<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-11914
CAPRIUS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2457487
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
46 Jonspin Road, Wilmington, MA 01887
----------------------------------------
(Address of principal executive offices)
(978) 657-8876
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of August 11, 1998, there were 7,364,934 shares of Common Stock, $.01 par
value, outstanding.
<PAGE> 2
CAPRIUS, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets - June 30, 1998
and September 30, 1997 3
Consolidated Statements of Operations - for the
three and nine months ended June 30, 1998
and 1997 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows - for the
nine months ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
EXHIBIT INDEX
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<PAGE> 3
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,250,723 $ 9,752,768
Cash, restricted -- 1,744,967
Accounts receivable, net of reserve for bad debts
of $603,152 atJune 30, 1998 and $612,500 at
September 30, 1997 2,899,519 2,691,858
Inventory 1,268,633 --
Other current assets 649,563 163,433
------------ ------------
Total current assets 9,068,438 14,353,026
------------ ------------
PROPERTY AND EQUIPMENT, AT COST:
Medical equipment 1,160,803 494,725
Office furniture and equipment 189,275 624,245
Other equipment 1,512,088 48,597
Leasehold improvements 1,152,063 751,394
------------ ------------
4,014,229 1,918,961
Less: accumulated depreciation and amortization 1,564,069 618,263
------------ ------------
Total property and equipment, at cost 2,450,160 1,300,698
------------ ------------
OTHER ASSETS:
Other intangibles, net of accumulated amortization
of $291,079 at June 30, 1998 and $800 at
September 30, 1997 1,321,297 58,595
Goodwill, net of accumulated amortization of
$414,364 at June 30, 1998 and $311,200 at
September 30, 1997 2,280,245 2,383,377
Investment in and advances to unconsolidated
subsidiary -- 1,525,387
Other 22,818 213,518
------------ ------------
Total other assets 3,624,360 4,180,877
------------ ------------
$ 15,142,958 $ 19,834,601
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 860,186 462,118
Accrued expenses 907,492 949,277
Accrued compensation 407,695 212,522
Current portion of long-term debt and capital
lease obligations 723,061 550,000
------------ ------------
Total current liabilities 2,898,434 2,173,917
------------ ------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
NET OF CURRENT PORTION 673,513 337,500
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - Series A, none;
Series B, convertible, 2,700 shares at
June 30, 1998 and September 30, 1997 2,700,000 2,700,000
Common stock, $.01 par value
Authorized - 50,000,000 shares
Issued and outstanding - 7,364,933 shares
at June 30, 1998 and 4,374,763 shares at
September 30, 1997 73,649 43,748
Additional paid-in capital 63,558,263 56,170,271
Accumulated deficit (54,758,651) (41,588,585)
Treasury stock (22,500 common shares, at cost) (2,250) (2,250)
------------ ------------
Total stockholders' equity 11,571,011 17,323,184
------------ ------------
$ 15,142,958 $ 19,834,601
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 4
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ---------------------------
1998 1997 1998 1997
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Net patient service revenues $ 963,441 $ 920,563 $ 2,680,804 $ 11,608,067
Management fees and other -- -- -- 287,316
----------- ---------- ------------ ------------
Total revenues 963,441 920,563 2,680,804 11,895,383
----------- ---------- ------------ ------------
OPERATING EXPENSES:
Cost of service operations 999,143 770,836 2,482,643 8,269,199
Research and development 880,768 -- 2,280,408 --
Purchased research and development (see note 2) -- -- 7,097,566 --
Selling, general and administrative 965,043 758,548 3,782,899 3,045,433
Provision for bad debt and collection costs 73,099 1,810 233,871 849,842
----------- ---------- ------------ ------------
Total operating expenses 2,918,053 1,531,194 15,877,387 12,164,474
----------- ---------- ------------ ------------
Operating income (loss) from continuing
operations (1,954,612) (610,631) (13,196,583) (269,091)
Gain (loss) on sale of imaging business (8,075) (144,922) 53,393 (9,377,283)
Other income -- 6,541 3,050 239,611
Interest income 46,018 113,848 278,461 149,674
Interest expense (60,940) (34,656) (142,852) (950,056)
----------- ---------- ------------ ------------
Income (loss) from continuing operations before
minority interests, equity in loss of subsidiary
and provision for income taxes (1,977,609) (669,820) (13,004,531) (10,207,145)
Minority interests in net losses of consolidated entities -- -- -- (202,234)
Equity in net loss of unconsolidated subsidiary -- (232,041) (67,358) (1,190,108)
----------- ---------- ------------ ------------
Loss from continuing operations before provision
for income taxes (1,977,609) (901,861) (13,071,889) (11,599,487)
Provision for income tax (expense) benefit (98,177) (40,000) (98,177) 63,445
----------- ---------- ------------ ------------
Loss from continuing operations (2,075,786) (941,861) (13,170,066) (11,536,042)
Income from operations of discontinued division -- 15,549 -- 58,450
----------- ---------- ------------ ------------
Net Loss $(2,075,786) $ (926,312) $(13,170,066) $(11,477,592)
=========== ========== ============ ============
Income (loss) per basic and diluted common share:
Loss from continuing operations $ (0.28) $ (0.22) $ (1.91) $ (2.85)
Income from operations of discontinued division -- -- -- 0.01
----------- ---------- ------------ ------------
Net loss per share $ (0.28) $ (0.22) $ (1.91) $ (2.84)
=========== ========== ============ ============
Weighted average number of common shares outstanding 7,361,197 4,374,763 6,909,447 4,042,953
=========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
-------------------- -------------------- -------------------- Additional Total
Number $0.01 Number $0.01 Number $0.01 Paid-in Accumulated Stockholders'
of Shares Par Value of Shares Par Value of Shares Par Value Capital Deficit Equity
--------- --------- --------- --------- --------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
SEPTEMBER 30, 1997 2,700 $2,700,000 4,374,763 $43,748 (22,500) $(2,250) $56,170,271 $(41,588,585) $ 17,323,184
Issuance of common
stock related to
AMS merger -- -- 2,956,742 29,567 -- -- 7,362,287 -- 7,391,854
Conversion of note
payable -- -- 27,429 274 -- -- 20,725 -- 20,999
Exercise of stock
options -- -- 6,000 60 -- -- 4,980 -- 5,040
Net loss -- -- -- -- -- -- -- (13,170,066) (13,170,066)
----- ---------- --------- ------- ------- ------- ----------- ------------ ------------
BALANCE,
JUNE 30, 1998 2,700 $2,700,000 7,364,934 $73,649 (22,500) $(2,250) $63,558,263 $(54,758,651) $ 11,571,011
===== ========== ========= ======= ======= ======= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 6
CAPRIUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(13,170,066) $(11,477,592)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in net loss of unconsolidated subsidiary 67,358 1,190,108
Loss (gain) on sale of imaging business (61,468) 9,377,283
Minority interest in net income (loss) of
consolidated entities -- 202,234
Purchased research and development 7,097,566 --
Depreciation and amortization 784,124 871,047
Changes in assets and liabilities:
Decrease in restricted cash 1,744,967 --
Accounts receivable, net (207,662) 58,271
Inventories (459,799) 44,800
Other current assets (348,904) 427,223
Accounts payable and accrued expenses (6,795) (1,405,177)
------------ ------------
Net cash provided by (used in) operating activities (4,560,679) (711,803)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of imaging business 61,468 7,938,917
Cash used in AMS merger (128,406) --
Advances to unconsolidated subsidiaries (479,673) (602,516)
Purchase of equipment, furniture and leasehold
improvements (925,907) (2,000,352)
Purchase of minority interest in rehabilitation business -- (1,500,000)
Other assets -- 225,912
------------ ------------
Net cash provided by (used in) investing activities (1,472,518) 4,061,961
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,113,347 1,842,707
Financing of purchase of minority interest in
rehabilitation business -- 1,300,000
Repayment of long-term debt and capital lease obligations (582,195) (1,674,827)
Distribution to minority interests -- (470,661)
------------ ------------
Net cash provided by (used in) financing activities 531,152 997,219
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,502,045) 4,347,377
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,752,768 3,287,880
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,250,723 $ 7,635,257
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 128,285 $ 924,117
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 7
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The results of operations of Caprius, Inc. ("Caprius" or the "Company")
(formerly Advanced NMR Systems, Inc.) for the interim periods shown in this
report are not necessarily indicative of results to be expected for the fiscal
year. In the opinion of management, the information contained herein reflects
all adjustments necessary to make the results of operations for the interim
periods a fair statement of such operations. All such adjustments are of a
normal recurring nature.
The accompanying financial statements do not contain all of the disclosures
required by generally accepted accounting principles and should be read in
conjunction with the financial statements and related notes included in the
Company's annual report on form 10-K for the fiscal year ended September 30,
1997.
NOTE 2 - THE COMPANY
The Company 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
with Advanced Mammography Systems, Inc. ("AMS") (effective April 9, 1998, AMS
changed its name to Caprius Systems, Inc.), the Company is now developing,
marketing and commercializing a dedicated Magnetic Resonance Imaging ("MRI")
system for breast imaging known as the Aurora System. In September 1997, the
Company installed its first Aurora System at the Faulkner-Sagoff Centre for
Breast Health Care in Boston, Massachusetts ("the Faulkner Centre") and in April
1998, its second at the University of Arkansas for Medical Sciences ("University
of Arkansas") in Little Rock, Arkansas. The Company is also engaged in
rehabilitation services, consisting of comprehensive physician care, physical
therapy and case management for motor vehicle accident patients.
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 "AMS Merger"). AMS was
originally formed on July 2, 1992 as a wholly owned subsidiary of Caprius to
develop a dedicated breast MRI system. Also, effective November 10, 1997, the
Company changed its name to Caprius, Inc. and effected a one-for-ten Reverse
Stock Split, which has been retroactively reflected in the financial statements.
The AMS Merger was accounted for under the purchase method of accounting with
the majority of the purchase price allocated to the value of research and
development on the Aurora System. The estimated value of purchased research and
development was based on the net present value of estimated future cash flow
arising from the sale and installation of breast imaging systems. Generally
accepted accounting principles requires that a portion of the purchase price be
allocated to research and development projects in process and that, if those
projects have no alternative future use, the amount should be charged to expense
as a research and development cost. The Company has determined that the
technology being developed by AMS is specific to breast MRI and has no
alternative use. Accordingly, the portion of the purchase price allocated to
purchased research and development has been charged to operations.
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 "US Diagnostic Merger"). 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.
Magnetic Resonance Imaging Technology
A majority of the Company's business is based on MRI. MRI provides very
high resolution medical images of soft tissue. When interpreted by a trained
physician, the images can be used in many applications and can be a valuable
tool in the detection and management of breast disease. MRI systems use large
magnets, digital computers and controlled radio waves to derive cross-sectional
(two-dimensional) and volume (three-dimensional) high resolution images of the
body's internal organs, tissues and function.
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<PAGE> 8
In February 1996, the U.S. Food and Drug Administration (the "FDA") cleared
the commercial use of the Aurora System. The Company has already contracted with
several significant managed care companies in Massachusetts and continues to
gain contracts from others, further supporting the clinical acceptance of MRI in
breast care. However, in order to fully commercialize the Aurora System, to
demonstrate its diagnostic effectiveness as an accepted tool for the diagnosis
and management of breast disease and to continue to obtain reimbursement for a
dedicated breast MRI by third parties such as Medicare, private insurance and
managed care consortiums, the Company must develop clinical utility. The Aurora
System has been placed at the University of Texas Medical Branch at Galveston,
the Faulkner Centre and The University of Arkansas. The Company has agreements
to install the Aurora System in August 1998 at the Englewood Hospital and
Medical Center in Englewood, New Jersey and at the Magee Women's Hospital in
Pittsburgh, Pennsylvania in September 1998, and at Massachusetts General
Hospital in Boston, Massachusetts at a time still to be determined.
The Aurora Breast Imaging System
The Company believes that the Aurora System has the potential to become
an important adjunct in the evaluation of the 15-20% of x-ray mammograms that
are ambiguous or indeterminate, for imaging dense breast tissue using a patent
pending technique that can suppress fat in breast images, for earlier diagnostic
intervention among high risk individuals, for characterizing breast lesions, for
staging cancer treatment and for post surgery and post radiation follow-up. The
Company began a study at the Faulkner Centre in late July of approximately 200
women to assess whether breast MRI, when used in conjunction with a clinical
breast exam and mammography, can detect breast cancers in high risk women with
dense breast tissue at an earlier stage in their development. Mammograms on
women with radiographically dense breasts are more difficult to interpret, and
may not reveal a cancer that is present. The Company anticipates undertaking
further studies to continue to explore broader applications of MRI in breast
imaging. This expansion of breast MRI's clinical utility should alter medical
practices to include MRI on a more routine basis which will drive patient demand
that should exceed the capacity of currently available whole body MRI systems.
The Aurora System uses a technology dedicated to breast imaging to address this
probable future demand and meet patient needs that are distinct from and not
adequately served by whole body MRI systems. The Aurora System for breast
imaging utilizes a .5T magnet that maintains an imaging field of view and image
quality comparable to a 1.5T whole body system, dramatically reducing the
customer purchase price and siting costs. The Aurora System will be offered at
about 1/3 of the cost of a whole body system, or approximately $550,000. With
future expanded applications and the Aurora System's market pricing strategy,
the Company expects sales of the Aurora System and its diffusion in the women's
healthcare marketplace to develop commensurate with new applications. The
Company plans to market the Aurora System to mammography clinics and practices
where patient volume is sufficient to justify the cost of adding MRI to the
diagnostic workup of certain breast patients and intends to operate and install
its breast imaging system through the following structures:
"Shared Revenue Agreements"
The Company may install the Aurora System under a shared revenue agreement,
whereby the Company provides the Aurora System, all upgrades to the system made
available during the term of the agreement, all maintenance and cryogens for the
system and equipment insurance coverage. The hospital then provides the
necessary leasehold improvements and all other required services, including the
technologists, and provides for all scheduling and screening, billing and
collecting of revenues from patients and third-party payers, maintaining medical
and administrative records and filing for required clinic licenses, if
necessary.
In exchange for the Company providing the equipment, the Company receives a
monthly lease payment based on a percentage of the collected net patient revenue
from technical services, generally 50%. Similar to the full-service provider
structure, total fees charged by the hospital will vary and reimbursement will
normally be less than the total fees charged. In addition, the hospital will
also enter into contractual arrangements with third-party payers that provide
for volume or group discounts.
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<PAGE> 9
"Direct Sales"
The Company may install the Aurora System through a direct sale to a
hospital or women's health center. The Company believes that direct sales will
be the most prevalent as breast MRI technology becomes more accepted in managing
and treating breast disease. The Company further expects to generate additional
future revenues through sales of upgrades and enhancements, as they become
available.
"Full-Service Provider"
The Company may operate as a full-service medical provider whereby the
Company provides the Aurora System and the technologists to operate the system.
It also provides for scheduling and screening of patients, maintaining medical
and administrative records, establishing charges and billing and collecting
revenues from patients and third-party payers.
In these instances, host hospitals generally function as a landlord for the
Company.
Total charges billed vary depending on the type and duration of
examination. Insurance reimbursements are normally less than rates charged. In
addition, the Company enters into contractual arrangements with third-party
payers that provide for volume or group discounts. Professional service charges
due to the radiologists who read and interpret the examination results are
generally billed separately by the radiologists.
"Comprehensive Breast Imaging Center"
The Company may acquire comprehensive breast imaging centers and install an
Aurora system to further differentiate the center and increase patient volume.
The comprehensive breast imaging centers will operate as full-service providers
whereby the Company will operate the equipment, schedule, bill and collect,
contract with the third-party payers, etc. The Company will also contract with
physicians for services to the extent necessary. (See Note 6)
NOTE 3 - PREFERRED STOCK - SERIES B
The Series B Preferred Stock consists of 2,700 shares, ranks senior to any
other shares of preferred stock which may be created and the Common Stock, has a
liquidation value of $1,000.00 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 1,159,793 shares of
Common Stock adjusted for the Reverse Stock Split, 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.
NOTE 4 - MEDICAL DIAGNOSTICS, INC.
Effective August 31, 1995, Medical Diagnostics, Inc. ("MDI") merged (the
"MDI Merger") with a wholly owned subsidiary of the Company. In connection with
the MDI Merger, MDI entered into a loan and security agreement with a bank to
finance the cash portion of the merger. The acquisition was accounted for under
the purchase method of accounting and the purchase price of $29,806,000,
exclusive of related costs, consisted of cash of approximately $11,196,000 and
stock valued at approximately $18,610,000. In addition, 233,172 warrants to
purchase the Company's common stock at $37.50 per share, adjusted for the
Reverse Stock Split, were issued to MDI shareholders. The purchase price and
costs associated with the acquisition exceeded the fair value of the net assets
acquired by approximately $26,933,000 which was assigned to goodwill and was
being amortized on a straight-line basis over thirty years.
At the effective time of the US Diagnostic Merger (see Note 2), US
Diagnostic paid the Company $22,000,000 (the "Merger Consideration") as follows:
(1) to Chase Manhattan Bank NA (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) to the
Company (approximately $10,000,000). As a result, 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 US Diagnostic Merger.
-9-
<PAGE> 10
There are also mutual indemnifications between the Company and US
Diagnostic whereby the Company has 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. The Company had also indemnified US
Diagnostic from any losses arising from the lawsuit between MDI and Raytel
Medical Corporation, et al ("Raytel"). In September 1997, the Raytel litigation
was settled whereby all actions between the parties were dismissed.
Consequently, the $1,000,000 of the Merger Consideration and the Company's
unescrowed shares in AMS placed in a blocked account as security has been
released. In March 1998, the $700,000 held by the bank securing certain of the
capital leases assumed by US Diagnostic was released. In addition, in July 1998,
the Company announced that in the matter of John Lynch vs. Advanced NMR Systems,
Inc., a panel of arbitrators unanimously reached a final decision rejecting
claims and denying damages. Caprius, prior to this date, paid Lynch certain
benefits pursuant to the severance provisions of his contract. The arbitrators
awarded less than half of the legal expenses demanded or approximately $200,000.
NOTE 5 - PRO FORMA INFORMATION
The following unaudited pro forma financial information sets forth the
results of the Company as if the AMS Merger and the US Diagnostic Merger had
occurred as of October 1, 1997. The pro forma financial information does not
purport to be indicative of what would have occurred had the acquisition been
made as of October 1, 1997 or results that may occur in the future.
<TABLE>
<CAPTION>
Nine Months Ended
June 30, 1998
-----------------
(000's omitted, except per share amount)
<S> <C>
Net revenues $ 2,681
Operating expenses $(9,268)
Operating loss from continuing operations $(6,588)
Loss from continuing operations $(6,426)
Loss per common share $ (0.87)
</TABLE>
NOTE 6 - SUBSEQUENT EVENT
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 of
the acquisition, the Company paid $600,000 in cash. The acquisition will be
accounted for under the purchase method of accounting and the cost in excess of
net assets of approximately $450,000 will be amortized over 20 years.
[This space intentionally left blank.]
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<PAGE> 11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THREE MONTHS ENDED JUNE 30, 1998, COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
The results of operations for the three months ended June 30, 1998 and 1997
are not necessarily indicative of the results for future periods. The following
discussion should be read in conjunction with the attached notes thereto, and
with the audited financial statements and notes thereto for the fiscal year
ended September 30, 1997.
Net patient service revenue totaled $963,441 for the three months ended
June 30, 1998 versus $920,563 for the three months ended June 30, 1997. Cost of
service operations totaled $999,143 for the three months June 30, 1998 versus
$770,836 for the three months ended June 30, 1997. These increases were largely
the result of the net patient revenue and operating expenses from the start-up
of the Faulkner Centre. This revenue stream is expected to increase with
increased patient volume and with the new sites expected in the fourth quarter.
Cost of service operations should increase as these additional sites commence
operations.
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 progress (see Note 2).
Selling, general and administrative expenses totaled $965,043 for the three
months ended June 30, 1998 versus $758,548 for the three months ended June 30,
1997. This increase reflects the Company's heightened efforts in marketing,
promoting and developing Aurora System installations.
Gain (loss) on sale of imaging business reflects the accounting for the US
Diagnostic Merger in February 1997. The loss for the three months ended June 30,
1997, consists of certain proceeds received pursuant to the Raytel litigation
offset by continuing costs incurred related to the US Diagnostic
indemnifications.
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.
NINE MONTHS ENDED JUNE 30, 1998, COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
The results of operations for the nine months ended June 30, 1998 and 1997
are not necessarily indicative of the results for future periods. The following
discussion should be read in conjunction with the attached notes thereto, and
with the audited financial statements and notes thereto for the year ended
September 30, 1997.
Net patient service revenue totaled $2,680,804 for the nine months ended
June 30, 1998 versus $11,608,067 for the nine months ended June 30, 1997. Cost
of service operations totaled $2,482,643 for the nine months June 30, 1998
versus $8,269,199 for the nine months ended June 30, 1997. The decrease from
1997 to 1998 was largely the result of the US Diagnostic 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 1997. The Company also recorded approximately $177,000 for the nine
months ended June 30, 1998, in net patient revenue from its start-up at the
Faulkner Centre, which is expected to increase with increased patient volume and
with the new sites expected in the fourth quarter. Cost of service operations
should also increase as these additional sites commence operations.
Management fees and other revenues for the nine months ended June 30, 1997,
include 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 R&D projects in
progress (see Note 2).
-11-
<PAGE> 12
Selling, general and administrative expenses totaled $3,782,899 for the
nine months ended June 30, 1998 versus $3,045,433 for the nine months ended June
30, 1997. This increase reflects the effects of the US Diagnostic Merger offset
by the increased efforts in marketing, promoting and developing Aurora System
installations.
Other Income for the nine months ended June 30, 1997 includes a gain of
$223,000 from the sale of certain equipment.
Gain (loss) on sale of imaging business reflects the accounting for the US
Diagnostic Merger in February 1997. The loss for the nine months ended June 30,
1998, consists of certain proceeds received pursuant to the Raytel litigation
offset by continuing costs incurred related to the US Diagnostic
indemnifications.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had available cash and cash equivalents of $4,250,723 at June
30, 1998. The Company intends to utilize the funds for the continuing
development of the Aurora System, for the clinical research study being
conducted on the role of MRI in breast care and for the opening of breast
imaging centers. In addition, the Company has equipment credit lines for up to
$3.2 million to fund Aurora System installations of which $700,000 has been
drawn as of June 30, 1998 and approximately $800,000 will be drawn when the
systems are installed at the Breast Care Center at the Englewood Hospital and
Magee Women's Hospital.
The significant cash flows used in operating activities for the three and
nine months ended June 30, 1998, reflect the Company's continuing investment in
the development of the Aurora System and in marketing to and developing future
breast imaging centers. This investment is offset by restricted cash released
from the blocked account.
The Company currently funds its operations principally through cash
obtained from the US Diagnostic merger. The Company anticipates that revenues
from the Faulkner Centre and future sites will increase significantly as
additional systems are installed. The Company continues to negotiate with
several unaffiliated parties to establish credit facilities for the capital
expenditures at its new sites. However, there can be no assurances that any
agreements can be consummated or that such agreements will be in amounts
sufficient to fund all the Company's installations or that revenues from future
sites will be sufficient to fund operations.
In addition, management is currently in discussions to obtain additional
funds through various funding options, including equity offerings, commercial
and other borrowings, strategic corporate alliances and joint ventures or the
sale of the Company's rehabilitation business. However, there can be no
assurance that such funding initiatives would be successful.
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.
The Company is including the following cautionary statement in this Report
of Form 10-Q 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
-12-
<PAGE> 13
involve risks and uncertainties, which could cause actual results, or outcomes
to differ materially from those expressed in the forward-looking statements. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including, without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
however, there can be no assurance that management's expectation, beliefs or
projections will 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.
[This space intentionally left blank]
-13-
<PAGE> 14
PART II: OTHER INFORMATION
ITEM 1. 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
Stated District Court for the District of Massachusetts. The complaint contains
claims for alleged violations of Sections 10(b) and 20(a) under the Securities
Exchange Act and for common law fraud, and seeks unspecified compensatory
damages sustained as a result of the defendants' alleged wrongdoing. 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." The complaint
alleges that during the class period the defendants "issued to the investing
public false and misleading financial statements, press releases and sales
projections" concerning the Company's revenues and future business prospects.
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 has been brought by Robert Curry and the complaint
alleges the same purported class and contains similar allegations and claims as
the class action complaint discussed above. On April 24, 1998, the District
Court consolidated the two class action claims into one for pre-trial purposes.
The Company believes it has meritorious defenses to these allegations and
intends to vigorously contest all claims.
In April 1998, the parties to the arbitration between John A. Lynch, the
former Chief Executive Officer of MDI, and the Company reached a tentative
agreement for some of Mr. Lynch's expenses and claims for bonuses. In July 1998,
a panel of arbitrators unanimously reached a final decision rejecting claims and
denying damages. Caprius, prior to this date, paid Lynch certain benefits
pursuant to the severance provisions of his contract. The arbitrators awarded
less than half of the legal expenses demanded or approximately $200,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports of Form 8-K
June 3, 1998 - Change in Registrant's Certifying Accountants
-14-
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Caprius, Inc.
---------------------------------
(Registrant)
Date: August 13, 1998 /s/ Jack Nelson
---------------------------------
Jack Nelson
Chief Executive Officer
Date: August 13, 1998 /s/ Steven J. James
---------------------------------
Steven J. James
Chief Financial Officer
-15-
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CAPRIUS,
INC. FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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