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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: JUNE 30, 1997
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period N/A to N/A
Commission File number: 0-24974
DIASYS CORPORATION
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(Exact name of small business issuer as specified in its charter)
DELAWARE 06-1339248
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(State or other jurisdiction of (I.R.S. Employer ID #)
incorporation or organization)
49 LEAVENWORTH STREET, WATERBURY, CT 06702
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(Address of principal executive offices)
203-755-5083
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(Issuer's Telephone number including area code)
NONE
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(Former name, address and/or fiscal year if changed from last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the 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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is no contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB._________
Registrant's revenues for the most recent fiscal year were $446,339.
As of September 1, 1997, the aggregate market value of the registrant's voting
stock held by non-affiliates was $15,367,300 based upon an average closing price
of $6 1/2 for the five trading days immediately prior thereto.
As of September 1, 1997, the Registrant had 2,364,200 shares of common stock and
565,800 common stock purchase warrants outstanding.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
DiaSys Corporation (the "Company") designs, develops, manufactures and
distributes instruments which standardize and automate routine, labor intensive
procedures in hospital, clinical and private physician laboratories. The Company
was organized in March, 1992 in the State of Connecticut and effected a
statutory merger into a Delaware Corporation of the same name in December 1993.
The Company is completing its developmental stage, and since its inception has
engaged primarily in organizational activities and creation of several
proprietary products.
In January of 1995, the Company completed an initial public offering
("Offering") of 1,000,000 shares of its Common Stock, par value $.001 ("Common
Shares") and 500,000 Common Stock Purchase Warrants, each exercisable at a fixed
price into one Common Share ("Warrants"). The Company received net proceeds
after expenses of $3,961,179 from the Offering. In addition, on February 2,
1995, the Company's underwriter exercised its option to purchase 130,000
additional Common Shares and 70,000 Warrants from the Company pursuant to an
over-allotment option granted to the underwriter as part of the Offering. The
Company received an additional $561,425 in net proceeds from the exercise.
Accordingly, the Company realized $5,735,500 in proceeds from its Offering with
net proceeds after expenses of $4,522,604.
On July 24, 1997 the Company filed a post effective amendment consisting of
566,000 shares of Common Stock, par value $.001 (the "Common Stock"), issuable
upon the exercise of 566,000 Redeemable Common Share Purchase Warrants (the
"Redeemable Warrants"). The Redeemable Warrants were issued in connection with a
public offering of the Company's securities in January 1995. Each Redeemable
Warrant entitles the registered holder thereof to purchase one share of Common
Stock at a price of $7.00 per share, subject to adjustment in certain
circumstances. On January 3, 1997 the Board of Directors of the Company approved
the extension of the 566,000 publicly traded redeemable warrants to July 10,
1997. On May 21, 1997, the Board of Directors of the Company reduced the
exercise price of the Redeemable Warrants for the remainder of their term to
$5.25 per share. The Redeemable Warrants were set to expire July 10, 1997. On
July 3, 1997, the Board of Directors of the Company approved the extension of
the expiration date of the 566,000 publicly traded Redeemable Warrants from July
10, 1997 to October 10, 1997. On October 9, 1997, the Board of Directors of
the Company approved the extension of the expiration date of the 565,800
publicly traded Redeemable Warrants from October 10, 1997 to April 10, 1998.
PRODUCTS
The Company's product strategy is to develop workstation products that reduce
operating costs and improve safety for hospital, clinical and private physician
laboratories throughout the world.
"R/S" SERIES
The Company's first product family is the "R/S" series workstations used to
automate and standardize routine urine sediment analysis conducted in hospitals,
private clinics, and physician group practices. The "R/S" family of workstation
products is comprised of the following: The R/S 1000 which serves the needs of
small laboratories; the R/S 2000 which serves the mid-sized user; and, the R/S
2003 which accommodates high volume laboratories. All three workstations satisfy
the critical requirements of routine analysis of urine sediment at each level.
Under traditional methods for urinalysis, a technologist takes centrifuged urine
to a sink, pours off ("decants") all of the excess fluid ("supernatant"), and
brings the tube containing the concentrated urine sediment ("button") to a
standard upright microscope. The technologist then draws up some amount of the
button, using a plastic device called a pipette. A drop of specimen fluid is
then squeezed from the pipette onto a glass microscope slide. The technologist
places a very thin piece of glass ("cover slip") onto the drop of specimen
fluid. The cover slip is pressed down so as to remove bubbles, flatten clumps of
the
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button, and distribute the fluid somewhat evenly. The glass assembly is then
positioned onto the stage of a microscope and examined. At the end of the
examination, the glass slide, cover slip and pipette are thrown away. The entire
procedure typically takes between 1 and 4 minutes to complete. The traditional
procedure for routine urinalysis is labor intensive, requires many disposable
items per test, is prone to variations in and among tests, and exposes the
technologist to potentially hazardous materials contained in the specimen
throughout the entire process. The "R/S" series workstations correct these
critical laboratory shortcomings by improving:
1. Speed
2. Cost-efficiency
3. Accuracy/Reproducibility
4. Safety.
1. Speed: In most applications, the "R/S" series increases the number of
urine tests that can be performed by a technologist in a given amount of time.
This increased "throughput" is very important to routine urinalysis since the
financial ability to hire additional personnel typically lags far behind
increases in demands on laboratory services. The "R/S" series increases
throughput by automating the sample process and eliminating the need to
manipulate several disposable and movable items otherwise required by
traditional laboratory methods.
In operation, once the supernatant (excess) is decanted, the technologist loads
the "R/S" workstation with up to 24 urine tubes. The technologist then inserts
the unit's automatic aspirator ("pipette") into the first tube, presses the
unit's SAMPLE button, and a consistent amount of specimen fluid is automatically
transferred to an optical slide assembly mounted on the stage of the microscope.
It takes under 3 seconds for this transfer to be completed. The technologist
then analyzes the specimen as he or she would under conventional methods. When
the analysis is finished, the technologist presses the PURGE button and within 5
seconds, the system is purged with isotonic saline solution, ready for a new
sample.
With conventional methods, it takes the technologist approximately 20 seconds to
make and discard a slide. The "R/S" series does the same function in 8 seconds.
With conventional methods, the technologist generally inspects 9-to-15 fields of
view per slide in order to make a competent analysis. Current users of the "R/S"
workstations report that the same analysis can be achieved within 3-to-5 fields
of view. Some users have reported increased throughput of up to 50% over
traditional urinalysis procedures. The labor savings realized through increased
throughput allows the laboratory to allocate its personnel to other testing
functions.
2. Cost-Efficiency: The increased throughput of the "R/S" series
workstations result in better allocation of staff time over total lab
requirements. The lab can therefore perform more and/or varied functions without
increasing staff. Labor savings is a significant benefit to laboratories since
labor costs and overhead associated therewith are the single largest expenditure
of most laboratories, accounting for 60-70% of direct costs.
In addition to labor savings, the "R/S" series workstations eliminate the need
to purchase and make space for pipettes, microscope slides and cover slips. The
only disposable item connected with the "R/S" workstations is the tube in which
the urine was originally centrifuged. Moreover, since there are no consumable
items, the cost traditionally incurred in disposing of such bio-hazardous items
is also saved.
3. Accuracy And Reproducibility: Many laboratory handbooks state that test
standardization is a key element of any quality control or quality assurance
program. The same handbooks criticize conventional methods of slide preparation
because specimen volume and fluid distribution tend to vary significantly from
test to test. The "R/S" series workstations eliminates technologist variations
in test procedures. Unlike manual pipetting, the peristaltic pump of the "R/S"
workstations is designed to deliver a consistent
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amount of specimen fluid each time to the optical slide chamber and, since the
dimensions of the optical slide chamber are constant, the volume size and depth
of view are also constant, test after test.
4. Safety: Routine urinalysis requires substantial contact with urine and
constant manipulation of the specimen. The surge of AIDS, hepatitis B,
tuberculosis, and government regulations in connection therewith have prompted
many laboratories to seek automated and safe procedures for urinalysis. The
"R/S" series workstations provide such safety and automation by preparing and
disposing of specimen samples without the technologist ever touching the
specimen. Furthermore, since the specimen is in a sealed environment, the risk
of spillage, overflow, and similar counter top accidents is avoided.
"FE" SERIES:
The FE-2 is the first of a new family of products designed by the Company for
use in microbiology. More specifically, the FE-2 is a counter top instrument
which automates and reduces the cost of microscopic analysis of fecal
concentrates. Microscopic analysis of feces is performed by thousands of
hospital, public health and private commercial laboratories world wide in order
to detect the presence of ova (eggs), cysts, and parasites in the lower
intestinal tract of humans and animals. The presence of such organisms is
critical to the proper care of the patient. The test is non-invasive, can be
performed on an out-patient basis, and quickly provides confirmatory results.
While there are multiple methods for preparing fecal concentrates, the end
result is fecal material which has been filtered and suspended in formalin, a
10% formaldehyde solution. The technologist then centrifuges the material, pours
off ("decants") all of the excess fluid ("supernatant"), resuspend the fecal
concentrate in saline solution, and brings the tube containing the fecal
concentrate to a standard upright microscope. The technologist then draws up
("aspirates") some amount of the concentrate using a pipette. A drop of
concentrate is then squeezed from the pipette onto each of two glass microscope
slides. Onto one slide the technologist will add either: (i) a drop of iodine to
highlight possible eggs, cysts or parasites; or, (ii) a drop of saline solution
in order to dilute the concentrate in case the other slide is too dense to
analyze. The technologist then places an oversized ("extended") cover slip onto
the drop of concentrate. Each cover slip is pressed down so as to remove air
bubbles, flatten clumps of concentrate, and distribute the fluid somewhat
evenly. Each glass assembly is then positioned onto the stage of a microscope
and examined, one after the other. At the end of the examination, the glass
slides, cover slips and pipette are thrown away. The entire procedure typically
could take as long as 15 minutes to complete.
Like the analysis of urine sediment, the analysis of fecal concentrates is labor
intensive, requires many disposable items per test, is prone to variations in
and among tests, and exposes the technologist to the specimen throughout the
entire process. In addition but unlike urinalysis, fecal concentrates are
generally prepared with formalin which is both noxious and potentially
carcinogenic. The Occupational Health and Safety Administration ("OSHA")
requires periodic monitoring of air formalin (formaldehyde) in laboratories with
air concentration levels above 0.75 parts per million. Prolonged inhalation of
the formalin in the fecal concentrates, therefore, is intensely discouraged by
both the examining technologist and the laboratory environmentalist.
The FE-2 workstation corrects the procedural shortcomings of current
methodologies in several significant ways. The FE-2 requires no special
training. To operate, the technologist inserts the instrument's automatic dual
aspirator into a prepared fecal concentrate and presses the "SAMPLE" button on
the control console of the workstation. Within 5 seconds, a consistent, measured
amount of concentrate is automatically transferred to the workstation's optical
slide assembly (OSA) on the stage of the microscope. During this process, one
chamber of the OSA is inoculated with 10 ul of the fecal concentrate. The other
chamber is inoculated with an equal mix of 5 ul of fecal concentrate and 5 ul of
an iodine solution (or isotonic saline solution as the laboratory may prefer).
Observations are conducted through the stage-mounted (OSA) which is included
with the FE-2. The chambers of the OSA are constructed of a seamless, high
optical quality glass capillary. The width of the viewing area of each capillary
is equal to the width of a standard 10x lens objective so that scanning is
quicker and more precise. When observations of both the stained and unstained
fecal concentrates are complete, the technologist may
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either: (a) purge the OSA by pressing either PURGE button on the control
console; or, (b) view a succeeding portion of the concentrate by pressing the
SAMPLE button. Pressing the SAMPLE button will advance the concentrate forward
by 50ul thereby displaying a new portion of the concentrate in the OSA. This
"Jog" may be performed twice after the original sample is made. Purging the
system takes about 7 seconds, after which time the FE-2 is ready to make the
next concentrate slides.
The FE-2 increases the level of safety and precision by automating the
aspiration, resuspension, staining or diluting, transfer, presentation and
disposal of fecal concentrates. It also eliminates the need and cost of
disposable pipettes, microscope slides, and cover slips. The FE-2 reduces
analysis time and increases accuracy by establishing strict physical parameters
of the viewing area. Moreover, since the fecal concentrate is contained in and
manipulated through a sealed system, the technologist is no longer exposed to
prolonged inhalation of the formalin.
ADDITIONAL WORKSTATION PRODUCTS:
The Company is developing several additional workstation products which automate
and standardize routine analysis of human and non-human fluids, one of which is
currently being tested in Germany. Each workstation is or will be designed to
increase the precision and reduce the cost of performing an otherwise labor
intensive, manually oriented laboratory procedure.
SALES, MARKETING, AND DISTRIBUTION
NORTH AMERICA:
The Company sales and services its workstation-products through its headquarter
offices in Waterbury, CT and eight regional sales offices throughout the United
States and Canada. Each sales office is staffed by a manager and each manager is
responsible for coordinating sales efforts with the dealers and independent
sales representatives in and for the region. The regional sales offices are
supported by a manager of marketing information systems, a director of strategic
accounts, a customer service technician and a newly appointed Vice President of
sales and marketing, each located at the Company's headquarter offices.
Each sales manager earns a base salary and an incentive bonus based upon
achievement of a quarterly and annual sales quota.
Independent sales representatives are given non-exclusive territories and
compensated on a commission basis only. Dealers are generally provided with
non-overlapping territories and are compensated by purchasing product against an
established discount schedule. Independent sales representatives and dealers do
not generally occupy the same sales territory.
Sales in North America are facilitated by a series of marketing programs which
include telemarketing, direct mail campaigns, advertising in key trade journals,
participation in technical workshops, and exhibitions at national trade shows.
MATERIAL CONTRACTS:
In August of 1994, SmithKline Beecham Clinical Laboratories declared the
Company's R/S 2000 workstation its preferred method for urine sediment analysis
within their national network. The Company installed one or more "2000"
workstations in each of SmithKline's key regional laboratories throughout
continental United States. In July of 1996, the Company entered into a second
agreement with SmithKline pursuant to which SmithKline may upgrade each of their
R/S 2000's with the Company's R/S 2003. For the fiscal year ending June 30, 1997
sales to SmithKline accounted for 8.5% of the net revenue.
On March 7, 1995, the Company was designated an approved vendor by and to the
Mid-Atlantic Group Network of Shared Services, Inc. (MAGNET), a 2,500 member
consortium of hospital purchasing agents.
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The Company has commenced joint marketing operations to the consortium with
MAGNET's marketing and technical personnel.
On June 17, 1996, the Company was awarded a two-year purchase agreement with
Kaiser Permanente, Southern California region.
On August 6, 1996 the Company announced that it had entered into a three year
group purchasing agreement with AmeriNet, Inc. of St. Louis Missouri. Under the
agreement AmeriNet and DiaSys will jointly promote DiaSys' urine sediment and
fecal concentrate workstation to AmeriNet's 3,500+ member laboratories. The
agreement provides AmeriNet members with uniform terms and conditions,
preferential pricing, and additional product support by AmeriNet's sales force.
November 1, 1996, the Company entered into a product integration agreement with
Intelligent Medical Imaging Inc. ("IMI") pursuant to which IMI agreed to
purchase a combination of two hundred (200) R/S 2003 and FE-2 workstations. The
first one hundred units of R/S 2003 workstations were delivered on or before
March 27, 1997. Pursuant to the IMI agreement, IMI was under an obligation to
order the remaining one hundred workstations prior to June 30, 1997 and accept
delivery thereof by December 31, 1997. On June 16, 1997, IMI advised the Company
that it was rejecting all workstations as non-conforming under the terms of the
IMI agreement. On July 3, 1997 and following several communications between the
parties, the Company notified IMI that it had suspended the IMI Agreement
pending the resolution of the outstanding disputes including the conformity of
the goods and non-payment for the goods delivered. On July 17, 1997, IMI
notified the Company that it had terminated the IMI agreement due to the
Company's alleged breach of the IMI agreement. The Company believes that it did
not breach the agreement. The Company is pursing its remedies against IMI,
including compensation to the Company for loss of profit. The Company believes
that it will ultimately prevail in obtaining a resolution of its claims against
IMI.
Bayer Inc:
On June 27, 1996 the Company entered into a strategic cooperation agreement with
Bayer Inc. of Canada. Under the agreement, Bayer's Health Care Division and the
Company will jointly market their urine analysis workstations to hospitals and
clinical reference laboratories in Canada. The two companies have also agreed to
engage in joint product development if and as mutually advisable. Bayer Inc. is
the Canadian subsidiary of the health care giant Bayer A.G. headquartered in
Germany.
International:
The Company is commencing distribution operations in Europe, South America,
Central America, China and parts of Pacific-Asia. The Company has appointed a
country manager in England to assist with and oversee European operations. The
country manager is not an employee of the Company and is compensated on a
percentage of European sales only. The Company has started to implement its
distribution plan for Japan, Philippines, Singapore, Mexico, Brazil and Bolivia.
Distribution in Pacific Asia and in South America is managed by personnel at the
Company's headquarter offices.
RESEARCH AND DEVELOPMENT
In fiscal year 1997, 1996, and 1995 the Company spent approximately $408,000,
$251,000 and $184,000 respectively on research and development. The Company
conducts research and product development through its product development and
technical support staff.
COMPETITION
THE "R/S" SERIES:
The Company knows of no other product which competes directly with the "R/S"
series workstations. There are however five competing technologies for the "R/S"
series: (i) traditional use of a microscope to examine a glass slide of urine
sediment; (ii) traditional use of a microscope to examine urine sediments
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introduced into a pre-formed plastic slide assembly; (iii) a video imaging
system which automatically "recognizes" and "counts" pre-stored images of
"common shapes" found in urine sediment; (iv) a laser based system which detects
"abnormal" urines thereby reducing the number which must be manually analyzed;
and, (v) pre-screening using chemically treated reagent or "dip" strips.
The oldest technology is the use of a microscope to examine a glass slide of
urine sediment. However, as described elsewhere, the use of microscope slides
and cover slips is time consuming, prone to inconsistencies, and expensive.
Pre-formed plastic slides are easier to handle than glass and provide more
standardization. However, the optical quality seen through plastic slides tends
to be significantly inferior to that of glass and the cost is generally higher.
The video imaging system on the market provides a "standard procedure" for
urinalysis, dispenses with the need for costly consumable items such as glass or
plastic slides, and, sharply reduces exposure to potentially infectious
materials carried in urine. However, since the basic unit costs between $70,000
and $120,000, the Company believes that only the largest laboratories with the
most liberal budgets can justify the purchase of such a system. The laser-based
system screens-out "normal" urines thereby reducing the number of "abnormal"
urines requiring manual analysis. However, the laser based system costs
approximately $100,000 and therefore is out of the economic reach of most
laboratories. Lastly, reagent strips are very efficient for determining chemical
compositions, but they do not detect the existence of many types of particulate
matter otherwise having clinical significance.
FE-2:
The Company knows of no other workstation product which automates resuspension,
aspiration and presentation of fecal concentrates for microscopic analysis.
The Company expects to encounter competition in the laboratory equipment
industry. While the Company believes that the "R/S" series and FE-2 workstations
are currently the only products of their type in the market, many of the
Company's competitors and potential competitors have substantially greater
resources, including capital, research and development, personnel and
manufacturing and marketing capabilities, and also may offer well established,
broad product lines and ancillary services. Some of the Company's competitors
have long-term or preferential supply arrangements with hospitals. Such
arrangements may act as a barrier to market entry to the Company's products.
Competing companies may succeed in developing products that are more efficacious
or less costly, and such companies may also be more successful than the Company
in production and marketing. Rapid technological development by others may
result in the Company's products becoming obsolete before the Company recovers a
significant portion of the research, development and commercialization expenses
incurred with respect to those products. There can be no assurance that the
Company will be able to compete successfully.
MANUFACTURING AND WARRANTIES
The Company internally designs and manufactures its workstations products. The
Company purchases sub-assemblies and parts designed according to Company
specifications, and assembles and final tests the sub-assemblies and parts
within its own facility. The Company has developed alternate qualified vendors
for its critical raw material and supplies that could fulfill its requirements
if needed. Implementation of the plan has resulted in higher manufacturing
quality, reduced lead time to delivery and reduced costs in manufacturing.
The Company provides its customers with a one year "swap out" warranty against
defects in parts or workmanship on all new or refurbished units from the date of
delivery, generally defined as FOB, DiaSys. This means that in the event a unit
fails from a defect in parts and/or workmanship during the warranty period, the
Company will replace the unit with a new or refurbished unit at the Company's
option. After the warranty expires, service is provided by the Company and
charged at an hourly rate. The Company also offers an extended maintenance
agreement for an additional charge. The Company experiences minimal additional
costs associated with its warranty obligations.
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TRADE SECRETS, PATENTS AND TRADEMARKS
PATENTS:
The Company has been granted two patents from the United States Department of
Commerce: one effective May 28, 1992; the other, February 28, 1995. The first
patent pertains to the concept and overall function of the "R/S" series
workstation. The second patent pertains to the unique and novel features of the
optical slide assembly.
The Company was also granted patent protection in Taiwan effective September 10,
1993 and in Australia effective December 16, 1994.
On February 18, 1997, the Company announced that its technology was granted
patent protection in Austria, Belgium, Denmark, England, France, Germany,
Greece, Ireland, Italy, Luxembourg, Monaco, the Netherlands, Portugal, Spain,
Sweden, Switzerland, Liechtenstein, and Singapore.
The Company is pursuing similar patents in Japan, Canada and Brazil.
The Company has applied for patent protections for its FE-2 fecal concentrate
workstation and other novel inventions.
TRADE NAMES:
The Company has five applications pending for trade names: three in the United
States, one in Europe and one in Japan.
INSURANCE:
The Company has purchased patent insurance from the Homestead Insurance Company.
Under the policy, Homestead will provide the Company with up to $500,000 (with a
$500,000 aggregate policy) in legal fees and assistance in the event that
litigation is required to protect or prosecute the Company's proprietary rights
under its patents.
There can be no assurance that any future applications by the Company for patent
protection will result in patents being issued, or, if issued, that such patents
will provide a competitive advantage or will afford protection against
competitors, with similar technology, or that competitors of the Company will
not circumvent, or challenge the validity of any patents issued or licensed by
the Company. Moreover, there can be no assurance that the Company's
non-disclosure agreements and other safeguards will protect its proprietary
information and trade secrets or provide adequate remedies for the Company in
the event of unauthorized use or disclosure of such information, or that others
will not be able to independently develop such information.
GOVERNMENT REGULATION
The Company has obtained safety certifications for its workstation products
from: (i) Underwriters Laboratories (UL) and TUV Rhineland of North America,
Inc. as well as CS, VDE and CE.
On May 23, 1995, the Company received clearance from the Food and Drug
Administration (FDA) to release the R/S 2003 and related products to market. In
the same letter, the FDA stated that any of the Company's future products which
are substantially equivalent to the new workstations may be marketed directly
without first submitting pre-market notification.
Although the "R/S" series and FE-2 workstations are exempt from FDA 510(k)
pre-market notification requirements, the development, testing, manufacturing
and marketing of the Company's products in the United States are regulated by
the FDA, which generally requires clearance of such products before marketing.
Moreover, regulatory approval, if granted, may include significant limitations
on the indicated
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uses for which a product may be marketed. Failure to comply with applicable
regulatory requirements can result in, among other things, fines, suspensions of
approvals, product seizures, injunctions, recalls of products, operating
restrictions and criminal prosecutions. There can be no assurance that the
Company will be able to obtain the necessary regulatory clearance for the
manufacturing and marketing of other products which are currently in the
development stage, either in the United States or in foreign markets on a timely
basis or at all. Certain of the Company's future diagnostic products may require
submission to the FDA of an application for Pre-market Approval. Delays in
receipt of or failure to receive clearances to commence clinical studies or to
market products, or loss of previously received clearances, would adversely
affect the marketing of the Company's proposed products and the results of
future operations.
Commercial distribution in most foreign countries is also subject to varying
government regulations. In addition, federal, state and international government
regulations regarding the manufacture and sale of diagnostic devices are subject
to future change, and additional regulations may be adopted which may prevent
the Company from obtaining, or affect the timing of, future regulatory
clearances and may adversely affect the Company.
The Company's manufacturing process is subject to stringent federal, state and
local regulations governing the use, generation, manufacture, storage, handling
and disposal of certain materials and wastes, and regarding the manufacture,
testing, labeling, record keeping, and storage of diagnostic devices, including
current Good Manufacturing Practices regulations and similar foreign
regulations. Although the Company believes that it and its subcontractors have
complied in all material respects with such laws and regulations, there can be
no assurance that the Company will not be required to incur significant costs in
the future in complying with manufacturing and environmental regulations.
LABORATORY REGULATIONS
Regulations issued under the Clinical Laboratory Improvement Amendments of 1988
("CLIA") became effective September 1, 1992. CLIA is intended to increase the
quality of laboratory services and extends these requirements to physicians
office laboratories. CLIA requires laboratory licensing and written operational
and quality control procedures for tests that are carried out in the laboratory.
It establishes personnel standards regarding qualification and training of
individuals who carry out the tests. It also mandates periodic inspection and
proficiency evaluation of the performance of these procedures and individuals.
CLIA requires the more complex procedures such as clinical microscopy to be
performed by more skilled medical technologists. The CLIA requirements have
caused more physician offices to transfer their urinalysis testing to reference
laboratories and has resulted in consolidation of many smaller reference
laboratories.
The Company believes that the "R/S" series and FE-2 workstations improve
laboratory operations, increase procedural quality and reduce labor costs.
Therefore, the Company believes the CLIA regulations are likely to help rather
than hinder its sales efforts in the longer term.
BIOHAZARD CONTAINMENT
OSHA mandated that all necessary precautions be taken to ensure the safety of
clinical laboratory personnel handling biohazard materials including bodily
fluid specimens that may contain life-threatening, blood-borne infectious
pathogens such as tuberculosis, hepatitis B and human immunologic viruses. To
the Company's knowledge, OSHA has not published any comparisons or analysis of
manual versus automated or semi-automated urinalysis procedures. However, the
Company believes that while conventional urinalysis has not been barred by the
OSHA regulations, it does expose technicians to potentially infectious urine
several times during the procedure, including accidental spillage and splashing
in the course of a number of its manipulative steps. In the event of such
inadvertent contact, skin cuts and abrasions which may occur from sharp edges in
the handling of microscope slides, cover slips and chipped or broken glass and
plastic ware, may become infected.
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The Company believes the "R/S" series and FE-2 workstations offer a contained
method of analyzing urine sediment and fecal concentrates and that each
workstation mitigates the risks associated with handling potentially biohazard
material.
MEDICARE/MEDICAID COST CONTAINMENT
The Company believes that the recent effort to contain costs have caused some
hospitals to reduce the number of urine sediment tests conducted, thus
diminishing the relative cost effectiveness of the "R/S" series and FE-2
workstations. Overall, hospitals have become significantly more cost-conscious.
Perhaps more important, hospitals have imposed more intense reviews of capital
acquisitions, particularly for new systems like the "R/S" series and FE-2
workstations, which address areas traditionally not requiring significant
capital investments.
However, laboratories must contend with the aforementioned new OSHA and CLIA
regulations. Since the Company's products are designed to reduce the amount of
labor required to perform laboratory tests and the specimen biohazard exposure,
as well as to standardize and improve the analytical quality of the urinalysis
procedure, the Company believes these factors could enhance its competitive
position in the market. There can be no assurance, however, that continued
reductions in reimbursements will not have a material adverse affect on sales
and Company operations.
Recent legislation has been introduced in the United States Congress to change
the existing health care system and Health Care Reform is a top priority of the
present administration. At the present time, the Company is unable to predict
what affect, if any, a change in the health care system would have on the
Company. While the Company believes that the cost-effectiveness of the "R/S"
series and FE-2 workstations should benefit medical and clinical laboratories,
medical and clinical laboratories may elect to postpone important decisions
regarding capital expenditures until any changes in the health care system are
completed and their full scope and effect known.
PRODUCT LIABILITY
The Company faces potential liability in connection with the use of its
products. The Company has purchased product liability insurance in the amount of
$2,000,000. The Company believes that its present insurance is sufficient for
its current level of business operations. There can be no assurance however that
such insurance will be sufficient to cover potential claims or that the present
level of coverage will be available in the future at a reasonable cost.
ENVIRONMENTAL COMPLIANCE
The Company believes that its manufacturing process conforms to all federal,
state and local environmental regulations. There can be no assurances, however,
that the Company will not be required to incur significant costs in the future
in complying with environmental regulations.
EMPLOYEES
As of September 2, 1997 the Company employed 23 persons, 11 of whom were engaged
in sales and marketing, 5 in research and development, 2 in manufacturing, and 5
in administrative, accounting and other clerical support activities.
ITEM 2. PROPERTIES
The Company leases 8,000 square feet of space at 49 Leavenworth Street,
Waterbury, Connecticut for its headquarters, research and development and
assembly operations. The Company's lease expires December 31, 1997. The Company
pays an annual rent of $38,808.00 paid in equal monthly installments of
$3,234.00. The Company is the process of negotiating a renewal and expansion of
space in the same building.
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
November 1, 1996, the Company entered into a product integration agreement with
Intelligent Medical Imaging Inc. ("IMI") pursuant to which IMI agreed to
purchase a combination of two hundred (200) R/S 2003 and FE-2 workstations. The
first one hundred units of R/S 2003 workstations were delivered on or before
March 27, 1997. Pursuant to the IMI agreement, IMI was under an obligation to
order the remaining one hundred workstations prior to June 30, 1997 and accept
delivery thereof by December 31, 1997. On June 16, 1997, IMI advised the Company
that it was rejecting all workstations as non-conforming under the terms of the
IMI agreement. On July 3, 1997 and following several communications between the
parties, the Company notified IMI that it had suspended the IMI Agreement
pending the resolution of the outstanding disputes including the conformity of
the goods and non-payment for the goods delivered. On July 17, 1997, IMI
notified the Company that it had terminated the IMI agreement due to the
Company's alleged breach of the IMI agreement. The Company believes that it did
not breach the agreement. The Company is pursing its remedies against IMI,
including compensation to the Company for loss of profit. The Company believes
that it will ultimately prevail in obtaining a resolution of its claims against
IMI.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company is authorized to issue 10,000,000 shares of Common Stock, $0.001 par
value, of which 2,364,200 shares were issued and outstanding as of September 1,
1997.
Commencing January 10, 1995 the Company's Common Stock began trading on the
NASDAQ Small Cap Market System under the symbol DIYS for the Common Stock and
DIYSW for the Warrants.
As of September 1, 1997 the Company's Common Stock was held by in excess of 600
beneficial holders. As of the same date, the Company's Warrants were held by in
excess of 150 beneficial holders.
The following table sets forth the high and low closing bid quotations for the
Company's Common Stock and Warrants as reported by NASDAQ for the periods
indicated. These quotations represent bid prices between dealers, do not include
retail mark-ups, markdowns or commissions, and do not necessarily represent
actual trade transactions.
COMMON STOCK
---------------
YEAR ENDED JUNE 30, 1995 HIGH LOW
------------------------ ---- ---
3rd Quarter 6 1/4 5 3/4
4th Quarter 6 1/4 6 1/8
YEAR ENDED JUNE 30, 1996 HIGH LOW
------------------------ ---- ---
1st Quarter 6 1/2 6 3/8
2nd Quarter 7 3/4 6 3/8
3rd Quarter 7 3/4 7 1/2
4th Quarter 8 1/8 7 5/8
10
<PAGE>
YEAR ENDED JUNE 30, 1997 HIGH LOW
------------------------ ---- ---
1st Quarter 6 5/8 6
2nd Quarter 6 1/2 6
3rd Quarter 6 3/4 6
4th Quarter 6 3/4 6
WARRANTS
YEAR ENDED JUNE 30, 1995 HIGH LOW
------------------------ ---- ---
3rd Quarter 1 1/8 1 3/16
4th Quarter 1 5/8 1 1/4
YEAR ENDED JUNE 30, 1996
-------------------------
1st Quarter 1 5/8 1 1/4
2nd Quarter 1 7/8 1 3/8
3rd Quarter 1 11/16 1 11/16
4th Quarter 1 3/4 1 1/2
YEAR ENDED JUNE 30, 1997 HIGH LOW
------------------------ ---- ---
1st Quarter 1 5/8 1 1/8
2nd Quarter 1 1/8 1/2
3rd Quarter 1 1/8 5/8
4th Quarter 1 3/8 5/8
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein are not based on historical facts, but are
forward-looking statements that are based upon numerous assumptions about future
conditions that could prove not to be accurate. Actual events, transactions and
results may materially differ from the anticipated events, transactions or
results described in such statements. The Company's ability to consummate such
transactions and achieve such events or results is subject to certain risks and
uncertainties. Such risks and uncertainties include, but are not limited to, the
existence of demand for and acceptance of the Company's products and services,
regulatory approvals and developments, economic conditions, the impact of
competition and pricing, results of financing efforts and other factors
affecting the Company's business that are beyond the Company's control. The
Company undertakes no obligation and does not intend to update, revise or
otherwise publicly release the result of any revision to these forward-looking
statements that may be made to reflect future events or circumstances.
The product integration agreement (the "IMI Agreement") between the Company and
Intelligent Medical Imaging Inc. ("IMI") pursuant to which IMI agreed to
purchase a combination of two hundred (200) R/S 2003 and FE-2 workstations had
been terminated by IMI. IMI notified the Company on July 17, 1997 that it had
terminated the IMI Agreement due to the Company's alleged breaches of the IMI
Agreement. The Company believes that it did not breach the IMI Agreement and
disputes the termination of the IMI Agreement by IMI. While the Company will
pursue all its remedies against IMI including compensation to the Company for
the loss of profit, there can be no assurance that the Company will recover the
gross margins that the Company expected to receive under the IMI Agreement for
the remainder of 1997.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
FISCAL
----------------------
1997 1996
---- ----
(IN DOLLARS, EXCEPT FOR RATIOS)
TOTAL CURRENT ASSETS 1,706,708 3,139,685
TOTAL CURRENT LIABILITIES 125,298 83,088
WORKING CAPITAL 1,581,410 3,056,597
WORKING CAPITAL RATIO TO 1 13.6 37.8
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
Working capital decreased by $1,475,187 from June 30, 1996 to June 30, 1997.
Cash and equivalents decreased by $1,648,982 over the same period. The decrease
in cash and equivalents and in working capital were anticipated by the Company
as those costs customarily associated with the development and introduction of
new technologies to new markets. These customary costs included: (i) an increase
in the number of domestic sales offices and corporate sales support personnel;
(ii) increased sales related travel; (iii) increased salary and benefits
associated with two additional product development engineers and one support
person in Finance; (iv) increased product development expenses for several new
workstations; and, (v) increased legal fees for patent and trademark protections
in key markets of the world. The decrease in cash and equivalents and in working
capital was also occasioned by costs incurred in connection with the product
integration agreement between IMI and DiaSys, including legal fees, travel,
salaries of support personnel, and development of a software interface.
Inventory increased from $291,447 in fiscal year 1996 to $366,106 in fiscal year
1997. The increase in inventory was primarily due to: (i) additional purchases
of long lead time items; and, (ii) creation of an adequate level of finished
goods.
The Company's fixed assets net of depreciation increased from $58,234 in fiscal
year 1996 to $79,866 in fiscal year 1997. This increase was due to the purchase
of additional computer workstations for engineering, testing equipment,
software, and special tooling.
As of June 30, 1997 the Company had no outstanding debt other than customary
trade payables.
Management believes that its over-all strategic operating plan minimizes
financial risk in the following ways:
1. The Company's product development plan calls for interrelated
workstations which share and build upon a common technology. Shared
technology allows the Company to mature relatively basic products into
more complex workstations in building block progression. This metered
progression proves the technology along the way and generates revenue
from sales of the individual building block products.
2. The Company's product manufacturing plan avoids the requirement for
large capital expenditures for plant and equipment, increases quality
over out-sourcing, and optimizes delivery times.
3. The Company maintains a very tight control on its cost of goods and
quality of product design.
REVENUES
The Company's gross revenue increased by $211,832 or 90.2% in fiscal year 1997
over 1996.
Management believes that sales will to continue to increase as benefits from the
Company's strategic growth plan are realized.
12
<PAGE>
COST OF GOODS:
The Company's gross profit (Net Revenue less cost of goods sold") increased by
$180,012 in fiscal year 1997 over 1996. The Company's gross profit percentage
(gross profit divided by Net Revenue) increased to 72.9% for fiscal year 1997 as
compared to 62.0% for fiscal year 1996. Management believes that the increase in
gross profit and gross profit margins are the combined result of savings
realized through greater economies of scale and continued success of the
Company's strategic growth plan.
SELLING GENERAL AND ADMINISTRATIVE
For the fiscal year ended June 30, 1997, the Company's expenses increased from
$1,105,157 to $2,015,548 an increase of $910,391 or 82.4%.
The increase in SG&A expenses was primarily "non-cash" and due to the effect of
a certain investment banking relationship (the "Agreement") made with Lester
Morse, Esq. P.C., as assigned to WR Consulting, Inc. ("Investment Banker").
Under the terms of the Agreement, the Investment Banker provides the Company
with the following services and/or undertakes the followings tasks, as the case
may be, ("Services"):
a. Attract and maintain reputable market makers of and for the Company's
common stock and common stock purchase warrants;
b. Posture and present the Company in the investment community through
means including but not limited to: (i) implementation of a national
investor relations program; (ii) assistance with format, layout,
presentation and timeliness of the Company's financial results in each
Annual Report to Shareholder, press release, proxy statement and
report on form 10-KSB and 10QSB; (iii) attraction of media and trade
publication coverage of the Company and/or its products; and, (iv)
arranging and managing presentation of the Company by its senior
management to strategic members of the investment community such as
brokers, stockholders, financial analysts, other investment bankers,
and institutions; and,
c. Assist the Company with implementing its strategic plan including but
not limited to: (i) design and development of merger and acquisition
(M&A) strategies;(ii) identification and introduction of M&A
candidates for such strategies; (iii) analysis of M&A proposals and
counter-proposal; (iv) development and implementation of a cash
investment and management program; (v) analysis of and advice in
relation to the Company's anticipated cash needs; and (vi)
identification and introduction to potential joint venture and/or
trading partners.
In return for Services, the Company has agreed to issue to the Investment Banker
170,000 shares of the Company's common stock of which 60,000 such shares have
been issued to Morse and 60,000 shares have been issued to WR Consulting. Under
applicable accounting principles, the stock has been valued at $5.75 per share
and is recognized as a "non-cash" SG&A expense of $172,500 for each of the four
quarters commencing October 1, 1996. The increase in the Company's SG&A expense
for the fiscal year ended June 30, 1997 includes the effect of the Agreement. In
July 1997, the Company issued an additional 50,000 shares to WR Consulting, Inc.
The Company is not required to issue any additional shares. The Investment
Banker is entitled to no other compensation for Services under its Agreement.
Without the effect of the Agreement, SG&A expenses would have increased from
$1,105,157 to $1,498,048.
The increase in Selling General and Administrative expense for the fiscal year
ended June 30, 1997 is primarily due to: (i) increased legal fees associated
with negotiating the product integration agreement with IMI; (ii) wages and
benefits associated with two additional employees; (iii) increased product
marketing expenses; (iv) increased sales office and sales related travel; and
(v) recognition of $47,000 of expense for "in-the-money" incentive stock options
held by certain Directors of the Company as prescribed by Statement of Financial
Accounting Standards No. 123 using the Black-Scholes option pricing model.
13
<PAGE>
RESEARCH AND DEVELOPMENT
For the fiscal year ended June 30, 1997, research and development expenses
increased from $250,930 to $408,214. Such increase was directly related to
purchases of materials for the prototype of three new workstation products and
costs associated with creating a software interface for units delivered to IMI
pursuant to a certain product integration agreement between IMI and the Company.
NET LOSS
As anticipated the Company's net loss increased from $1,039,026 in fiscal year
1996 to $2,004,575 in fiscal year 1997. Management attributes the increased net
loss to: (i) the effect of the investment banking relationship with Lester
Morse, Esq. P.C., as assigned to WR Consulting, Inc. (see: SELLING GENERAL AND
ADMINISTRATIVE above; (ii) increased wages and benefits associated with
additional employees; (iii) increased product marketing expenses; (iv) increased
sales office and sales related travel; (v) increased legal fees associated with
negotiating the product integration agreement with IMI; (vi) recognition of
stock option expense as prescribed by Statement of Financial Accounting
Standards No. 123; and, (vii) increased research and engineering costs
associated with new product development.
INFLATION
Although the Company believes that inflation has not had a material adverse
affect on the results of operations to date, any increases in costs of raw
materials to the Company could affect the prices charged by the Company to its
clients.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
Working capital decreased by $1,040,231 over the same period of the prior year.
Cash and equivalents decreased by $1,135,060 from 1995. The decrease in cash and
equivalents and in working capital were anticipated by the Company as those
costs customarily associated with developing and launching new technologies into
new markets. These costs included: (i) developing the R/S 2003 and FE-2
workstations; (ii) production of initial inventory of R/S 1000 and R/S 2003
workstations; (iii) increased sales office and travel related expenses; (iv)
increased sales, marketing, and promotional activities; and, (v) increased legal
fees associated with applying for and/or securing the Company's proprietary
product rights.
Inventory increased from $207,606 in fiscal year 1995 to $291,447 in fiscal year
1996. The increase in inventory was primarily caused by initial production of
the R/S 2003 and the FE-2 workstations.
The Company's fixed assets net of depreciation increased from $53,512 in fiscal
year 1995 to $58,235 in fiscal year 1996. This increase resulted from the
purchase of additional computers and software programs needed to automate the
Company's information systems.
REVENUES
The Company's gross revenue increased by $109,733 or 87.7% in fiscal year 1996
over 1995. The increase was attributable to initial success of the Company's
then newly implemented strategic sales plan.
COST OF GOODS
The Company's gross profit percentage (gross profit divided by net sales) was
substantially unchanged at 62.0% for fiscal year 1996 compared to 61.7% for
fiscal year 1995. Gross profit percentage increased slightly despite the: (i)
higher costs associated with first-production units of the R/S 1000, R/S 2003
and FE-2; and, (ii) increased sales to international distributors where gross
profit margins are traditionally reduced by distributor discounts.
14
<PAGE>
OPERATING EXPENSES
Reflecting its developmental character, the Company's expenses exceeded sales,
and the Company incurred a net loss as anticipated.
Selling, general and administrative expenses increased from $642,198 in fiscal
year 1995 to $1,105,157 in fiscal year 1996. The increase was primarily due to
costs associated with building a business such as: (i) establishing and
maintaining seven domestic sales offices throughout North America; (ii) initial
product marketing expenses for three new workstation products; (iii) increased
sale related support personnel; (iv) increased sales related travel plans; (v)
increased travel associated with negotiating and finalizing major business
relationships such as those announced with Bayer Inc., AmeriNet and several
international distributors; and, (vi) increased office supplies and expenses
incurred in support of the above items or activities.
RESEARCH AND DEVELOPMENT
The Company increased spending for research and development from $184,466 in
fiscal year 1995 to $250,930 in fiscal year 1996. The Company increased its
product development staff from three to four as part of its overall product
development plan.
NET INCOME (LOSS)
The Company's net loss increased from $657,055 in fiscal year 1995 to $1,039,026
in fiscal year 1996. The loss was primarily due to: (i) increased staffing for
sales, marketing, research, and development activities; (ii) increased spending
on sales and marketing related activities such as sales-related travel,
participation in several national and regional trade shows, and, development and
initial printing of product brochures, advertising, and similar promotional
materials; and (iii) increased legal, accounting and other professional fees in
connection with regulatory compliance and reporting.
INFLATION
Management believes that inflation and changing prices have not had a material
impact on the Company's results of operations.
ITEM 7 - FINANCIAL STATEMENTS AND SCHEDULES
See Schedules
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the caption "Election of Directors and Officers" in the
Company's definitive Proxy Statement, to be filed pursuant to Regulation 14A for
the 1997 Annual Meeting of Shareholders, is hereby incorporated herein by
reference.
ITEM 10 - EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" in the Company's
Proxy Statement to be filed pursuant to Regulation 14A for the 1997 Annual
Meeting of Shareholders is hereby incorporated herein by reference.
15
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Voting Securities and Principal Holders
Thereof" and the information as to beneficial ownership of the Company's Common
Stock and Warrants in the table under the caption "Election of Directors" in the
Company's definitive Proxy Statement, to be filed pursuant to Regulation 14A for
the 1997 Annual Meeting of Shareholders, is hereby incorporated herein by
reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 13 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
No reports on Form 8-K were filed during the last quarter of the fiscal year
ended June 30, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
(DiaSys Corporation)
- --------------------------------------------------------------------------------
By: Todd M. DeMatteo
- --------------------------------------------------------------------------------
Date: October 14, 1997 President and Chief Executive Officer
Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
- --------------------------------------------------------------------------------
Todd M. DeMatteo
President, CEO and Director Date: October 14, 1997
- --------------------------------------------------------------------------------
Walter Greenfield
Chief Scientist and Director Date: October 14, 1997
- --------------------------------------------------------------------------------
Conard R. Shelnut
Secretary and Director Date: October 14, 1997
- --------------------------------------------------------------------------------
Michael F. Primini
Chief Financial Officer, Date: October 14, 1997
Assistant Secretary and
Vice President-Finance and Administration;
- --------------------------------------------------------------------------------
Dr. Robert Engel
Director Date: October 14, 1997
- --------------------------------------------------------------------------------
Robert P. Carroll
Director Date: October 14, 1997
- --------------------------------------------------------------------------------
17
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors F-2
Financial Statements:
Balance sheet at June 30, 1997 F-3
Statements of operations for the years ended June 30, 1997
and 1996 and the period March 27, 1992 (date of inception)
through June 30, 1997 F-4
Statements of changes in stockholders' equity for the years ended
June 30, 1997 and 1996 F-5
Statements of cash flows for the years ended June 30, 1997
and 1996 and the period March 27, 1992 (date of inception)
through June 30, 1997 F-6
Notes to financial statements F-7 to F-14
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
DiaSys Corporation
We have audited the balance sheet of DiaSys Corporation (a development stage
company) as of June 30, 1997 and the related statements of operations, changes
in stockholders' equity and cash flows for two years in the period then ended,
and the period March 27, 1992, date of inception, through June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of DiaSys Corporation at June 30,
1997, and the results of its operations and its cash flows for the
aforementioned periods, in conformity with generally accepted accounting
principles.
/s/ WISS & COMPANY
------------------------------
WISS & COMPANY, LLP
Livingston, New Jersey
August 1, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
JUNE 30, 1997
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $1,123,486
Accounts receivable, less allowance for sales returns
and doubtful accounts of $345,031 197,763
Inventories 366,106
Prepaid expenses and other current assets 19,353
----------
Total Current Assets 1,706,708
EQUIPMENT, FURNITURE AND FIXTURES, LESS 79,866
ACCUMULATED DEPRECIATION
PATENT, LESS ACCUMULATED AMORTIZATION 72,914
DEFERRED OFFERING COSTS 14,003
----------
$1,873,491
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 125,298
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock $.001 par value:
Authorized 100,000 shares, no shares issued --
Common stock $.001 par value:
Authorized 10,000,000 shares, issued 2,364,000 2,364
Additional paid-in-capital 5,802,036
Deficit accumulated during the development stage (4,056,207)
-----------
Total Stockholders' Equity 1,748,193
----------
$1,873,491
==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
<TABLE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<CAPTION>
March 27, 1992
Year Ended June 30, (date of inception)
--------------------------- through
1997 1996 June 30, 1997
---------- ----------- -------------------
<S> <C> <C> <C>
NET SALES $ 446,669 $ 234,837 $ 1,275,692
COST OF GOODS SOLD 121,127 89,307 425,570
----------- ----------- -----------
GROSS PROFIT 325,542 145,530 850,122
----------- ----------- -----------
OPERATING EXPENSES:
Selling 939,645 654,754 2,059,083
General and administrative 558,403 450,403 1,632,754
Investment banking advisory services 517,500 -- 517,500
Research and development 408,234 250,930 1,050,171
----------- ----------- -----------
2,423,782 1,356,087 5,259,508
----------- ----------- -----------
LOSS FROM OPERATIONS (2,098,240) (1,210,557) (4,409,386)
INTEREST INCOME 93,665 171,531 357,679
INTEREST EXPENSE TO STOCKHOLDERS
AND RELATED PARTY -- -- (4,500)
----------- ----------- -----------
NET LOSS $(2,004,575) $(1,039,026) $(4,056,207)
=========== =========== ===========
NUMBER OF COMMON SHARES OUTSTANDING 2,364,000 2,240,000
=========== ===========
NET LOSS PER COMMON SHARE $ (.85) $ (.46)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Deficit
Accumulated
Common Stock During the
------------------------- Paid-in Development
Shares Par Value Capital Stage
------------ ---------- ------- ------------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 2,240,000 $2,240 $5,209,660 $(1,012,606)
YEAR ENDED JUNE 30, 1996:
Net loss -- -- -- (1,039,026)
---------- ------ ---------- -----------
BALANCE, JUNE 30, 1996 2,240,000 2,240 5,209,660 (2,051,632)
YEAR ENDED JUNE 30, 1997:
Issuance of common stock for
investment banking advisory
services at $5.75 per
share, 120,000 shares issued 120,000 120 517,380 --
Exercise of 4,000 warrants at
$7.00 per share 4,000 4 27,996 --
Issuance of common stock options
to directors for services
rendered -- -- 47,000 --
Net loss -- -- -- (2,004,575)
--------- ------ ---------- -----------
BALANCE, JUNE 30, 1997 2,364,000 $2,364 $5,802,036 $(4,056,207)
========= ====== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<TABLE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<CAPTION>
March 27, 1992
(date of
Year Ended June 30, inception)
------------------------------- Through
1997 1996 June 30, 1997
----------- ----------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (2,004,575) $(1,039,026) $(4,056,207)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Compensation forgiven by officers -- -- 200,000
Amortization of patent 37,617 24,052 74,608
Depreciation of equipment, furniture
and fixtures 16,057 12,217 37,077
Provision for losses on accounts
receivable and sales returns in 1997 326,031 -- 345,031
Common stock issued for service 517,500 -- 517,500
Common stock options issued for services 47,000 -- 47,000
Changes in operating assets and liabilities:
Accounts receivable (475,991) 21,985 (542,794)
Inventories (74,659) (83,841) (366,106)
Prepaid expenses and other current assets 8,614 (14,344) (19,353)
Accounts payable and accrued expenses 42,210 (18,629) 128,618
----------- ----------- -----------
Net cash flows from operating activities (1,560,196) (1,097,586) (3,634,626)
----------- ----------- -----------
Purchases of equipment, furniture and fixtures (37,688) (16,940) (116,943)
Costs of patent (65,095) (20,534) (147,521)
----------- ----------- -----------
Net cash flows from investing activitieS (102,783) (37,474) (264,464)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Offering costs (14,003) -- (1,303,424)
Proceeds from issuance of common stock and warrants 28,000 -- 6,326,000
----------- ----------- -----------
Net cash flows from financing activities 13,997 -- 5,022,576
----------- ----------- -----------
NET CHANGE IN CASH AND EQUIVALENTS (1,648,982) (1,135,060) 1,123,486
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 2,772,468 3,907,528 --
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 1,123,486 $ 2,772,468 $ 1,123,486
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- $ -- $ --
=========== =========== ===========
Income taxes paid $ -- $ -- $
=========== =========== ===========
NONCASH FINANCING ACTIVITIES -
Issuance of common stock for finders
fees and expenses $ -- $ -- $ 25,000
=========== =========== ===========
Application of deferred offering costs at
June 30, 1994 $ -- $ -- $ 25,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF THE BUSINESS - DiaSys Corporation ("the Company"), designs,
develops, manufactures, and distributes proprietary products for
medical and clinical laboratory applications. The Company distributes
its products primarily through regional sales managers employed by the
Company, in addition to independent sales representatives and dealers,
who sell to medical and clinical laboratories and hospitals in the
United States, Europe and Pacific Asia.
The Company is in the development stage and since its incorporation on
March 27, 1992, has engaged in organizational activities, development
and marketing of the "R/S 2000", "R/S 1000" and the "R/S 2003" urine
sediment workstation, and the "FE-2" workstation for fecal
concentrates. The Company has had limited sales and has operated at a
loss since inception.
ESTIMATES AND UNCERTAINTIES - 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, as determined at a later date, could differ from those
estimates.
FINANCIAL INSTRUMENTS - Financial instruments include cash and
equivalents, accounts receivable, accounts payable and accrued
expenses. The amounts reported for financial instruments are
considered to be reasonable approximations of their fair values based
on market information available to management. The use of different
market assumptions and/or estimation methodologies could have a
material effect on the estimated fair value amounts.
REVENUE RECOGNITION - Revenue from equipment sales is recognized at
the time the equipment is shipped.
INCOME TAXES - Deferred income taxes arise from temporary differences
between financial and tax reporting, principally bad debt expense and
net operating loss carryforwards.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out method) or market and consist of products manufactured by
the Company,
F-7
<PAGE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
in addition to products manufactured by subcontractors to Company
specifications.
EQUIPMENT, FURNITURE AND FIXTURES - Equipment, furniture and fixtures
are recorded at cost and are depreciated primarily using the
straight-line method over their estimated useful lives of 3 to 10
years.
PATENT COSTS - The costs of obtaining patents are amortized over a 3
year life for accounting purposes.
DEFERRED OFFERING COSTS - Offering costs have been deferred, pending
the outcome of an offering. If the offering is successful, these costs
will be charged against additional paid-in capital; otherwise, they
will be charged to expense.
WARRANTY COSTS - Through March 1995 warranty costs were incurred by
subcontractors and accordingly, no accrual was appropriate. Since
April 1995, the Company assembles its finished goods, and will repair
or replace any unit which fails to operate due to defective parts or
workmanship within one year from the purchase date. As warranty costs
remain and are expected to remain insignificant, no accrual for
warranty costs is appropriate.
NET LOSS PER SHARE - Net loss per share is based upon the weighted
average of all common shares outstanding. No effect is given to common
share equivalents when there is a net loss.
CASH EQUIVALENTS - The Company considers money market funds and all
other highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
STOCK OPTIONS - The Company accounts for stock option grants using the
intrinsic value based method prescribed by APB Opinion No. 25. Since
the exercise price equaled or exceeded the estimated fair value of the
underlying shares at the date of grant, no compensation was recognized
in 1997 and 1996.
Had compensation cost been based upon the fair value of the option on
the date of grant, as prescribed by Statement of Financial Accounting
Standards No. 123, the Company's proforma net loss and net loss per
share would have been approximately ($2,029,000) ($.86 per share) in
1997 and ($1,044,000) ($.47 per share) in 1996, using the
Black-Scholes option pricing model.
F-8
<PAGE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NEW ACCOUNTING PRONOUNCEMENTS - Effective in 1998, the Company will be
required to adopt Statement of the Financial Accounting Standards
Board FAS 128 (earnings per share). The impact of the adoption is not
expected to have a material effect on the Company's financial
statements.
NOTE 2 - INVENTORIES:
Inventories at June 30, 1997 consist of the following:
Raw material $211,406
Work-in-process 5,019
Finished goods 149,681
--------
$366,106
========
NOTE 3 - CONCENTRATION OF CREDIT RISK:
Included in cash and equivalents are U.S. Treasury bills of
approximately $1,106,000 maturing at weekly intervals, bearing
interest between 4.85% and 5.33%.
NOTE 4 - EQUIPMENT, FURNITURE AND FIXTURES:
Equipment, furniture and fixtures at June 30, 1997 are summarized as
follows:
Machinery and equipment $94,977
Furniture and fixtures 21,859
--------
116,836
Less: Accumulated depreciation 36,970
--------
$79,866
========
NOTE 5 - INCOME TAXES:
For income tax reporting purposes, the Company has a December 31 year
end. The Company has a net operating loss carryforward of
approximately $3,650,000 at June 30, 1997 (including net losses for
the six months ended June 30, 1997) which can be used to offset future
federal taxable income through 2011.
F-9
<PAGE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
The significant components of the Company's deferred tax assets are
summarized below:
June 30, 1997
-------------
Allowance for sales returns and
doubtful accounts $ 148,000
Net operating loss tax carryforwards 1,561,000
-----------
1,709,000
Valuation allowance (1,709,000)
-----------
$ --
===========
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The
Company has determined that a full valuation allowance is appropriate
at June 30, 1997.
NOTE 6 - PREFERRED STOCK:
The Board of Directors is authorized to issue 100,000 shares of
Preferred Stock, $.001 par value, in one or more series and, to the
extent now or hereafter permitted by the laws of the State of
Delaware, to fix and determine the preferences, voting powers,
qualifications and special and relative rights or privileges of each
series including, but not limited to: (i) the number of shares to
constitute such series and the distinguishing designation thereof;
(ii) the dividend rate on the shares of such series and the
preferences, if any, and the special and relative rights of such
shares of such series as to dividends; (iii) whether or not the shares
of such series shall be redeemable and, if redeemable, the price,
terms and manner of redemption; (iv) the preferences, if any, and the
special and relative rights of the shares of such series upon
liquidation of the Company; (v) whether or not shares of such series
shall be subject to the operation of a sinking fund and, if so, the
terms and provisions of such fund; (vi) whether or not such series
shall be convertible into shares of any other class or other series of
the same class of stock of the Company and, if so, the conversion
price or ratio and other conversion rights; (vii) the conditions under
which the shares of such series shall have separate voting rights or
no voting rights; and (viii) such other designations, preferences and
relative, participating, optional or other special rights and
qualifications, limitations or restrictions of such series to the full
extent now or hereafter permitted by the laws of the State of
Delaware. Notwithstanding the fixing of the number of shares
constituting a particular series, the Board of Directors may at any
time authorize the issuance of additional shares of the same series.
F-10
<PAGE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - WARRANTS:
Each Redeemable Warrant entitles the registered holder to purchase one
share of Common Stock at a price of $7.00, subject to adjustment in
certain circumstances. The Redeemable Warrants were set to expire on
January 10, 1997. On January 3, 1997, the Board of Directors approved
the extension of the expiration date of the redeemable warrants to
July 10, 1997. On May 21, 1997, the Board of Directors of the Company
reduced the exercise price of the Redeemable Warrants for the
remainder of their term to $5.25 per share. On July 3, 1997 the Board
of Directors of the Company approved the extension of the expiration
date of the 566,000 publicly traded Redeemable Warrants to October 10,
1997.
NOTE 8 - INCENTIVE STOCK OPTION PLAN:
The Company has an incentive stock option plan, the 1993 Incentive
Stock Option Plan (the "Plan"), under Section 422 of the Internal
Revenue Code whereby the Company will reserve up to 100,000 shares of
its common stock for the purpose of granting options to purchase such
shares (the "Options") pursuant to the Plan. Options are granted to
its officers, employees, and directors, as determined by the Board of
Directors or by a committee appointed by them, provided that the
exercise price of the Options is equal to or greater than the fair
market price of the Company's common stock on the date the Option is
granted. No options may be granted under the Plan after November 14,
2003. No Options may be exercised until the twenty-fourth month
following the date the Option was granted. At such time, 50% of the
shares of common stock covered by the Option may be exercised, the
remaining 50% balance are exercisable thirty-six months after issuance
of the Option.
Unless otherwise provided, no Options granted under the Plan are
transferable by the Optionee other than by will or by the law of
descent and distribution. Options granted under the Plan terminate
within a specified period of time following termination of an
Optionee's employment.
With respect to an Option granted to an employee who possesses more
than 10% of the voting rights of the Company's outstanding capital
stock on the date of grant, the exercise price of the Option must be
at least equal to 110% of the fair market value of the shares subject
to the Option on the date of the grant. The aggregate fair market
value of the common
F-11
<PAGE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
stock (determined at the date of the Option grant) for which incentive
stock options granted under the Plan may become first exercisable in a
calendar year may not exceed $100,000. No Option will be exercisable
prior to two years from the date of grant and Options may not be
exercisable more than ten years after the date of grant (five years if
held by an employee holding more than 10% of total voting rights).
During February 1996, the Plan was amended to increase the number of
shares of common stock available for granting Options to purchase such
shares to a total of 200,000 shares. An additional amendment, approved
at the 1997 annual meeting, increased the number of shares to a total
of 300,000.
Outstanding Options at June 30, 1997 are as follows:
Shares Exercise Price Expiration
Exercise Date Issuable Per Share Date
------------- -------- -------------- -----------
February 1996 35,000 $2.50 February 2004
February 1997 8,000 6.00 February 2005
September 1997 3,000 6.875 September 2005
February 1998 9,000 7.25 February 2006
June 1998 5,500 7.625 June 2006
September 1998 63,000 6.25 September 2006
November 1998 5,000 5.75 November 2006
February 1999 44,000 7.063 February 2007
June 1999 12,500 6.00 June 2007
-------
Total Options Outstanding 185,000 $2.50-7.625
=======
F-12
<PAGE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Options under the Incentive Stock Option Plan are summarized as
follows:
Year Ended June 30, 1997
-----------------------------------
Weighted-
Shares Average
Under Option Exercise Price
------------ --------------
Options outstanding at
beginning of year 88,000 $5.28
Options granted 124,500 6.49
Options expired/withdrawn (27,500) 7.33
Options exercised -- --
-----------
Options outstanding at end of year 185,000 5.79
-----------
Option price per share $2.50-7.625
-----------
Options exercisable:
Number of shares 39,000 2.86
===========
The fair value of options granted in 1997 were estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions, respectively: risk-free interest rates of
6.0% dividend yield of 0.0%, volatility factors of the expected market
price of the Company's Common Stock of 22.5% and a weighted-average
expected life of the options of 8 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of normal
publicly traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NOTE 9 - COMMITMENTS:
LEASES - The following is a schedule of future minimum rental payments
required for all non-cancellable operating leases:
1998 $19,404
=======
F-13
<PAGE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Rent expense for the years ended June 30, 1997 and 1996, and the
period March 27, 1992 (date of inception) through June 30, 1997 was
$33,923, $21,250 and $100,219, respectively.
OFFICERS' COMPENSATION - Two of the Company's officers have employment
agreements for a one year term effective January 1, 1997 and renewable
upon mutual consent of the parties. For the years ended June 30, 1997
and 1996 the two officers earned annual base compensation of $135,000
and $70,000, respectively. During January 1997 the Chief Executive
Officer received a $50,000 "sign-on bonus" for agreeing to extend his
employment contract one year.
NOTE 10 - MAJOR CUSTOMERS:
Sales to major customers as a percentage of net sales are summarized
as follows:
Year Ended June 30,
-------------------
1997 1996
----- ------
Smith Kline Beechum Clinical Laboratories --% 11%
Foreign Customers 13 14
F-14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Diasys
Corporation June 30, 1997 Financial Statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,123
<SECURITIES> 0
<RECEIVABLES> 543
<ALLOWANCES> (345)
<INVENTORY> 366
<CURRENT-ASSETS> 1,707
<PP&E> 117
<DEPRECIATION> (37)
<TOTAL-ASSETS> 1,873
<CURRENT-LIABILITIES> 125
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 1,746
<TOTAL-LIABILITY-AND-EQUITY> 1,873
<SALES> 446
<TOTAL-REVENUES> 540
<CGS> 121
<TOTAL-COSTS> 2,423
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,004)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,004)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,004)
<EPS-PRIMARY> (0.85)
<EPS-DILUTED> (0.85)
</TABLE>
