as determined by the Compensation Committee based on performance.
The Levy Employment Agreement further provides that if Mr. Levy terminates his employment "for cause" or the Company terminates his employment "without cause" (as such term is defined in the Levy Employment Agreement), or upon Mr. Levy's death or disability, Mr. Levy or his representative shall receive his annual base salary for two full years from the date of his termination, less any amounts received under the Company's insurance policies. In the event that the Company, without the consent of Mr. Levy, assigns its rights and obligations under the Levy Employment Agreement to any company with or into which the Company may merge or consolidate, or to which the Company may sell or transfer all or substantially all of its assets or of which 50% or more of the equity investment and of the voting control is owned, directly or indirectly, by the Company, and if the assignee was not previously part of a consolidated group with the Company, then Mr. Levy may terminate the Levy Employment Agreement within thirty days after notice of assignment, and he shall receive 2.99 times his full annual base salary plus any bonuses, but not to exceed such amount which would result in an excise tax.
On November 1, 1996, each member of senior management accepted the opportunity to have the exercise price of all outstanding stock options held by them repriced to the market price of the Company's Common Stock as of August 22, 1996 ($0.50) if, in exchange for such repricing, such member of senior management agreed to defer 17% of his salary for one year, at which time the Compensation Committee would determine whether additional deferrals were necessary. Messrs. Nelson, Levy and Gaynor agreed to the repricing of options held by them on
such terms.
As of March 31, 1997, Steven J. James' employment agreement was amended to provide that upon the MDI merger his employment as Vice President of Finance/ CFO would be with both Caprius and AMS, instead of MDI, at an annual base salary of $125,000 split between the two companies, terminating on June 30, 1999, and each company would grant to him options for the purchase of 2,500 shares (on a post-reverse stock split basis) of its common stock at the market price upon the respective date of grant. The change of control provisions in his employment agreement were terminated upon payment of $150,000 to Mr. James in satisfaction of the application of such provisions to the entry into the MDI/ US Diagnostic merger agreement.
Upon the Merger of AMS with the Company, the Company assumed all obligations pursuant to the above employment agreements.
The Company does not have any annuity, retirement, pension or deferred compensation plan or other arrangement under which any executive officers are entitled to participate without similar participation by other employees.
(1) Reflects the Company's 1-for 10 Reverse Stock Split
- -------------------------------------------------------------------------------- FISCAL YEAR END OPTION VALUE
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT SEPT. 30, 1998 AT SEPT. 30, 1998 NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE ($) - ---- ------------------------- --------------------
Jack Nelson 186,000/27,000 $-0-
Steven J. James 18,800/15,500 $-0-
Enrique Levy 170,001/14,999 $-0-
COMPENSATION OF DIRECTORS
Directors who are employees of the Company are not paid any fees or additional compensation for services as members of the Company's Board of Directors or any committee thereof. Although non-employee Directors do not receive Board fees, they are entitled to Options to purchase shares of the Company's Common Stock. Each person that becomes a member of the Board is granted Options to purchase 15,000 shares of the Common Stock. Thereafter, a Director is granted Options to purchase 10,000 shares annually if that person has been a Director of the Company for more than six months. Pursuant to the 1993 Directors Stock Option Plan for Non-Employee Directors (the "1993 Directors Plan"), which was amended in December 1997, the number of shares available under the 1993 Directors Plan has been increased to 200,000 shares on a post-Reverse Stock Split basis. See "Submission of matters to a Vote of Security Holders."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation/Option Committee are Robert Spira, M.D., Bernard Weiner, M.D. and Daniel E. Straus, none of whom is an executive officer or employee of the company or its subsidiaries. The Compensation Committee met during Fiscal 1998 to review executive compensation and, primarily based on the report of a compensation consultant to the Company, obtained approval from the Board of Directors for changes to executive compensation. See "Executive Compensation - Employment Agreements".
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1998, 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 of the Company, and (iii) all directors and executive officers as a group:
- -------------- * Less than one percent (1%).
(1) All shares of Caprius Common Stock are beneficially owned, and the sole voting and investment power is held by the persons named, except as set forth in the notes below. A person is deemed to be the beneficial owner of shares that can be acquired within 60 days of the date of this table upon exercise of options or warrants.
(2) Includes 32,500 shares owned and 186,000 shares underlying presently exercisable options granted under the 1993 Employee Plan. Excludes (i) 30,200 shares owned by Mr. Nelson's wife and children, as to which shares he disclaims beneficial ownership; (ii) 27,000 shares underlying options granted under the 1993 Employee Plan which are subject to vesting thereunder; (iii) 125,000 shares of restricted stock that the Company has committed to issue (see "Employment Agreements" for description).
(3) Includes 12,000 shares owned and 170,001 shares underlying presently exercisable options granted under the 1993 Employee Plan. Excludes(i) 14,999 shares underlying options granted under the 1993 Employee Plan which are subject to vesting thereunder; and (ii) 100,000 shares of restricted stock that the Company has committed to issue (see "Employment Agreements").
(4) Includes 18,800 shares underlying presently exercisable options granted under the 1993 Employee Plan. Underlying options include 10,000 options granted under the 1993 Employee Plan pursuant to the Merger. Excludes 15,500 share underlying options granted under the 1993 Employee Plan which are subject to vesting thereunder.
(5) Includes 14,000 shares underlying options presently exercisable granted under the 1993 Directors Plan and excludes 1,500 shares underlying options granted under the 1993 Directors Plan, which are currently not exercisable.
(6) Includes 17,000 shares underlying options presently exercisable granted the 1993 Directors Plan and excludes 1,500 shares underlying options granted under the 1993 Directors Plan, which are currently not exercisable.
(7) Includes 9,000 shares underlying options presently exercisable granted under the 1993 Directors Plan and excludes 5,000 shares underlying options granted under the 1993 Directors Plan, which are currently not exercisable.
(9) Includes 11,500 shares underlying options presently exercisable granted under the 1993 Directors Plan and excludes 2,500 shares underlying options granted under the 1993 Directors Plan, which are currently not exercisable.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1992, the Company formed AMS as a subsidiary for the purpose of financing the development of a MRI breast imaging system. Pursuant to the License Agreement, the Company licensed its proprietary technology for such system to AMS, which paid $1,680,000 and issued to the Company 4,000,000 shares of AMS Common Stock, of which 2,750,000 shares were subject to an escrow agreement ("Escrow Agreement"), which has been terminated. In early 1993, AMS completed an initial public offering, whereupon AMS and the Company entered into a shared services agreement ("Shared Services Agreement"). Effective November 10, 1997, upon the Merger of AMS into Caprius, the Shared Services Agreement was terminated.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are filed herewith:
Independent Auditors' Reports
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)(2) The following Financial Statement Schedules are filed herewith: None. All schedules have been omitted because they are inapplicable or not required, or the information is included in the financial statements or notes thereto.
(a)(3) Exhibits, including those incorporated by reference.
Exhibit No. Description - ----------- -----------
2.1 Agreement and Plan of Merger among Registrant, ANMR Acquisition Corp. and MDI, dated May 2, 1995 (incorporated by reference to Annex A to the Joint Proxy Statement/Prospectus to Registrant's Registration Statement on Form S-4, declared effective August 3, 1995 (File No. 33-95302)("Registrant's Form S-4").
2.2 Agreement and Plan of Merger, dated January 20, 1997, by and among Registrant, MDI, MDI Acquisition Corporation and US Diagnostic (incorporated by reference to Exhibit 1 to Registrant's Report of Form 8-K filed January 23, 1997)
2.3 Agreement and Plan of Merger, dated as of June 23, 1997, among Registrant, ANMR/AMS Merger Corp. and AMS (incorporated by reference to Annex A to the Joint Proxy Statement Prospectus that forms part of Registrant's Registration Statement of Form S-4 filed on October 9, 1997.
Exhibit No. Description - ----------- -----------
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. 2084785 ("Registrant's Form S-2"))
3.2 Amendment to Certificate of Incorporation of Registrant filed November 5, 1993 (incorporated by reference to Exhibit 3.2 to Registrant's Form S-4).
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.
3.5 Amended and Restated By-laws of Registrant (incorporated by reference to Exhibit 3.4 to Registrant's Form S-4).
4.1.1 Form of Warrant Agreement between Registrant and American Stock Transfer & Trust Company, as Warrant Agent (incorporated by reference to Exhibit 4 to Registrant's August 1995 Form 8-K).
4.1.2 Form of Warrant Certificate (incorporated by reference to Annex B to the Registrant's Joint Proxy Statement, dated August 31, 1995).
4.2 Specimen Certificate for Common Stock, par value $.01 per share, of Registrant (incorporated by reference to Exhibit 4.2 to Registrant's Form S-4).
4.3.1 Form of Supplemental Agreement relating to Registrant's assumption of MDI's Obligations under the Warrant Agreement between MDI and First Albany Corporation and Janney Montgomery Scott, Inc. (incorporated by reference to Exhibit 4.3.1 to Registrant's Form S-4).
4.3.2 Form of Supplemental Agreement relating to Registrant's assumption of MDI's Obligations under the Warrant Agreement between MDI and Jacob Agam (incorporated by reference to Exhibit 4.3.2 to Registrant's Form S-4).
4.4 Form of Warrant Certificate, dated as of March 6, 1994, issued to Dominick & Dominick Incorporated (incorporated by reference to Exhibit 4.4 to Registrant's Form S-4).
4.5 Certificate of Designation of Series A Preferred Stock of the Company (incorporated by reference to the Company's Current Report on Form 8-K, filed on March 31, 1996 (File No. 0-11914).
4.6 Certificate of Designation of Series B Convertible Redeemable Preferred Stock of Registrant (incorporated by reference to Registrant's Report of Form 8-K, filed September 2, 1997).
10.1 Registrant's 1983 Incentive and Non-Qualified Stock Option Plan, Amended and Restated as of February 1, 1988, and form of incentive stock option (incorporated by reference to Exhibit 10.4 to Registrant's Form S-2).
10.2 Registrant's 1993 Employee Stock Option Plan (incorporated by reference to Exhibit A of the Proxy Statement for Registrant's 1993 Annual Meeting of Stockholders (File No. 0-11914)).
Exhibit No. Description - ----------- -----------
10.3 Registrant's 1993 Directors Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit B of the Proxy Statement for Registrant's 1993 Annual Meeting of Stockholders (File No. 0-19914)).
10.4.1 Amended and Restated Agreement between the Registrant and General Electric Company, dated November 30, 1989 (incorporated by reference to Exhibit 10.6 filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 0-19914)).
10.4.2 Amended 1989 Agreement with General Electric Company, dated March 5, 1993 (incorporated by reference to Exhibit 10.12 filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 0-11914).
10.4.3 Amended 1993 Agreement with General Electric Company, dated March 5, 1993 (incorporated by reference to Exhibit 10.4.2 filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-11914) (the "ANMR 1994 Form 10-K").
10.4.5 1994 Agreement between Registrant and General Electric Company, dated July 29, 1994 (incorporated by reference to Exhibit 10.4.5 to Registrant's Form S-4).
10.4.6 Purchase Agreement between Registrant of GE, dated July 29, 1994 (incorporated by reference to Exhibit 10.4.5 to Registrant's Form S-4.
10.4.7 Registration Rights Agreement, dated august 18, 1997, between the Registrant and GE (incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 8-K, filed September 2, 1997).
10.4.8 Stockholders Agreement, dated August 18, 1997, between the Registrant and GE (incorporated by reference to Exhibit 10.3 to the Registrant's Report on Form 8-K, filed September 2, 1997).
10.4.9 Settlement and Release Agreement, dated August 18, 1997, between the Registrant and GE (incorporated by reference to Exhibit 10.4 to the Registrant's Report of Form 8-K, filed September 2, 1997).
10.4.10 License Agreement, dated August 18, 1997, between the Registrant and GE (incorporated by reference to Exhibit 10.4 to the Registrant's Report of Form 8-K, filed September 2, 1997).
10.5 Employment Agreement between Registrant and Jack Nelson, dated as of December 6, 1993 (incorporated by reference to Exhibit 10.5 filed with the ANMR 1994 Form 10-K).
10.6 Employment Agreement among Registrant, Advanced Mammography Systems, Inc. ("AMS") and Enrique Levy, dated September 17, 1995.
10.7 Employment Agreement between Registrant and Robert L. Kwolyk, dated as of April 25, 1994 (incorporated by reference to Exhibit 10.8 to Registrant's Form S-4).
10.8 Employment Agreement among Registrant, MDI and John A. Lynch, dated May 2, 1995 (incorporated by reference to Exhibit 47 to MDI's Schedule
Exhibit No. Description - ----------- -----------
14D-9 (Amendment No. 18) filed on May 3, 1995).
10.9 Lease Agreement between Registrant and John T. Spinelli, dated May 5, 1991 (incorporated by reference to Exhibit 10.9 filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (File No. 0-19914)).
10.10 License Agreement between Registrant and AMS, dated July 29, 1992 (incorporated by reference to Exhibit 10.13 to Registrant's Form S-2).
10.11 Shared Services Agreement between Registrant and AMS dated August 29, 1996.
10.12 Escrow Agreement among Registrant, AMS and American Stock Transfer & Trust Company, dated December 1992 (incorporated by reference to Exhibit 10.15 to Registrant's Form S-2).
10.13 Loan and Security Agreement, dated as of August 31, 1995, between MDI and Chemical Bank (without exhibits) (incorporated by reference to Exhibit 10.2 to Registrant's August 1995 Form 8-K).
10.14 Guaranty and Security Agreement, dated as of August 31, 1995, between Registrant and Chemical Bank (without exhibits) (incorporated by reference to Exhibit 10.3 to Registrant's August 1995 Form 8-K).
10.15 Guaranty and Security Agreement, dated as of August 31, 1995, between certain subsidiaries of MDI and Chemical Bank (without exhibits) (incorporated by reference to Exhibit 10.4 to Registrant's August 1995 Form 8-K).
10.16 Pledge Agreement, dated as of August 31, 1995, between Registrant and Chemical Bank (incorporated by reference to Exhibit 10.5 to Registrant's August 1995 Form 8-K).
10.17 Pledge Agreement, dated as of August 31, 1995, between MDI and Chemical Bank (incorporated by reference to Exhibit 10.6 to Registrant's August 1995 Form 8-K).
10.18 Amended and Restated Joint Venture Agreement among MDI and Medical Imaging Partners, L.P., dated August 6, 1990 (incorporated by reference to Exhibit 10(b)(1) to MDI's Registration Statement on Form S-1 as amended on October 30, 1991 (File No. 33-42748)) (the "MDI Registration Statement").
10.19 Restated Management Agreement between MDI and Mass. Mobile Imaging Venture, dated August 6, 1990 (incorporated by reference to Exhibit 10(b)(2) to the MDI Registration Statement).
10.20 Restated and Amended Medical Imaging Lease and Services Agreement between Western Mass. Magnetic Resonance Services, Inc. and Mass. Mobile Imaging Venture, dated August 6, 1990 (incorporated by reference to Exhibit 10(b)(3) to the MDI Registration Statement).
10.21 Medical Imaging Lease and Services Agreement between Mobile MRI of Western Massachusetts Associates and Mass. Mobile Imaging Venture,
Exhibit No. Description - ----------- -----------
dated August 6, 1990 (incorporated by reference to Exhibit 10(b)(4) to the MDI Registration Statement).
10.22 Lease Agreement between Medical Imaging Partners, L.P. and Mass. Mobile Imaging Venture, dated December 31, 1986 (incorporated by reference to Exhibit 10(b)(9) to the MDI Registration Statement).
10.23 MRI Management Services Agreement between Merrimack Valley Health Services, Inc. and MDI dated October 1, 1990 (incorporated by reference to Exhibit 10(f)(1) to the MDI Registration Statement).
10.24 Joint Venture Agreement of Mobile MRI of Western Massachusetts Associates, between Mobile MRI of Western Massachusetts, Inc. and MRI Associates Inc., dated December 22, 1986 (incorporated by reference to Exhibit 10(h)(1) to the MDI Registration Statement).
10.25.1 Lease Agreement between MDI and the Trustees of Six New England Executive Park, dated January 22, 1988 (incorporated by reference to Exhibit 10(j) to the MDI Registration Statement).
10.25.2 First Amendment to Lease Agreement between MDI and the Trustees of Six New England Executive Park, dated October 15, 1992.
10.25.3 Second Amendment to Lease Agreement between MDI and the Trustees of Six New England Executive Park, dated April 6, 1993.
10.26 Severance Agreements between MDI and each of Judy C. Erbstein, David C. Gaynor, Steven J. James, Eileen H. Kirrane, Elaine H. McCarthy, Ruselle W. Robinson and John F. Sweeney, each dated February 16, 1995 (incorporated by reference to Exhibit 35 to MDI's Schedule 14D-9 (Amendment No. 13) filed with the Commission on February 23, 1995).
10.27 Stock Purchase Agreement between MDI, John W. Hammer and Hi-Chicago Trust, dated October 12, 1988 (incorporated by reference to Exhibit 10(o) to the MDI Registration Statement).
10.28 Clinical License for MRI Services by Western Mass. Magnetic Resonance Services, Inc. (incorporated by reference to Exhibit 10(p)(1) to the MDI Registration Statement).
10.29 Clinical License for MRI Services by Mobile MRI of Western Massachusetts Associates (incorporated by reference to Exhibit (10(p)(2) to the MDI Registration Statement).
10.30 Clinical License for MRI Services by Central Mass. MRI Limited Partnership ("Central Mass.") (incorporated by reference to Exhibit 10(p)(4) to the MDI Registration Statement).
10.31 Clinical License for MRI Services by Greater Boston MRI Limited Partnership ("Greater Boston") (incorporated by reference to Exhibit 10(p)(3) to the MDI Registration Statement).
10.32.1 Determination of Need issued to Western Mass. Magnetic Resonance Services, Inc., to provide Mobile MRI Services, dated May 29, 1986 (incorporated by reference to Exhibit 10(q)(1) to the MDI Registration Statement).
10.32.2 Determination of Need issued to Western Mass. Magnetic Resonance Services, Inc., to provide free-standing, fixed site MRI services, dated
Exhibit No. Description - ----------- -----------
April 3, 1989 (incorporated by reference to Exhibit 10(q)(2) to the MDI Registration Statement).
10.33 Determination of Need issued to Central Mass., dated July 20, 1988 (incorporated by reference to Exhibit 10(q)(3) to the MDI Registration Statement).
10.34.1 Determination of Need issued to Greater Boston MRI Services, Inc. ("Greater Boston"), dated April 8, 1988, with letter transferring ownership of the Determination of Need to Greater Boston (incorporated by reference to Exhibit 10(q)(4) to the MDI Registration Statement).
10.34.2 Determination of Need issued to Greater Boston, dated October 12, 1989 (incorporated by reference to Exhibit 10(q)(5) to the MDI Registration Statement).
10.35 Determination of Need issued to Mobile MRI of Western Massachusetts Associates, dated August 28, 1989 (incorporated by reference to Exhibit 10(q)(6) to the MDI Registration Statement).
10.36 Agreement between Stephen O. Dell, Seacoast Scanning, Inc., MDI and Casco Bay MR Services, Inc., dated June 20, 1987 (incorporated by reference to Exhibit 10(u) to the MDI Registration Statement).
10.37 Agreement in principle between MDI and Toshiba America Medical Systems, Inc., dated November 8, 1991 (incorporated by reference to Exhibit 10(ae)(7) to the MDI Registration Statement).
10.38 "Maxiservice" MRI Lease Agreement between General Electric Company and Mass. Mobile Imaging Venture, dated February 21, 1991 (incorporated by reference to Exhibit 10(af)(1) to the MDI Registration Statement).
10.39 "Masterline" Van Lease Agreement between General Electric Company and Mass. Mobile Imaging Venture, dated February 21, 1991 (incorporated by reference to Exhibit 10(af)(2) to the MDI Registration Statement).
10.40 Asset Purchase Agreement and Support Services Agreement (incorporated by reference to Exhibit E-1 and E-2 to MDI's Report on Form 8-K filed on November 17, 1993 (File No. 0-11914)).
10.41 Stock Purchase Agreement and First Amendment to Stock Purchase Agreement (incorporated by reference to Exhibit E-1 and E-2 to MDI's Report on Form 8-K/A filed on July 25, 1994 (File No. 0-11914)).
10.42 Amended License and Services Agreement between Burlington Imaging Associates, Inc., P.C. and MDI (incorporated by reference to Exhibit 10 to MDI's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (File No. 0-19736)).
10.43 Purchase and Sale Agreement dated November 17, 1994 between MDI Rehab, Inc. and MVA Center for Rehabilitation, P.C. (incorporated by reference to Exhibit 2 to MDI's Report on Form 8-K filed on February 15, 1995 (File No. 0-19736)).
10.44 Amended Management Agreement between MDI and ICI dated October 30, 1987 and amended October 1, 1991 (incorporated by reference to Exhibit 10(a)(1) and 10(a)(2) to the MDI Registration Statement).
10.45 Key Employment Agreement between MVA Rehabilitation Associates and
Exhibit No. Description - ----------- -----------
Eric T. Shebar, M.D. dated as of January 31, 1995 (incorporated by reference to Exhibit 10(b) to MDI's Report on Form 8-K filed on February 15, 1995 (File No. 0-19736)).
10.46 Amended and Restated Agreement of Partnership of MVA Rehabilitation Associates (incorporated by reference to Exhibit 10(a) to MDI's Report on Form 8-K filed on February 15, 1995 (File No. 0-19736)).
10.47 Employment Agreement, dated December 20, 1995, between ANMR and Jack Nelson.
10.48 Employment Agreement, dated December 1, 1995, between MDI and David Gaynor.
10.49 Form of Regulation S Securities Subscription Agreement relating to the Company's Series A Preferred Stock (incorporated by reference to the Company's current report on Form 8-K, dated March 31, 1996 (File No. 0-11914)).
21* List of Company's subsidiaries.
23.1* Consent of BDO Seidman, LLP, independent public accountants for Company.
23.2* Consent of Richard A. Eisner & Company, LLP.
27* Financial Data Schedule
(b) Reports of Form 8-K
On June 3, 1998, the Company filed a Form 8-K announcing a change in the registrant's certifying accountants. This change was due to the Boston office of the Company's accountants, Richard A. Eisner & Company, LLP, merging with BDO Seidman, LLP.
- ----------------- * Filed herewith
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 12th day of January 1998.
CAPRIUS, INC.
By: /s/ Enrique Levy --------------------------- Enrique Levy, President/COO
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/ Jack Nelson Chairman of the Board January 13, 1999 - ---------------------- Jack Nelson
/s/ Enrique Levy President, Chief Operating January 13, 1999 - ---------------------- Officer and Director Enrique Levy
/s/ Steven J. James Chief Financial and Accounting January 13, 1999 - ---------------------- Officer Steven J. James
CAPRIUS, INC. AND SUBSIDIARIES
I N D E X
Independent Auditors' Reports ,
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Caprius, Inc.
We have audited the accompanying consolidated balance sheet of Caprius, Inc. (formerly Advanced NMR Systems, Inc.) and subsidiaries as oft September 30, 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for year ended September 30, 1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 at September 30, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. However, the Company has incurred substantial losses in recent years which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to this matter are described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP BDO Seidman, LLP Boston, Massachusetts November 30, 1998
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Caprius, Inc.
We have audited the accompanying consolidated balance sheet of Caprius, Inc. (formerly Advanced NMR Systems, Inc.) and subsidiaries as of September 30, 1997 and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended September 30, 1997 and September 30, 1996. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Caprius, Inc. and subsidiaries at September 30, 1997, and the consolidated results of their operations and their cash flows for the years ended September 30, 1997 and September 30, 1996 in conformity with generally accepted accounting principles.
/s/ Richard A. Eisner & Company, LLP Richard A. Eisner & Company, LLP Cambridge, Massachusetts November 28, 1997
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE A) - BUSINESS
Caprius, Inc. ("Caprius" or the "Company") (formerly Advanced NMR Systems, Inc.) was founded in 1983 and through August 1996, operated under two segments (one of which was discontinued during fiscal 1996) consisting of Imaging Systems and Imaging and Rehabilitation Services. Pursuant to the merger (see below) with Advanced Mammography Systems, Inc. ("AMS"), the Company is now developing, marketing and commercializing a dedicated MRI system for breast imaging known as the Aurora system and in September 1997 opened its first breast imaging center at the Faulkner-Sagoff Center for Breast Health Care in Boston, Massachusetts ("Faulkner Center"). The Company is also engaged in rehabilitation services, consisting of comprehensive physician care, physical therapy and case management for motor vehicle accident patients.
In December 1998, Caprius announced that it was pursuing a strategy of identifying a strategic alliance to either acquire or joint venture its Aurora technology (the "Strategic Partner"). This is a consequence that at this point in time, Caprius lacks sufficient funds to continue necessary research and development or to fund manufacturing costs to produce its next systems. A Letter of Intent to sell the technology in a transaction valued at approximately $5 million was entered into in December 1998, but was terminated on December 17, 1998. At that time, the Company announced that it would reopen discussions with other interested parties and would continue to identify and pursue the acquisition of comprehensive breast imaging centers. The Company anticipates that any sale or joint venture of the Aurora technology may include some form of cash, royalty payments and ownership. There can be no assurances that any such sole or joint venture can be entered into or completed. Furthermore, unless a Strategic Partner is identified, near term, to acquire its Aurora technology, the Company's viability could be threatened. The financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
In July 1998, the Company acquired its first comprehensive breast imaging center, the Strax Institute, located in Lauderhill, Florida. The Strax Institute is a multi-modality breast care center that treats approximately 15,000 patients per year offering x-ray mammography, ultrasound, stereotactic biopsy and bone densitometry. The Company believes that there is an opportunity to acquire and consolidate similar breast care centers.
Effective November 10, 1997, the Company completed a merger with AMS, whereby AMS merged into AMS Merger Corp., a wholly owned subsidiary of Caprius, and became a wholly owned subsidiary of Caprius (the "Merger"). AMS was originally formed on July 2, 1992 as a wholly owned subsidiary of Caprius to develop a dedicated breast MRI system. AMS obtained its mammography technology from Caprius and retained certain rights to other dedicated MRI systems utilizing the technology rights. AMS then completed an initial public offering of its securities in 1993 generating net cash proceeds of approximately $7.4 million. Subsequently, certain warrants and options were exercised, AMS closed a private placement and 2,750,000
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE A) - BUSINESS - CONTINUED
shares of AMS common stock owned by Caprius were forfeited from escrow, such that the Company's interest in AMS was approximately 14% immediately preceding the merger.
On February 27, 1997, Medical Diagnostics, Inc. ("MDI") a wholly-owned subsidiary of Caprius merged with MDI Acquisition Corporation, a newly formed wholly-owned subsidiary of US Diagnostic, Inc. ("US Diagnostic") and became a wholly-owned subsidiary of US Diagnostic. The Company had acquired MDI, which provided imaging and rehabilitation services, on August 31, 1995. Pursuant to the US Diagnostic merger, Caprius retained the rehabilitation centers formerly operated by MDI. Caprius sold MDI principally to pursue its strategy of developing and installing its breast imaging system and to repay all the indebtedness to the senior lender.
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
[2] REVENUE RECOGNITION
The breast imaging and rehabilitation services businesses recognize revenue as services are provided to patients. Reimbursements for services provided to patients covered by Blue Cross/Blue Shield, Medicare, Medicaid, HMO's and other contracted insurance programs are generally less than rates charged by the Company. Differences between gross charges and estimated third-party payments are recorded as contractual allowances in determining net patient service revenue during the period that the services are provided.
Revenue from the sale of Aurora systems will be recognized when the system is installed at the customer site and training is completed.
[3] CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
[4] INVENTORIES
Inventories are accounted for at the lower of cost or market using the first-in, first-out ("FIFO") method.
[5] EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements are recorded at cost. Expenditures for repairs and maintenance are charged to expense as incurred, whereas major betterments are capitalized. 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. Assets are written off when they become fully depreciated.
Equipment under capital lease is stated at the lower of the fair market value or the net present value of the minimum lease payments at the inception of the lease. Capitalized lease equipment is amortized over the shorter of the term of the lease or the estimated useful life.
Asset Classification Useful Lives -------------------- ------------
Medical and other equipment 5-8 years Office furniture and equipment 5 years Other equipment 5 years Leasehold improvements Term of lease
[6] GOODWILL AND OTHER INTANGIBLES
Goodwill is related to the Company's Rehabilitation Services business and to its breast care center. Other intangibles at September 30, 1998 consisting of purchased contracts and other intangibles relate to the merger with AMS. Goodwill and other intangibles are amortized over their estimated useful lives. The Company periodically reviews the carrying amount of goodwill and other intangibles to determine whether an impairment has been incurred based on undiscounted future cash flows. During the year ended September 30, 1998, the Company reduced the goodwill related to the Company's rehabilitation services business in the amount of $1,900,000 pursuant to this review.
[7] NET LOSS PER SHARE
Effective October 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earning Per Share" ("SFAS No. 128"). SFAS No. 128 requires the
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
[7] NET LOSS PER SHARE - CONTINUED
presentation of both basic and diluted earnings per share and replaces previously required standards for computing and presenting earnings per share. Earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the new requirements of SFAS No. 128. Adoption of SFAS No. 128 did not have an effect on the Company's loss per share calculation.
Basic net loss per common share was computed using the weighted average common shares outstanding during the period. Outstanding warrants and options had an anti-dilutive effect and were therefore excluded from the computation of diluted net loss per common share.
[8] MINORITY INTERESTS IN NET INCOME OR LOSS OF CONSOLIDATED ENTITIES
Minority interests in net income or loss of consolidated entities represents the allocation of net income from certain consolidated entities to the respective minority interest shareholders and joint venture partners.
[9] INCOME TAXES
The Company utilizes the liability method of accounting for income taxes, as set forth in Statement of Financial Accounting Standards No. 109. "Accounting for Income Taxes". Under this method, deferred tax liabilities and assets are recognized for the expected tax consequences of temporary differences between the carrying amount and the tax basis of assets and liabilities.
[10] USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
[11] RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued two new disclosure standards. Results of operations and financial position will be unaffected by implementation of these new standards.
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
[11] RECENT PRONOUNCEMENTS - CONTINUED
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." ("SFAS No. 130") established standards for reporting and display of comprehensive income, its components, and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information", which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas, and major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief decision maker in deciding how to allocate resources and in assessing performance.
Both of these new standards are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Management does not expect implementation of these standards to materially affect future financial statements and disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133"). SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedge risk or (ii) the earning effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has no derivitives and does not expect the pronouncement to materially effect future financial statements and disclosures.
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE C) - ACQUISITIONS
On July 1, 1998, the Company acquired substantially all of the assets and business of the Gertrude and Philip Strax Breast Diagnostic Institute in Lauderhill, Florida, a comprehensive breast imaging center. As consideration for the acquisition, the Company paid $600,000 in cash. The acquisition was accounted for under the purchase method of accounting and the cost in excess of net assets of approximately $450,000 is being amortized over 20 years.
Effective November 10, 1997, the Company acquired the majority interest in AMS through the issuance of 2,956,741 shares of common stock to the AMS stockholders. The acquisition was accounted for as a purchase. Prior to the acquisition, the Company accounted for its minority interest in AMS using the equity method. The calculation of the cost of AMS and the allocation of that cost is as follows (see Note I for Pro forma effects of this acquisition):
Calculation of cost of AMS:
AMS shares outstanding 8,641,854 Less shares owned by Caprius (1,250,000) ----------- Shares converted 7,391,854 Conversion ratio .40 ----------- Caprius shares issued 2,956,741 Caprius share price $ 2.50 ----------- Value of Caprius shares issued 7,391,855 Transaction costs - AMS 101,252 Transaction costs - Caprius 344,549 ----------- Cost of AMS shares purchased 7,837,655 Basis of existing investment in AMS (123,681) Accounts receivable from AMS 1,937,701 ----------- Total cost of AMS $ 9,651,675 ===========
Cost allocated as follows: Cash $ 20,193 Inventories 808,834 Other current assets 137,225 Equipment 631,824 Other assets 38,153 Purchased contracts 500,000 Purchased research and development 7,097,566 Other intangible assets 1,000,000 Other current liabilities (578,160) Note payable (3,960) ----------- Total cost of AMS $ 9,651,675 ===========
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE C) - ACQUISITIONS - CONTINUED
The purchased research and development costs were immediately charged to expense. The amounts allocated to purchased contracts and other intangible assets are being amortized over five years.
(NOTE D) - INVENTORY
Inventory represents materials used to manufacture the Aurora system. At September 30, 1998 the components of inventory were:
Raw materials $454,124 Work in process 266,734 -------- $720,858 ========
(NOTE E) - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations at September 30, 1998 and 1997 consisted of the following:
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE E) - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS - CONTINUED
Future minimum debt payments for the next five years are as follows:
(NOTE F) - INCOME TAXES
At September 30, 1998, the Company had deferred tax assets totaling approximately $11,000,000 due to a temporary difference relating to the amortization of goodwill ($800,000) and a net operating loss carryover ($10,200,000). At September 30, 1997, the Company had a deferred tax asset due to a net operating loss carryover of approximately $7,400,000. All tax assets have been fully reserved due to uncertainty as to the realization of the benefit.
As discussed in Note A, during the year ended September 30, 1997 the Company sold MDI. This sale resulted in a taxable gain for the Company, which was offset by utilization of net operating losses, resulting in a lower net operating loss carryforward to 1998.
At September 30, 1998 and September 30, 1997, the Company had available net operating loss carryforwards for tax purposes, expiring through 2013 of approximately $30,000,000 and $22,000,000 respectively. The Internal Revenue Code contains provisions which may limit the net operating loss carry forward available for use in any given year if significant changes in ownership interest of the Company occur.
Effective November 10, 1997, the Company and AMS file a consolidated income tax return. Accordingly, losses incurred by AMS prior to that date may be limited in their availability to offset future income.
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE F) - INCOME TAXES - CONTINUED
The following table reconciles the tax provision per the accompanying statements of operations with the expected provision obtained by applying statutory tax rates to the pretax loss:
(NOTE G) - COMMITMENTS AND CONTINGENCIES
[1] OPERATING LEASES
The Company leases facilities and equipment under non-cancelable operating leases expiring at various dates through fiscal 2003. Facility leases require the Company to pay certain insurance, maintenance and real estate taxes. Rental expenses totaled approximately $528,000 and $587,000 and $2,349,000 for the years ended September 30, 1998, 1997 and 1996.
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE G) - COMMITMENTS AND CONTINGENCIES: CONTINUED
[1] OPERATING LEASES - CONTINUED
Future basic rental commitments under operating leases net of subleases are as follows. Sublease income for fiscal 1999 and 2000 equals approximately $278,000 and $186,000, respectively.
Fiscal Year Amount ---------------------------------------- 1999 $393,090 2000 248,658 2001 17,265 2002 17,265 2003 15,826 -------- $692,104 ========
[2] LEGAL PROCEEDINGS
On January 7, 1998, the Company and Jack Nelson, the Company's Chairman and Chief Executive Officer were served with a complaint in connection with a purported class action brought against them by Dorothy L. Lumsden in the United States District Court of the District of Massachusetts. The complaint contains claimed for alleged violations of Sections 10(b) and 20(a) under the Securities Exchange Act and for common law. Ms. Lumsden purports to bring her action "on behalf of herself and all other persons who purchased or otherwise acquired the common stock of the Company during the period August 10, 1994 through and including December 12, 1997". On February 2, 1998, the Company and Mr. Nelson were served with a second class action complaint naming them as defendants in connection with another action brought in the United States District Court for the District of Massachusetts. This action was brought by Robert Curry and the complaint alleged the same purported class and contained similar allegations and claims as the class action complaint discussed above. On April 24, 1998, the District Court consolidated the two class actions claims into one for pre-trial purposes. On January 7, 1999, the Company announced that it has reached a preliminary settlement in the shareholder class action in Federal Court in Boston. Under the terms of the settlement, Caprius will make a cash payment of $150,000 and issue 325,000 shares of common stock to Plaintiffs. Caprius' insurance carrier will contribute $100,000 of the cash payment. The settlement also stipulates that in the event Caprius sells all or part of its business within 12 months an additional payment of $75,000 and issuance of 100,000 additional shares will be made by Caprius to plaintiffs. The agreement is subject to final court approval. The Company will account for the Settlement when it becomes final and it is not expected to have a material effect on the financial statements.
In December 1998, the Company filed a complaint against Eric T. Shebar, M.D. ("Shebar"), the former Chief Operating Officer and Medical Director for the Company's motor
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE G) - COMMITMENTS AND CONTINGENCIES: CONTINUED
[2] LEGAL PROCEEDINGS - CONTINUED
vehicle accident rehabilitation ("MVA") business, and MVA Center for Rehabilitation, Inc. ("MVA, Inc.") whereby the Company alleges breach of contract and certain misrepresentations and seeks damages, in an amount to be determined at trial. The Company received a preliminary injunction to reach and apply a secured promissory note to MVA, Inc. against damages sought from Shebar and to enjoin against any remedies under default of the Note. The Note payment of $347,000 was due October 15, 1998. A final motion has been scheduled for January, 1999.
MDI, as general partner of Mass. Mobile Imaging Venture (MMIV), and Western Massachusetts Magnetic Resonance Services, Inc. (WMMRS) filed a complaint in September 1992 in Middlesex County Superior Court, Cambridge, Massachusetts against Medical Imaging Partners, L.P. (MIP), which is wholly owned by Raytel Medical Corporation (Raytel), and certain of its affiliates, seeking a declaration, unspecified monetary damages and equitable relief relating to an alleged breach by MIP of certain fiduciary and contractual obligations with respect to the business of MMIV. MIP filed a counterclaim against MDI also seeking a declaratory judgment, unspecified monetary damages and equitable relief on the basis of an alleged breach of fiduciary and contractual obligations by MDI with respect to the business of MMIV. In connection with the MDI sale to US Diagnostic in February 1997, Caprius indemnified US Diagnostic from any claims or damages. On September 12, 1997, the parties entered into a settlement agreement pursuant to which all actions were dismissed between them and provided each other with mutual releases and divided all funds in an escrow account between themselves, such that pursuant to its arrangement with US Diagnostic, Caprius received the MDI portion, or $ 270,000.
Effective November 28, 1995, the Company terminated the Key Employment Agreement, dated May 2, 1995, of John A. Lynch, Chief Executive Officer of MDI ("Lynch Employment Agreement"). In March 1996, Mr. Lynch filed a demand for arbitration seeking a declaratory ruling, equitable relief, monetary damages of approximately $2.0 million and legal fees related to claims arising out of the Lynch Employment Agreement. On September 23, 1997, the arbitration panel ruled in favor of the Company and MDI on substantially all of Mr. Lynch's claims such that the only issues remaining in the Lynch arbitration were for performance unit payments defined in the Lynch Employment Agreement and reasonable attorneys' fees. In July 1998, the arbitration panel ruled in favor of the Company and MRI on the final two issues.
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE H) - CAPITAL TRANSACTIONS
[1] PREFERRED STOCK - CLASS A
In May 1996, the Company closed a private placement (the "Placement") of $3.7 million principal amount of newly issued Series A Convertible Preferred Stock, $.01 par value, (the "Preferred Stock"). Each share of Preferred Stock was convertible into shares of common stock at a conversion price equal to the lesser of 125% of the market price on the issuance date, or 75% of the market price on the conversion date. At September 30, 1997, all of the Preferred Stock Class A had been converted into a total of 1,348,832 shares of common stock.
[2] 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 initially convertible into 1,597,930 shares of Common Stock, subject to customary anti-dilution provisions, commencing on August 18, 1998, or earlier upon a change of control as defined. 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.
[3] WARRANTS
At September 30, 1998, in connection with various transactions including the acquisition of MDI and the AMS Merger, the Company had outstanding warrants to purchase 996,987 shares of the Company's common stock at exercise prices ranging from $4.20 to $106.30 and have a weighted average exercise price of $16.83. The warrants expire at various dates from January 31, 2000 to May 31, 2001.
[4] STOCK OPTIONS
The Company has an Incentive and Nonqualified Stock Option Plan which provides for the granting of options to purchase not more than 100,000 shares of common stock. Exercise prices for any incentive options are at prices not less than the fair market value at the date of grant, while exercise prices for nonqualified options may be at any price in excess of $.01. When fair market
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE H) - CAPITAL TRANSACTIONS- CONTINUED
[4] STOCK OPTIONS- CONTINUED
value at the date of issuance is in excess of the option exercise price, the excess is recorded as compensation expense. The total number of shares authorized for grant under this plan were reached during 1993 and no additional options can be granted. During fiscal 1997 and 1998 certain options were canceled and replaced with options exercisable at the then fair market value.
Stock option transactions under the above plan for the past three fiscal periods are as follows:
Number of Option Price Shares Per Share --------- ------------
Balance, September 30, 1995 29,622 $6.50 - $43.80 Granted in 1996 12,500 $5.00 Exercised in 1996 (3,163) $6.50 Cancelled in 1996 (23,750) $26.30 - $43.80 -------
Balance, September 30, 1996 15,209 $5.00 - $43.80 Cancelled in 1997 (10,709) $5.00 - $43.80 -------
Balance, September 30, 1997 4,500 $5.00 - $31.30 Repriced Options: Original (2,000) $3.13 Repriced 2,000 $0.84 Cancelled in 1998 (2,500) $5.00 ------- Balance, September 30, 1998 2,000 $0.84 =======
During 1993, the Company adopted a new employee stock option plan and a stock option plan for non-employee directors. The employee stock option plan provides for the granting of options to purchase not more than 1,000,000 shares of common stock. The options issued under the plan may be incentive or nonqualified options. The exercise price for any incentive options cannot be less than the fair market value of the stock on the date of the grant, while the exercise price for nonqualified options will be determined by the option committee. The Directors' stock option plan provides for the granting of options to purchase not more than 200,000 shares of common stock. The exercise price for shares granted under the Directors' plan cannot be less than the fair market value of the stock on the date of the grant. Both plans expire May 25, 2003.
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE H) - CAPITAL TRANSACTIONS- CONTINUED
[4] STOCK OPTIONS- CONTINUED
During 1998 certain options were cancelled and replaced with options exercisable at the then fair market value. Stock option transactions under the 1993 plans are as follows:
Number of Option Price Shares Per Share --------- ------------
Balance, September 30, 1995 238,904 $7.90 - $52.50 Granted in 1996 44,000 $5.00 - $21.90 Exercised in 1996 (7,586) $14.50 - $25.60 Cancelled in 1996 (62,249) $15.80 - $52.50 --------
Balance, September 30, 1996 213,069 $5.00 - $52.50 Granted in 1997 2,500 $2.80 Cancelled in 1997 (33,802) $5.00 - $25.60 --------
Balance, September 30, 1997 181,767 $2.80 - $52.50 Granted in 1998 576,510 $0.84 - $1.46 Granted pursuant to AMS Merger 454,000 $0.84 - $20.00 Exercised in 1998 (10,107) $0.84 Repriced Options: Original (182,141) $5.00 - $8.00 Repriced 182,141 $0.84 Cancelled in 1998 (292,849) $0.84 - $42.50 -------- Balance, September 30, 1998 909,321 $0.84 - $33.80 ========
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE H) - CAPITAL TRANSACTIONS- CONTINUED
[4] STOCK OPTIONS- CONTINUED
Stock option transactions not covered under the option plans in 1998, 1997 and 1996 are as follows:
Number of Option Price Shares Per Share --------- ------------
Balance, September 30, 1995 87,532 $7.90 - $33.80 Granted in 1996 13,000 $5.00 - $14.10 Cancelled in 1996 (15,000) $25.60 -------
Balance September 30, 1996 85,532 $7.90 - $33.80 Cancelled in 1997 (4,500) $33.80 -------
Balance, September 30, 1997 81,032 $7.90 - $33.80 Repriced Options: Original (6,000) $5.00 Repriced 6,000 $0.84 Cancelled in 1998 (4,000) $14.10 ------- Balance, September 30, 1998 77,032 $0.84 - $20.10 =======
Under all plan and non-plan stock options, as of September 30, 1998, options to purchase 290,679 shares were available for grant and options to purchase 650,424 shares at a weighted average price of $3.88 per share were exercisable. The outstanding options expire at various dates within ten years from the date of grant.
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE H) - CAPITAL TRANSACTIONS- CONTINUED
[4] STOCK OPTIONS- CONTINUED
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting or Stock-Based Compensation", but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans. There was no compensation expense recognized in 1998, 1997, or 1996. If the Company had elected to recognize compensation cost for the plans based on the fair value at the grant date for awards under the plans, consistent with the method prescribed by SFAS No. 123, net income per share would have been changed to the pro forma amounts indicated below:
The fair value of the Company's stock options used to compute pro forma net income and net income per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for 1998, 1997, and 1996: dividend yield of 0%; expected volatility of 0.30; a risk free interest rate of 5.70%; and an expected holding period of 5-10 years.
The weighted-average grant-date fair value of options granted was $0.44 per share, $1.09 per share and $4.39 per share for the years ended September 30, 1998, 1997 and 1996, respectively.
During fiscal 1998, the stockholders of the Company approved a reverse 1 for 10 stock split and an increase of shares authorized under the 1993 plans to 1,200,000 shares on a post-reverse stock split basis. All share and option amounts have been restated to reflect the stock split. On January 1, 1998, all 190,141 of the then outstanding employee stock options were repriced to the current market price, using the existing exercise durations.
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE I) - UNCONSOLIDATED SUBSIDIARY (AMS):
AMS completed its initial public offering of stock in 1993 which generated net cash proceeds to AMS of approximately $7,400,000. As a result of the offering, the Company's percentage ownership of AMS was reduced to 73%. Prior to the offering, AMS issued bridge notes with warrants to purchase shares of common stock at a price of one-half the public offering price. In connection with the offering, AMS also granted an option to the underwriter to purchase shares at a price of 130% of the public offering price. AMS has also established an employee stock option plan under which certain options have been granted. As the warrants and options were exercised, the Company's percentage ownership of AMS was further reduced. During 1994 and 1995, most of the above warrants and options were exercised whereby the Company's percentage ownership of AMS was reduced to approximately 61% at September 30, 1995.
On May 15, 1996, AMS closed a private placement (the "AMS Placement") of $3 million principal 4% convertible debentures. Net proceeds from the AMS Placement was approximately $2,752,000 after payment of fees and related expenses. As of January 31, 1997, an additional 1,748,364 shares of common stock had been issued in connection with the conversion of these debentures at which time the Company's percentage ownership of AMS was reduced to approximately 48%. Accordingly, as of September 30, 1996, the Company changed from consolidation of AMS to the equity method of accounting for its investment in AMS.
In connection with the AMS public offering, the Company, which was the sole stockholder of AMS, placed in escrow an aggregate of 2,750,000 (the "Escrow Shares") of the 4,000,000 shares of Common Stock it owned. On May 1, 1997, all shares subject to the escrow were forfeited as a result of AMS' failure to achieve certain financial milestones, which if achieved would have resulted in the release of the escrow shares to the Company. Upon forfeiture of the escrow shares, the Company's interest in AMS was reduced to approximately 16%.
As of September 30, 1997, an additional 1,025,600 shares of common stock had been issued in connection with the conversion of the May 1996 convertible debentures reducing ownership of AMS to approximately 14%. The Company continued to account for its investment in AMS utilizing the equity method through the merger of AMS.
On November 10, 1997, the shareholders of Caprius and AMS agreed to merge, and AMS became a wholly-owned subsidiary of the Company (See Note C).
The following unaudited pro forma financial information sets for the results of the Company as if the AMS merger and the MDI merger had occurred prior to October 1, 1997 and October 1, 1996, respectively. The pro forma financial information does not purport to be indicative of what would have occurred had the acquisition been made as of 1996, or results that may occur in the future. The pro forma information does not include the expense for the purchased research and development costs.
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(NOTE I) - UNCONSOLIDATED SUBSIDIARY (AMS): - CONTINUED
Year ended September 30, 1998 1997 --------- --------- (000's)
Net revenues $ 3,764 $ 13,124 Operating expenses (15,005) (18,586) -------- -------- Operating loss from continuing operations $(11,241) $ (5,462) Net loss $(11,395) $ (5,979) Net loss per common share $ (1.55) $ (0.82)
(NOTE J) - MEDICAL DIAGNOSTICS, INC.
On February 27, 1997, MDI a wholly owned subsidiary of the Company, merged with MDI Acquisition Corporation, a newly-formed wholly-owned subsidiary of US Diagnostic and became a wholly-owned subsidiary of US Diagnostic (the "MDI Merger"). The MDI Merger was effected pursuant to an Agreement and Plan of Merger, dated January 20, 1997.
At the effective time of the MDI Merger, US Diagnostic paid the Company $22,000,000 (the "Merger Consideration") as follows: (1) to Chase Manhattan Bank N.A. (the "Bank"), on behalf of obligations of MDI which were guaranteed by the Company, an amount sufficient to fully satisfy all of MDI's obligations to the Bank (approximately $12,000,000) and (2) the remainder of the Merger Consideration (approximately $10,000,000) to the Company. As a result of the MDI Merger, US Diagnostic assumed approximately $9,000,000 in payment obligations under MDI's capital leases. The Company paid a financial advisor fee to Leeds Group Inc. and other expenses related to the MDI Merger.
In addition, there were mutual indemnifications between the Company and US Diagnostic whereby the Company had indemnified US Diagnostic from any claims arising from the termination of the Key Employment Agreement of John A. Lynch, MDI's former Chief Executive Officer and from any losses arising from the lawsuits between MDI and Raytel Medical Corporations, et al. Both claims have since been settled.
(NOTE K) - DISCONTINUED OPERATIONS
In August 1996, the Company's Board of Directors adopted a formal plan to discontinue its Imaging Systems business segment. The segment was accounted for as discontinued operations in accordance with APB 30, which among other provisions, requires the plan of disposal to be carried out within one year. The Company's estimated loss on disposal was less than anticipated resulting in income in fiscal 1998 amounting to approximately $107,000.