As filed with the Securities and Exchange Commission on __________
Registration No. 33-84068
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
----------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Post Effective Amendment No. 1)
DIASYS CORPORATION
----------------------------------------------
(Name of Small Business Issuer in its Charter)
DELAWARE 3841-000 06-1339248
- ------------------------ ----------------- -------------------
(State of Incorporation) (S.I.C. Code No.) (I.R.S. Employer
Identification No.)
49 LEAVENWORTH STREET
WATERBURY, CT 06702
(203) 755-5083
------------------------------------------------------------
(Address and telephone number of Principal Executive Office)
49 LEAVENWORTH STREET
WATERBURY, CT 06702
(203) 755-5083
- --------------------------------------------------------------------------------
(Address of Principal Place of Business or Intended Principal Place of Business)
STANLEY MOSKOWITZ, ESQ.
MOSKOWITZ, ALTMAN & HUGHES, LLP
11 EAST 44TH STREET, SUITE 504
NEW YORK, NEW YORK 10017
----------------------------------------------------------
(Name, address, and telephone number of Agent for Service)
----------
Approximate DATE OF PROPOSED SALE to the Public: As soon as practicable after
the date this Post-effective Amendment becomes effective.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [X] 33-84068
--------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box [X].
----------
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
===========================================================================================
Title of Each Class | Dollar Amount | Proposed Maximum | Proposed Maximum | Amount of
Of Securities To Be | To Be | Offering Price | Aggregate Offering | Registration
Registered | Registered | Per Share | Price | Fee
- --------------------|---------------|------------------|--------------------|--------------
<S> <C> <C> <C> <C>
566,000(1) | $2,971,500 | $5.25 | $2,971,500 | (2)
Common Shares | | | |
===========================================================================================
(1) Represents the Common Shares issuable upon the exercise of Warrants at $5.25 per share.
(2) Indicates registration fee is already paid.
</TABLE>
----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
(THE "COMMISSION"), ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
PROSPECTUS
- ----------
566,000 SHARES OF COMMON STOCK
DIASYS CORPORATION
The offering consists of 566,000 shares of Common Stock, par value $.001
(the "Common Stock"), of DiaSys Corporation (the "Company"), a Delaware
corporation, issuable upon the exercise of 566,000 Redeemable Common Share
Purchase Warrants (the "Redeemable Warrants"). The Redeemable Warrants were
issued in connection with a pubic 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. The Redeemable Warrants expire 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 are redeemable by the Company upon
notice of not less than 30 days, at a price of $.05 per Redeemable Warrant,
provided that the average closing bid quotation of the Common Stock for the 20
trading days ending on the third day prior to the day on which the Company gives
notice has been at least $8.00. See "Description of Securities."
The Common Stock and the Redeemable Warrants are quoted on the Nasdaq
Smallcap Market ("Nasdaq") under the symbols, DIYS, and DIYSW, respectively.
A sales commission of (5) five percent will be paid to Tasin & Company,
Inc., a member of the National Association of Securities Dealers, Inc. ("NASD")
which acted as Representative of the several underwriters in the Company's
initial public offering in January 1995, for assisting the Company in soliciting
the exercise of the Warrants.
----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED
BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS, PAGE 6" AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY
STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
| Price | | Proceeds
| to | Sales Agent | to
| Public | Commission(1) | Company
- -------------------------------|--------------|-----------------|---------------
Per Share .................. | $5.25 | $.2625 | $4.9875
Total ...................... | $2,971,500 | $148,575 | $2,822,925
================================================================================
(1) Before deducting expenses, in the amount or including printing, legal, and
accounting fees for a total of $35,000 in estimated expenses payable by the
Company.
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
Prospectus and is qualified in its entirety by the more detailed information and
financial statements appearing elsewhere in this Prospectus. Except as otherwise
indicated herein, information in this Prospectus assumes that the Over-Allotment
Option and Representative's Warrants have not been exercised. See "Underwriting"
and "Description of Securities."
THE COMPANY
DiaSys Corporation (the "Company") was organized in 1992 in the State of
Connecticut and effected a statutory merger into a Delaware Corporation of the
same name in 1993. The Company designs, develops, manufactures, and distributes
proprietary products for medical and clinical laboratory applications. The
Company's strategy is to develop workstation products that reduce the user's
operating costs and improve safety through automation of routine testing
procedures.
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 products is
comprised of: (i) the R/S 2000 which was the Company's first product; (ii) the
R/S 1000 which was introduced in May of 1995; and, (iii) the R/S 2003 which was
introduced in September, 1995. The R/S 1000 serves the needs of small
laboratories; the R/S 2000 serves the mid-sized user; and the R/S 2003
accommodates high volume laboratories. The Company believes that all three
products satisfy the critical requirements of routine analysis of urine sediment
at each level.
The "R/S 2003", "R/S 2000" and "R/S 1000" are designed primarily to
automate human urine sediment analysis. Such analysis are performed by doctors
offices, hospitals, and clinical reference laboratories to assist in the
detection of disease and abnormalities.
In May of 1996, the Company introduced its fourth workstation product, the
"FE-2." 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 human and animals. The knowledge of 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.
The Company has several additional proprietary products in various stages
of design and development. Each new product is designed to upgrade and/or create
workstations from currently employed laboratory equipment. There can be no
assurance that the Company will be able to continue to develop commercially
successful products.
On November 1, 1996, the Company entered into a product integration
agreement with Intelligent Medical Imaging Inc. ("IMI"). IMI agreed to purchase
a combination of 200 R/S 203 and FE-2 workstations. The first 100 units which
were R/S 2003's were delivered on March 27, 1997. Pursuant to this agreement,
IMI is under an obligation to order the final 100 workstations before June 30,
1997 and accept delivery by December 31, 1997.
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
2
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
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.
In addition, the Company's products have been approved, marketed, and/or
sold to SmithKline Beecham Clinical Laboratories, the Mid-Atlantic Group
Networks of Shared Services, Inc. (A 2,500 member consortium of hospital
purchasing agents), the General Services Administration of the United States
Government; Kaiser Permanente, Southern California Region, and AmeriNet, Inc.
(an association with 3,500 member laboratories), See "Business of the Company."
The Company has also commenced distribution operations in Europe, South America,
Central America, China and parts of Pacific-Asia.
The Company's principal office is located at 49 Leavenworth Street,
Waterbury, CT 06702. Its telephone number is (203) 755-5083.
3
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
THE OFFERING
Common Shares offered by the Company ..... 566,000
Common Stock to be outstanding prior
to offering ............................ 2,304,000 Shares
Common Stock to be outstanding after
the offering(l) ........................ 2,870,000 Shares
Redeemable Warrants outstanding
prior to the offering .................. 566,000 Redeemable Warrants
Redeemable Warrants to be outstanding
after the offering(2) .................. None
Use of Proceeds .......................... The Company intends to apply the net
proceeds of this offering to
working capital.
Risk Factors ............................. The securities offered hereby
involve a high degree of risk,
including but not limited to, the
Company's limited operating
history and prior losses, future
competition, and substantial
dilution. The securities should
not be purchased by investors who
cannot afford the loss of their
entire investment. See "Risk
Factors" and "Dilution."
Nasdaq symbols(3) ........................ Common Stock---DIYS
Warrants--DIYSW
- -----------
(1) Does not include (i) an aggregate of 150,000 shares reserved for issuance
upon exercise of the Representative Warrants (the "Representatives
Warrants") and the Redeemable Warrants included therein issued in
connection with the Company's Initial Public Offering ("IPO") in January
1995, (ii) 300,000 shares reserved for issuance upon exercise of options
available for future grant under the Option Plan. (See "Management 1993
Incentive Stock Option Plan"; and "Certain Transactions.") and (iii) 60,000
shares reserved for issuance to Lester Morse, Esq., P.C. for the
performance of certain investment banking services. (See "Selling General
and Administrative").
(2) Does not include the Representative's Warrants or the Redeemable Warrants
included therein.
(3) Nasdaq quotation does not imply that a meaningful, sustained market for the
Common Stock or Redeemable Warrants will continue. In addition, continued
inclusion on the Nasdaq System is subject to certain maintenance criteria.
The failure to meet these maintenance criteria in the future may result in
the discontinuance of inclusion of the Company's Common Stock and
Redeemable Warrants on the Nasdaq SmallCap market which may have an adverse
affect on the market for the securities. See "Risk Factors--Possible
Delisting of Securities from the SmallCap Market and Possible Market
Illiquidity."
4
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
SELECTED FINANCIAL INFORMATION
The following financial data has been derived from the unaudited financial
statements of the Company dated as of March 31, 1997 and the audited financial
statement of the Company dated as of June 30, 1996 and 1995, and for the periods
then ended which are included elsewhere in this Prospectus and such financial
data is qualified in its entirety by reference to such financial statements. In
the opinion of management, the Company's financial statements include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the information set forth therein. The following financial
information should be read in conjunction with the Company's financial
statements and notes thereto included herein.
<TABLE>
<CAPTION>
March 27, 1992
Date of Inception
Nine Months Nine Months through
Year End Year End Ended March Ended March March 31,
June 30, 1996 June 30, 1995 31, 1997 31, 1996 1997
------------- ------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Net Sales ............................. 234,837 125,104 726,044 239,861 $ 1,555,067
Loss From Operations .................. 1,210,557 749,538 1,053,459 764,254 $(3,364,605)
Net Loss .............................. 1,039,026 657,055 976,769 612,804 $(3,028,401)
Net Loss per common share ............. .46 .29 .42 .27 --
Primary
Number of common shares and
equivalent deemed outstanding ... 2,240,000 2,240,000 2,304,000 2,240,000 --
</TABLE>
BALANCE SHEET DATA
At March 31, 1997
----------------------------
Actual As Adjusted(1)
At June 30, 1996 (Unaudited) (Unaudited)
---------------- ----------- -----------
Working Capital ................ 3,056,597 2,416,128 5,204,053
Total Assets ................... 3,243,356 2,631,810 5,419,735
Total Liabilities .............. 83,088 75,311 75,311
Shareholders' Equity ........... 3,160,268 2,556,499 5,344,424
- ---------
(1) Adjusted to reflect the sale by the Company of the Shares offered hereby
without giving effect to the use of proceeds.
5
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
RISK FACTORS
The securities offered hereby involve a high degree of risk and substantial
dilution and should only be purchased by suitable investors who can afford to
lose their entire investment. These securities have not been approved or
disapproved by the Commission nor has the Commission passed upon the accuracy or
adequacy of these offering documents. Any representation to the contrary is a
criminal offense.
1. HISTORY OF LOSSES AND COSTS CONNECTED WITH EXPANSION. The Company is in
a development stage and has a short history of revenue producing activities.
Accordingly, the Company's operations are subject to all the risks inherent in
the business. The Company has generated limited revenue and has incurred net
losses of $3,028,401 from its inception (March 27, 1992) to March 31, 1997. The
Company's operating expenses have increased and can be expected to continue to
increase significantly with the Company's proposed expansion of marketing and
sales efforts and other contemplated expenditures. There can be no assurance
that the Company will be able to achieve and sustain profitable operations or
meet its liabilities as they become due. See "Management's Discussion and
Analysis of the Company's Financial Condition and Results of Operations",
"Business" and "Financial Statements"
2. POSSIBLE NEED FOR ADDITIONAL EXTERNAL FINANCING. Notwithstanding the
Company's estimate that it will not require additional external financing for
the next twelve months to implement its business plan, in the event that the
Company's plans change, its assumptions change or prove to be inaccurate, the
Company would be required to seek additional financing sooner than currently
anticipated or, if such funding were not received, curtail its operations. The
Company has no current arrangements with respect to, or sources of additional
financing. There can be no assurance that such additional financing will be
available on acceptable terms, or at all.
3. LACK OF MARKET ACCEPTANCE AND RISK OF TECHNICAL OBSOLESCENCE. The
Company expects that the laboratory equipment market will continue to be subject
to frequent and rapid changes in technology and customer preferences. There can
be no assurance that any new products will be successfully developed or achieve
market acceptance, or that other laboratory equipment vendors will not develop
and market products which render obsolete or less marketable the Company's
existing products or its products under development.
4. COMPETITION. Many of the Company's competitors and potential competitors
have substantially greater financial, research and development, manufacturing
and marketing resources, and also may offer well established, broad product
lines and ancillary services. Long term or preferential supply arrangements
between competitors and hospitals may act as a barrier to market entry to the
Company's products. Competing companies may develop products that are more
useful or less costly, rendering the Company's products obsolete.
5. COST CONTAINMENT. Recently, reductions have been made for Medicare
reimbursements for capital equipment which may include the Company's products
and/or the tests they perform. The Company believes efforts at cost containment
resulting from the reduction of reimbursements has caused some doctors and
hospitals to reduce the number of tests being conducted, thus diminishing the
relative cost effectiveness of the Company's products. Hospitals have imposed
more intense reviews of capital acquisitions, particularly for new systems which
address areas traditionally not requiring significant capital investments. The
factors described above may materially adversely affect sales and Company
operations, although the Company believes the Company's products are cost
effective regardless of reimbursement provisions.
6. LACK OF PROTECTION OF PROPRIETARY RIGHTS. Although the Company has
received patent protection for its R/S technology, and is applying for similar
protection of its FE technology, there can be no assurance that any future
applications by the Company for patent protection will result in patents being
issued for additional protection of other inventions of the Company in the
United States or internationally, or, if issued, that such patents will provide
a competitive advantage or will afford protection against competitors with
similar
6
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
technology, or that competitors of the Company will not circumvent, or challenge
the validity of, any patents issued to or licensed by the Company. Moreover,
there can be no assurance that the Company's nondisclosure 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. In the event that the Company becomes involved in
litigation to enforce its proprietary rights, the length and cost of such
litigation may divert the efforts of the Company and its management with no
guarantee of success.
There can be no assurance that claims alleging the R/S or FE technologies,
or other inventions of the Company, infringe upon intellectual property rights
of others will not be brought against the Company in the future, or that, if
made, such claims will not be successful. In addition to any potential monetary
liability for damages, the Company could be enjoined from making or selling the
R/S and/or FE workstation products or any other product developed by the
Company. The Company has obtained insurance in the sum of $500,000 with a 25%
co-payment provision, to cover legal fees and expenses in prosecuting and/or
defending the Company's patents.
7. GOVERNMENT REGULATION. Although the Company's current products are
exempt from Food and Drug Administration ("FDA") 510(k) premarket notification
requirements, the development, testing, manufacturing and marketing of the
laboratory products in the United States generally requires governmental
clearance before marketing. The process of obtaining FDA and other required
regulatory approvals is lengthy, expensive and uncertain. Moreover, regulatory
approval, if granted, may include significant limitations on the indicated 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. Certain of the Company's future
diagnostic products may require submission of a PMA (pre-market approval)
application to the FDA which generally involves a substantially longer review
process than that of a 510(k) premarket notification. Delays in receipt of or
failure to receive clearances to commence clinical studies or to market
products, would adversely affect the marketing of the Company's proposed
products and the results of future operations. Commercial distribution in most
foreign countries are also subject to varying government regulations.
The manufacturing processes of the Company's products are 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.
8. PROPOSED LEGISLATION AFFECTING THE HEALTH CARE INDUSTRY. Several bills
have been introduced in the U.S. Congress to change the existing health care
system in the United States. 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 its
products should benefit medical and clinical laboratories if their revenues are
further controlled, medical and clinical laboratories may elect to postpone
important decisions regarding capital expenditures until any changes in the
health care system, if any, are completed and their full scope and effect known.
9. DEPENDENCE ON SUB-CONTRACTORS. Certain components of the Company's
products are currently produced by sub-contract manufacturers pursuant to the
Company's specifications. There can be no assurance that the Company will be
able to renew its contracts with its subcontractors or that any sub-contractors
engaged by the Company will meet the Company's requirements for quality,
quantity, timeliness, or pricing or that the Company would be able to find or
obtain substitute manufacturers, if required.
10. EXPENSES AND UNCERTAINTY OF MARKETING EXPANSION. The Company currently
markets its products through regional sales managers in North America and
through distributors in several foreign
7
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
countries. There can be no assurance that marketing and sales efforts and
increased expenditures will result in significantly greater product recognition
or market penetration, or significantly increased levels of revenues.
11. DEPENDENCE ON KEY PERSONNEL. The Company's success will be dependent to
a significant degree upon the involvement of Todd M. DeMatteo, the Chief
Executive Officer and President of the Company. It would be difficult for the
Company to find adequate replacement for Mr. DeMatteo. In addition, the Company
will need to attract and retain additional talented individuals in order to
carry out its business objectives. The competition for such persons is intense
and there are no assurances that these individuals will be available to the
Company. The Company maintains key-man life insurance on Mr. DeMatteo in the sum
of $1,000,000.
12. INADEQUATE PRODUCT LIABILITY INSURANCE. 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 coverage is sufficient for its current level of
business operations. There can be no assurance 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. A partially or completely
uninsured successful claim against the Company could have a material adverse
affect on the Company.
13. MAINTENANCE CRITERIA FOR NASDAQ SECURITIES. The Nasdaq Stock Market,
Inc., which administers Nasdaq, has established the criteria for initial listing
and continued eligibility on Nasdaq. In order to be listed and continue to be
included on Nasdaq, the Company must maintain U.S. $2 million in total assets, a
U.S. $200,000 market value of its public float and U.S. $1 million in total
capital and surplus. In addition, continued inclusion requires two
market-makers, at least 300 holders of the Common Shares and a minimum bid price
of the Common Shares of U.S. $1 per share; provided, however, that, if the price
of the Common shares falls below such minimum bid price, a company's securities
will remain eligible for continued inclusion on Nasdaq if the market value of
the public float is at least U.S. $1 million and the company has U.S. $2 million
in capital and surplus. Furthermore, Nasdaq has made a proposal to adopt more
stringent initial listing and maintenance criteria. The Company's failure to
meet these maintenance criteria in the future may result in the discontinuance
of the inclusion of its securities on Nasdaq. In such event, trading, if any, in
the securities may then continue to be conducted in the over-the-counter market
commonly referred to as the NASD OTC Bulletin Board and the "pink sheets." As a
result, an investor may find it more difficult to dispose of or to obtain
accurate quotations as to the market value of the securities. In addition, the
Company would be subject to a rule promulgated by the Commission that, if the
Company fails to meet the criteria set forth in such rule, imposes varius sales
practice requirements on broker-dealers who sell securities governed by the rule
to persons other than established customers and accredited investors. There can
be no assurance that the Company will continue to meet the requirements for its
securities to be listed on Nasdaq. (See "Penny Stock Regulations" below.)
14. "PENNY STOCK" REGULATIONS. The Commission has adopted regulations under
The Exchange Act of 1934, as amended, which generally define a "penny stock" to
be any equity security that has a market price (as defined) of less than $5.00
per share or an exercise price of less than $5.00 per share, subject to certain
exceptions. If the securities offered hereby are not listed on or are removed
from Nasdaq, the Company's securities may be deemed to be "penny stocks" and
become subject to rules that impose additional sales practice requirements on
broker-dealers who sell such securities. These rules include disclosure
requirements, record keeping duties, and monthly reporting requirements.
The above-described rules may materially adversely affect the liquidity for
the market of the Company's securities. Such rules may also affect the ability
of broker-dealers to sell the Company's securities and may impede the ability of
holders of the Common Stock (including, purchasers in this offering) to sell
such securities in the secondary market. See "Penny Stock Regulations".
8
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
15. LACK OF DIVIDENDS. The Company has not previously paid any dividends on
its shares and intends to follow a policy of retaining all of its earnings, if
any, to finance the development and expansion of its business. Investors who
anticipate the need for immediate dividend income from their investment in the
common stock should refrain from the purchase of these securities.
16. FUTURE ISSUANCE OF STOCK BY THE COMPANY. The Company has authorized
capital stock of 10,000,000 shares of Common Stock, and 100,000 shares of
Preferred Stock (the "Preferred Stock"). As of the date hereof, there are
2,304,000 shares of Common Stock and no Preferred Stock issued and outstanding.
The issuance of any shares of stock or related securities by the Company could
have anti-takeover effects insofar as they could be used as a method of
discouraging, delaying or preventing a change in control of the Company. Such
issuance could also dilute the public ownership of the Company. Inasmuch as the
Company may, in the future issue authorized shares of Common Stock or Preferred
Stock without prior stockholder approval, there may be substantial dilution to
the interests of the Company's stockholders. Further dilution may result upon
the issuance or exercise of any options or warrants.
DILUTION
The difference between the public offering price per share of Common Stock
and the adjusted net tangible book value per share of Common Stock after this
offering constitutes the dilution to investors in this offering. Net tangible
book value per share is determined by dividing the net tangible book value of
the Company (total tangible assets less total liabilities) by the number of
shares of Common Stock outstanding.
At March 31, 1997, the actual net tangible book value of the Company was
$2,498,101 or $1.08 per share. After giving effect to the sale of 566,000 shares
of Common Stock (less commissions and estimated expenses of this offering) the
adjusted net tangible book value of the Common Stock at March 31, 1997, would
have been $1.84 per share. This represents and immediate increase in net
tangible book value of $.76 per share to existing stockholders and an immediate
dilution to new investors of $3.41 per share. The following table illustrates
the foregoing information with respect to dilution to new investors on a per
share basis:
Public offering price ........................................ $5.25
Net tangible book value before offering ...................... $1.08
Increase attributable to new investors ....................... $ .76
As adjusted net tangible book value after offering ........... $1.84
Dilution to new investors .................................... $3.41
DIVIDEND POLICY
To date, the Company has not paid any dividends on its Common Stock. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors of the Company and will depend on the Company's earnings, its
capital requirements and financial condition and other relevant factors. The
Company does not intend to declare any dividends in the foreseeable future, but
instead intends to retain all earnings, if any, for use in the Company's
operations.
9
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
USE OF PROCEEDS
The net proceeds to be realized by the Company from the sale of the
securities offered hereby, after deduction of all commissions, and all other
estimated expenses of this offering, are estimated at approximately $2,787,925.
All of the proceeds from the sale of the securities offered hereby will be
added/as working capital.
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1997, and as adjusted to give effect to the sale of the offering and the
application of a portion of the net proceeds:
As
Actual Adjusted(1)
--------- ----------
Stockholders' equity:
Preferred Stock 100,000 authorized, shares issued .... 0 0
Common Stock, $.001 par value, 10,000,000
share authorized ................................... 2,304
Shares Issued 2,304,000 2,870
After offering 2,870,000
Additional paid-in capital ........................... 5,582,596 8,369,955
Total Stockholders' equity ........................... 2,556,499 5,344,424
Total Capitalization ................................. 2,556,499 5,344,424
- -----------
(1) Adjusted to reflect the sale by the Company of the Common Stock offered
hereby.
10
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S
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.
NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO NINE MONTHS ENDED MARCH 31, 1996
RESULTS OF OPERATIONS:
NET REVENUE AND BACKLOG
The Company's Net Revenue increased by $419,535 and $486,183 for the
three-month and nine-month periods ended March 31, 1997 as compared to the same
periods in the previous year. As of March 31, 1997, the Company's backlog was
approximately $434,000, $20,000 of which was immediately shippable.
Management attributes the increase in Net Revenue to: (i) continued market
acceptance of the Company's workstation products; and, (ii) initial success of
several of the Company's sales distribution plans. Management expects that Net
Revenue will increase as benefits from the Company's strategic growth plan are
realized.
GROSS PROFIT
The Company's gross profit (Net Revenue less cost of goods sold) increased
by $355,430 and $402,218 for the three-month and nine-month periods ended March
31, 1997. The Company's gross profit percentage (gross profit divided by Net
Revenue) increased for the three month period ended March 31, 1997 from 60.3% to
80.8%. For the nine month period ended March 31, 1997, gross profit margin
increased to 77.4% as compared to 66.5% for the same period in 1996. Management
believes that the increases in gross profit and gross profit margins are the
combined result of savings realized through greater economies of scale and
initial success from the Company's strategic growth plan.
Management believes that gross profit and gross profit margins will not
change significantly for the remainder of 1997.
SELLING GENERAL AND ADMINISTRATIVE
For the three month period ended March 31, 1997, the Company's expenses
increased from $256,517 to $476,570 over the same three month period in 1996, an
increase of $220,053 or 85.8%. For the nine month period ended March 31, 1997,
SG&A expenses increased from $752,901 to $1,371,280 over the same nine month
period in 1996, an increase of $618,379 or 82.1%.
11
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
The increase in SG&A expenses was due primarily to the effect of a certain
investment banking relationship ("Agreement") made with Lester Morse, Esq. P.C.
("Morse"). Under the terms of the Agreement, Morse is providing the Company with
the following services and/or undertaking the following 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 Shareholders, press release, proxy statement and
report on form 10-K and 10-Q; (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-proposals; (iv) development and implementation of a cash
investment and management program; (v) analysis of and advise 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 Morse up to 120,000
of the Company's common stock of which 60,000 such shares have been issued.
Under applicable accounting principles, the stock has been valued at $5.75 per
share and will be recognized as an SG&A expense of $172,500 for each of the four
quarters commencing October 1, 1996. The increase in the Company's SG&A expenses
for the periods ended March 31, 1997 includes the effect of the Agreement. Morse
is entitled to no other compensation for Services under the Agreement. Morse
subsequently assigned his rights and duties under the Agreement to WR Consulting
in May 1997. Without the effect of the Agreement, SG&A expenses would have
increased from $256,517 to $304,069 over the same three month period in 1996,
and from $752,901 to $1,015,280 over the same nine month period in 1996. The
increase in Selling General and Administrative for the three month period ended
March 31, 1997 is a direct result of; (i) increase sales related travel; and,
(ii) wages and benefits associated with two additional employees over the
comparable period. The increase in Selling General and Administrative for the
nine month period ended March 31, 1997 is a direct result of; (i) increased
legal fees associated with negotiating the product integration agreement with
IMI; (ii) wages and benefits associated with four additional employees over the
comparable period; (iii) increased product marketing expenses; and, (iv)
increased sales related travel.
RESEARCH AND DEVELOPMENT
For the three month period ended March 31, 1997, research and development
expenses increased from $51,388 to $93,762 over the same three month period for
1996, an increase of $42,374 or 82.5%. For the nine month period ended March 31,
1997, research and development expenses increased from $170,761 to $243,805 over
the same nine month period for 1996, an increase of $73,044 or 42.7%. Increases
in research and development expenses over the above periods were directly
related to purchases of materials for the prototype of two new workstation
products to be introduced in 1997 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.
12
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
NET LOSS
The Company reported a net loss of: (i) $142,275 for the three month period
ended March 31, 1997 compared to a net loss of $233,782 for the same period
ended March 31, 1996; and, (ii) a net loss $976,709 for the nine month period
ended March 31, 1997 compared to a net loss of $612,804 for the nine month
period ended March 31, 1996.
Management attributes the increased net loss to expenses associated with:
(i) the effect of the investment banking relationship described in Selling
General and Administrative above; (ii) wages and benefits associated with four
additional employees over the comparable period; (iii) increased product
marketing expenses; (iv) increased sales related travel; and, (v) increased
legal fees associated with negotiating the product integration agreement with
IMI.
INFLATION
Although the Company believes that inflation has not had a material adverse
affect on the results of operations to date, any increase in the 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
The Company has invested $2,650,000 in short term United States Treasury
bills. The Company has invested in short term Treasuries because such
instruments provide maximum liquidity and minimum investment risk. The Company
expects that during the fiscal year ending June 30, 1997 the available cash and
cash flow from operations will be adequate to fund operations.
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; (ii) production of initial inventory of R/S 1000 and R/S 2003
workstations; (iii) increased sales offices; (iv) increased sales and marketing
promotional materials and activities; and, (v) increased sales related travel.
Inventory increased from $207,606 in fiscal year 1995 to $291,447 in fiscal
year 1996. The increase in inventory was primarily caused by
production-into-inventory of the R/S 2003 and the FE-2 workstations introduced
in September, 1995 and May, 1996 respectively.
The Company's fixed assets net of depreciation increased form $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.
As of June 30, 1996 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 manufacturing plan eliminates the requirement for large
capital expenditures for plant and equipment, increases quality over
out-sourcing, and optimizes delivery times.
13
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
3. The Company has developed a strategic distribution network of
employees, commission-based representatives, and third party
re-sellers which the Company believes will limit "up front" demands on
cash without sacrificing over-all market penetration.
Management believes that it has sufficient funds and resources to meet its
financial obligations for at least the next twelve months and does not perceive
a need for additional funding or cash generated through non-operational
activities.
REVENUES
The Company's gross revenue increased by $109,733 or 87.7% in fiscal year
1996 over 1995. This increase is a result of: (i) management's shift in focus to
sales and distribution now that the Company has secured its manufacturing,
engineering and product development strengths; and, (ii) continued growing
awareness and acceptance of the Company's workstation products in the
marketplace.
Management believes that sales will continue to increase as the effects of
the Company's strategic sales and distribution plan implemented earlier this
year are recognized.
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.
Management believes that gross profit will increase in fiscal year 1997 as
a result of increased unit sales.
OPERATING EXPENSES
Reflecting its developmental character, the Company's expenses exceeded
sales, and the Company has incurred net losses to date 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: (i) wages and benefits of ten sales, marketing and
support personnel for the full fiscal year; (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. The Company expects research and development expenses to
increase in fiscal year 1997 as it develops additional products and systems
which automate and standardize human and non-human fluids.
14
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
NET LOSS
As anticipated, 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.
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994
Working capital increased by $3,848,804 over the same period of the prior
year. Cash and equivalents increased by $3,743,508 from 1994. The increase in
cash and equivalents and in working capital were substantially the result of the
Company's initial public offering in January, 1995. Net proceeds from the
offering were $4,522,604, including partial exercise of an over-allotment option
granted to the underwriter as part of the Offering. The Company has invested
$3,000,000 in short term United States Treasury bills. The Company has invested
in short term Treasuries because such instruments provide maximum liquidity and
minimum investment risk. The Company expect that during the fiscal year ending
June 30, 1996 the available cash and cash flow from operations will be adequate
to fund operations. The Company does expect however to continue to increase
expenditures for research and development which will in the short term adversely
impact the Company's cash position.
The Company's inventory increased from $59,850 in fiscal year 1994 to
$207,606 in fiscal year 1995. The increase in inventory was primarily caused by:
(i) the Company's decision to repurchase inventory from dealers terminated by
the company due to inadequate sales performance; and, (ii) implementation of the
Company's internal manufacturing plan. Commensurate with the Company's
manufacturing plan, raw material and work in process inventory increased by
$121,509 from fiscal year 1994.
The Company's fixed assets net of depreciation increased from $12,383 in
fiscal year 1994 to $53,512 in fiscal year 1995. This increase was a direct
result of the Company's plan to automate its sales offices and upgrade several
computing workstations at the headquarter offices. In fiscal year 1995, the
Company purchased $32,730 of computers and software applications for use by its
research and development, field sales and administrative support personnel.
As of June 30, 1995 the Company had no outstanding debt other than
customary trade accounts payable. 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 manufacturing plan eliminates the requirement for large
capital expenditures for plant and equipment, increases quality over
out-sourcing, and optimizes delivery times.
15
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
3. The Company has developed a strategic distribution network of
employees, commission-based representatives, and third party
re-sellers which the Company believes will limit "up front" demands on
cash without sacrificing over-all market penetration.
Management believes that it has sufficient funds and resources to meet its
financial obligations for at least the next twelve months and does not perceive
a need for additional funding or cash generated through non-operational
activities.
REVENUES
The Company's revenue decreased by $140,328 in fiscal year 1995 over 1994
as the Company recognized $105,594 in non-recurring charges associated with the
Company's implementation of its strategic sales distribution plan. Management
believes that the decline in sales was directly related to its strategic sales
distribution plan implemented in January of 1995, specifically with regard to
management's decision to cancel and/or terminate dealers who, in the
management's estimation, were not willing or able to represent the Company's
products in a timely and/or professional manner. In most instances, terminated
dealers were replaced by employees and/or independent representatives. However,
the transition required time to: (i) hire and train regional sales managers;
(ii) introduce regional managers to key representatives and dealers in the
respective territories; (iii) organize the territories under the appropriate
regional sales manager; (iv) determine which dealers if any were performing or
could in time perform to the Company's expectations; and, (v) commence direct
contact with potential customers in the region. Management believes that the
Company has completed this transition period and has begun to see an increase in
product inquires and qualified sales leads. Management believes that although
this change severely affected the Company's short term financial results, the
overall effect of managements decision to terminate non-performing dealers will
allow the Company to properly implement its sales plan thereby favorably
impacting future periods.
COST OF GOODS
The Company's gross profit percentage (gross profit divided by net sales)
decreased to 61.7% in 1995 from 68.1% in fiscal year 1994. This decrease was a
direct result of management's decision to terminate relationships with dealers
who, in the Company's estimation, could not adequately represent the Company's
products. In most cases, the Company agreed to purchase any unused, undamaged
product back from such dealers in exchange for: (i) an agreement of termination;
and, (ii) a promise on behalf of the dealer to relay product inquiries from
potential customers to the Company. Units purchased back from the re-sellers
were evaluated, refurbished if necessary, and returned to inventory, Units
returned to inventory are valued at their original cost of manufacture which is
higher than the Company's current cost under its "in house" final assembly and
test plan. The mix of higher cost units repurchased from the field with lower
cost units manufactured by the Company under its current plan, has lowered the
Company's profit margin. Management believes that gross profit will rise in
fiscal year 1996 as: (i) savings from the Company's manufacturing plan are
realized for a full year; and, (ii) the inventory repurchased from terminated
dealers is resold to customers.
OPERATING EXPENSES
Reflecting its developmental character, the Company's expenses exceeded
sales, and the Company has incurred net losses to date as anticipated.
Selling, general and administrative expenses increased from $307,471 In
fiscal year 1994 to $642,198 in fiscal year 1995. The increase was primarily due
to the costs associated with: (i) the addition of seven sales, marketing and
support personnel; (ii) product marketing expenses associated with the Company's
first two products; (iii) the cost to open and maintain six regional sales
offices and the associated support expenses; (iv) an increase in sales related
travel by Company personnel in conjunction with the transition from independent
dealers to one comprised of direct sales employees in conjunction with the
transition of the
16
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
independent representatives and dealers; and, (v) an increase in advertising and
promotional material associated with the introduction of two additional "R/S"
series workstations.
RESEARCH AND DEVELOPMENT
The Company increased spending for research and development from $176,659
in fiscal year 1994 to $184,466 in fiscal year 1995. The Company increased its
product development staff from two to three as part of its overall product
development plan. The Company expects research and development expenses to
increase in fiscal year 1996 as it develops additional products and systems
which automate and standardize human and non-human fluids.
NET LOSS
The Company's net loss increased from $305,997 in fiscal year 1994 to
$657,055 in fiscal year 1995. The following contributed to the loss in 1995; (i)
a deadline in revenue rate occasioned by management's decision to terminate
non-performing and/or inadequate dealers; (ii) increased staffing expenditures
predominately in sales and marketing and research and development; (iii) the
purchase of one time expenditures of expendable tools and equipment required to
commence "in house" assembly, operations; (iv) increased spending on sales and
marketing activities which included sales-related travel, participation in
regional trade shows, development and printing of marketing materials,
advertising, and similar costs required to increase the Company's visibility in
the marketplace.
INFLATION
Management believes that inflation and changing prices have not had a
material impact on the Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997 the Company had cash and equivalents of $1,568,306 a
decrease of $1,204,162 from $2,772,468 as of June 30, 1996. The decrease in cash
and equivalents was caused primarily by increased expenditures in sales-related
activities, new product marketing, and new product development.
The Company's inventory increased by $74,517 from $291,447 as of June 30,
1996 to $365,964 as of March 31, 1997. The increase in inventory was due
primarily to: (i) additional purchases of long lead time items; and, (ii)
creation of an adequate level of finished goods.
The proceeds of this offering will be used principally for additional
working capital.
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.
17
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
In January of 1995, the Company completed an initial public offering
("IPO") 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 price
of $7.00 per share into one Common Share ("Warrants"). The Company received net
proceeds after expenses of $3,961,179 from the IPO. In addition, on February 2,
1995, the companies 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 as part of the IPO. The Company received an
additional $561,425 in net proceeds. Accordingly, the Company realized
$5,735,500 in gross proceeds from its IPO with net proceeds after expenses of
$4,522,604.
PRODUCTS
The Company's product strategy is to develop workstation products and
systems that improve accuracy and reduce the costs to perform routine medical
testing procedures.
"R/S" SERIES
The Company's first family of products is the "R/S" series of urine
sediment workstations. These workstations increase the accuracy, productivity
and safety of the numerous laboratories which routinely analyze urine sediment.
The "R/S" family is comprised of the: (i) R/S 2000 which was the Company's first
product; (ii) R/S 1000 which was introduced in May of 1995; and (iii) R/S 2003
which was introduced in September of 1995. The R/S 1000 serves the needs of
laboratories conducting fewer than 30 urine tests a day such as doctor office
laboratories, out patient clinics, and "stat" labs where accuracy,
standardization and quick turnaround are of utmost importance. The R/S 2000
serves mid-sized laboratories such as general hospitals. The R/S 2003
accommodates high volume laboratories such as clinical reference labs.
Users of the "R/S" series workstations include hospital laboratories
performing as few as 10 urine tests per day and clinical laboratory chains
performing in excess of 10,000 urine tests per night. The "R/S" series
workstations have also been the subject of numerous favorable evaluations and
publications including The Journal of Laboratory Medicine, American Clinical
Laboratory magazine, European Clinical Laboratory magazine, and College of
American Pathology Today.
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
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.
18
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
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 productivity 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 productivity 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, in many cases 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 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
In May of 1996, the Company announced its fourth workstation product, the
FE-2. 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
19
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
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"), resuspends 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. 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 instruments 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 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 50 ul 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.
20
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
ADDITIONAL WORKSTATION PRODUCTS
The Company develops its workstation products by analyzing current
procedures and collecting customer observations and suggestions. The Company can
therefore better define workstations which more closely meet customer needs. The
Company is aggressively developing several additional workstation products and
has doubled its developmental work force in order to accelerate the release of
the workstations that are presently in development.
SALES, MARKETING, AND DISTRIBUTION
North America
The Company sells and services its workstation-products through its
headquarter offices in Waterbury, CT and seven regional sales offices located
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 field services and support, and a newly appointed vice
president of sales and marketing, each located at the Company's headquarter
office.
Each sales manager earns a base salary and an incentive bonus based upon
achievement of: (i) a stipulated number of product demonstrations; and, (ii) a
quarterly 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.
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 installed workstations in
Ireland, Italy, Spain, Belgium, France, Switzerland, Portugal and Luxembourg.
The Company has started to implement its distribution plan for Japan, Taiwan and
Singapore.
Material Contracts and Arrangements
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.
On November 1, 1996, the Company announced that it entered into a product
integration agreement with Intelligent Medical Imaging, Inc. (NASD: IMI). Under
the agreement, IMI will purchase 200 of the Company's workstation products by
June 30, 1997 and integrate such products into IMI's new core laboratory
workstation which is designed to fully automate microscopic analysis of several
key body fluids including white
21
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
blood cells, urine sediment and fecal concentrates. On March 27, 1997 the
Company completed delivery of 100 workstations to IMI.
The Company has established a number of important relationships with large
scale customers. These relationships include: SmithKline Beecham Clinical
Laboratories; Mid-Atlantic Group Network of Shared Services, Inc. (MAGNET);
Kaiser Permanente, Southern California region; and, AmeriNet, Inc. of St. Louis
Missouri. The Company is also an approved vendor to the Federal Government
pursuant to a contract with the General Services Administration (GSA).
RESEARCH AND DEVELOPMENT
In fiscal year 1996, 1995, and 1994 the Company spent approximately
$251,000, $184,000 and $177,000 respectively on research and development. The
Company conducts research and product development through its technical staff.
The Company introduced its third workstation product, the R/S 2003, in September
of 1995. It introduced its fourth workstation product, the FE-2, in May of 1996.
The Company has several additional products at various stages of development
with scheduled completion by the end of 1996. The Company expects to spend in
excess of $250,000 in fiscal year 1997.
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
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 in this prospectus, 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 $195,000, 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 does not recognize the presence of several urine constituents
(eg. casts and crystals) and because it costs approximately $100,000, it is
therefore 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
22
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
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
On March 1, 1995, the Company implemented a manufacturing plan which
eliminated the use of outside "turn key" contract manufacturers. 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 on a parts and labor basis. The Company also offers an extended
service agreement for an additional charge. The Company experiences minimal
additional costs associated with its warranty obligations.
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.
23
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
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
Food & Drug Administration
The Company has obtained safety certifications for its workstation products
from Underwriters Laboratories (UL) and TUV Rhineland of North America, Inc
(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 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.
24
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
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 semiautomated 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.
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 routine 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.
25
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
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 high 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
complying with environmental regulations.
EMPLOYEES
As of March 31, 1997 the Company employed 19 persons, 10 of whom were
engaged in sales and marketing, 5 in research, development and manufacturing,
and 4 in administrative, accounting and other clerical support activities.
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.
LEGAL PROCEEDINGS
The Company knows of no legal proceeding, actual or pending, the outcome of
which would have a material effect upon the Company.
26
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
MANAGEMENT
The officers and directors of the Company are as follows:
Name Age Office
---- --- ------
Todd M. DeMatteo ........... 39 President, Chief Executive Officer, Director
Walter Greenfield .......... 67 Chief Scientist, Director
Conard R. Shelnut .......... 62 Secretary, Director
Michael F. Primini ......... 49 Vice President & CFO; Finance
& Administration Assistant Secretary
Robert H. Engel ............ 60 Director
Robert P. Carrol ........... 65 Director
Todd M. DeMatteo is a co-founder of the Company and has been with the
Company since its inception in 1992. From 1988 to 1991, Mr. DeMatteo was Vice
President and General Manager of Oracle Industries, a private company that
manufactured and distributed medical and industrial laboratory equipment. From
1983 to 1988, Mr. DeMatteo was employed by Data Switch Corporation, lastly as
Vice President--OEM and Distributor Operations. Mr. DeMatteo received a Bachelor
of Science degree in History, Political Science and Economics from Sacred Heart
University in 1979 and a law degree from Quinnipiac University, formerly
Bridgeport University, in 1982. He is admitted to the bar in the State of
Connecticut.
Walter Greenfield is a co-founder of the Company and has been with the
Company since its inception in 1992. From 1989 to 1991, Mr. Greenfield was
Chairman and Vice President of Research and Development of Scientific Imaging
Instruments, Trumbull, CT, a developer of a video based microscope. From 1983 to
1988, Mr. Greenfield was Vice President -- Research and Development of Wright
Labs, Bohemia, NY, where he developed diagnostic products for blood samples.
From 1980 to 1983, Mr. Greenfield was employed in product development at Medical
Lab Automation, Mt. Vernon, NY. From 1978 to 1980, Mr. Greenfield was employed
in product development at Nice Pak Products, Mt. Vernon, NY. From 1975-1978, Mr.
Greenfield was employed in product development by Carrol Donham Smith, a
division of Cooper Labs, New Brunswick, NJ. From 1970 to 1975, Mr. Greenfield
was employed in product development at Denver Chemical, Stamford, CT. From 1960
to 1970, Mr. Greenfield was employed in analytical development at USV
Pharmaceutical. From 1954 to 1960, Mr. Greenfield was a Laboratory Manager at
N.E. Clinical Labs, Hartford, CT. From 1952 to 1954, Mr. Greenfield served in
the U.S. Army Medical Corps. Mr. Greenfield attended New York University from
1948 to 1952 where his course work concentrated on clinical chemistry.
Conard R. Shelnut is a co-founder of the Company and has been with the
Company since its inception in 1992. Since 1987, Mr. Shelnut has also been
President of GPL, Las Vegas, NV, a consulting company to U.S. manufacturers
distributing products in Asia. From 1985 to 1987, Mr. Shelnut was Vice President
of T-Bar Incorporated, Wilton, CT, a manufacturer of electronic matrix switches.
From 1982 to 1985, Mr. Shelnut was a Director of International Marketing in
South Korea for Litton Aero Products, Aeropark, CA. From 1980 to 1982, Mr.
Shelnut was Group Vice President in South Korea for Litton Advanced Electronic
Systems Group, Beverly Hills, CA. From 1973 to 1980, Mr. Shelnut was a Senior
Advanced Program Manager for Litton Guidance and Control Systems Division,
Woodland Hills, CA. From 1970 to 1973, Mr. Shelnut was a Director of Operations
for Litton Mellonics Division Sunnyvale, CA. From 1963 to 1970, Mr. Shelnut was
a Manager of Field Engineering at Litton Guidance and Control Systems Division,
Woodland Hills, CA. From 1961 to 1963, Mr. Shelnut was a Department Manager in
chemical manufacturing for Proctor and Gamble Mfg. Co., St. Louis, MO. In 1961,
Mr. Shelnut obtained a B.S. degree in Technical Engineering from the University
of Arkansas. He served with the Strategic Air Command (SAC) and held the rank of
Captain in the United States Air Force Reserve. Mr. Shelnut is fluent in
Mandarin Chinese and taught avionics in China. Mr. Shelnut does not devote his
full-time to the Company.
27
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
Michael F. Primini is the Company's Vice President of Finance and
Administration, Chief Financial Officer, and Assistant Secretary. He has been
employed by the Company since January, 1995. From 1993 to 1995 Mr. Primini was
Controller for Albert Brothers, a metal recycling company (Waterbury, CT). For
six years prior thereto, Mr. Primini was employed by Heminway and Bartlett in
the position of Senior Vice President, for 13 years. Prior thereto, Mr. Primini
was Controller for two manufacturing plants for TRW Inc.
Robert H. Engel, Ph.D. was appointed to the Board of Directors of the
Company in February 1994. From 1993 to the present, Dr. Engel has been an
efficiency consultant to clinical reference laboratories and a key consultant
with Chi Laboratory Systems, Inc., a national laboratory consulting firm. From
1977 to 1993, Dr. Engel was employed by Damon Clinical Laboratories (Needham
Heights, MA), most recently as the Vice President, Technical Affairs. From 1971
to 1977, Dr. Engel was employed by SmithKline Beecham Clinical Laboratories
(Waltham, MA). From 1968 to 1971, Dr. Engel was a Senior Marine Biochemist at
Batelle Memorial Institute (Duxbury, MA), and from 1962 to 1968 he was a
Research Chemist at Lederle Laboratories, a division of American Cyanmid Inc.
(Pearl River, NY).
Robert P. Carroll was appointed to the Board of Directors of the Company in
February, 1994. From 1977 to the present, Mr. Carroll has been employed by
Unisys Corporation (McLean, VA), most recently as Vice President of Federal
Systems. From 1951 to 1977, Mr. Carroll was a member of the United States Air
Force assigned to information systems, retiring with the rank of Colonel.
The term of office of each director expires at the Company's annual
meeting of shareholders or until their successors are duly elected and
qualified. Except as otherwise set forth herein, officers serve at the
discretion of the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
compensation paid by the Company for the fiscal year ended June 30, 1996, to the
Company's Chief Executive Officer and the most highly compensated executive
officers of the Company whose aggregate cash compensation exceeded $100,000.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
| | Long Term Compensation |
| |-----------------------------------|
| Annual Compensation | Awards | |
|-------------------------------------|-------------------------| |
| | | Other | Restricted | | |
| | | Annual | stock | Options/ | | All other
- --------------------------------------------| Salary | Bonus | Compensation | award(s) | SAR | | Compensation
Name and principal position | Year | ($) | ($) | ($) | ($) | (#) | Payouts | ($)
- ------------------------------------|-------|----------|---------|----------------|--------------|----------|---------|-------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Todd M. DeMatteo, | | | | | | | |
President ..................... | 1996 | $135,000 | 0 | 0 | 0 | 0 | 0 | 0
| | | | | | | |
Walter Greenfield, | | | | | | | |
Chief Scientist, Director ..... | 1996 | $ 70,000 | 0 | 0 | 0 | 0 | 0 | 0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law, authorizes
corporations organized thereunder, such as the Company, to indemnify directors
and officers against liabilities which they may incur as such. The Company's
Certificate of Incorporation and By-Laws contain such indemnity provisions.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
COMBINATION OF DIRECTORS
Directors currently do not receive salaries or fees for serving as
directors of the Company. Certain non- affiliated Directors of the Company have,
however, received certain grants under the Company's 1993 Stock Incentive Plan.
See "Incentive Stock Option Plan."
EMPLOYMENT AGREEMENTS
Messrs. DeMatteo and Greenfield each have an employment agreement with the
Company. Each agreement: (i) is for a one year term effective January 1, 1997,
renewable upon the mutual consent of the parties; (ii) requires that the
employee devote substantially all of his professional time to performing the
duties defined in his agreement or as such duties may from time to time be
modified by the Company; (iii) contains provisions for termination of the
employee for "Cause" and "Without Cause"; (iv) entitles the employee to
participate in any and all employee benefits programs and/or plans sponsored by
the Company including but not limited to stock option plans, stock bonus plans,
profit sharing plans and other such programs as and if adopted; and, (v) as a
condition to employment, requires that the employee: (a) keep in confidence and
trust all Proprietary Information of the Company; (b) will not use or disclose
the Proprietary Information of the Company or anything related to it without the
prior written consent of the Company; and, (c) pledge and warrant that during
the term of employment with the Company, such employee will not engage in any
activity, employment, consultation, or otherwise which directly or indirectly
competes with the business of the Company.
In addition to the above, in the event that the employee is terminated due
to an acquisition, merger, or other change in control of the Company, the
employee is entitled to receive severance compensation in an amount equal to two
and one-half times the amount of compensation received in the twelve month
period immediately preceding the effective date of such change. Through the term
of the agreement, Mr. DeMatteo's base compensation is fixed at $135, 000 per
year and Mr. Greenfield's base compensation is fixed at $70,000.
INCENTIVE STOCK OPTION PLAN
The Company has adopted a 1993 Incentive Stock Option Plan (the "Plan"),
under Section 422 of the Internal Revenue Code of 1986. The Plan provides for
administration by a committee of the Board of Directors or, as is currently the
case, by the Board of Directors in the absence of a committee. Pursuant to the
Plan, the Company has reserved 300,000 shares of Common Stock for the purpose of
granting options to purchase such Common Stock (the "Options") to officers,
employees, and directors of the Company. The exercise price of the Options
granted must at least equal the fair market price of the Company's Common Stock
on the date of the Option grant. No Option may be granted under the Plan after
November 14, 2003 and each Option must expire no later than ten years after the
grant thereof. No Option may be exercised until the twenty-fourth month
following the date the Option was granted, at which time, 50% of the shares of
Common Stock covered by the Option may be exercised with certain limitations.
The remaining 50% balance are exercisable thirty-six months after issuance of
the Option. Options cannot be granted to holders of more than 10% of the
Company's Common Stock at the time of grant, unless the exercise price is 110%
of market
29
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
value and the Option expires five years from the date of issuance. Unless
otherwise provided by the administrators, 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 will automatically terminate in the
event (i) the Option holder ceases to be an employee or director of the Company
within twenty-four months of the date of grant or (ii) after twenty-four months
of the date of grant, the Option holder ceases to be an employee or director of
the Company and the Option is not exercised within ninety days after cessation
of employment or directorship. The foregoing is not a complete description of
the Plan, a copy of which has been filed as an exhibit to the Registration
Statement of which this prospectus forms a part.
PRINCIPAL SHAREHOLDERS
The following tables set forth, as of March 31, 1997, the number of shares
beneficially owned: (i) by each person known by the Company to be a beneficial
owner of more than five percent of the outstanding shares of Common Stock; (ii)
by each Director of the Company; and, (iii) by all executive officers and
Directors of the Company as a group. Unless otherwise indicated, each of the
following persons has sole voting and investment powers with respect to the
shares of Common Stock set forth opposite their respective names.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF PERCENT OF CLASS PERCENT OF CLASS
BENEFICIAL OWNERS (1) OWNERSHIP(2) BEFORE EXERCISE AFTER EXERCISE
- --------------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Todd M. DeMatteo(5) ................... 342,000(3) 14.84% 11.92%
Walter Greenfield ..................... 297,000 12.89% 10.35%
Conard R. Shelnut(5) .................. 90,000(4)(5) 3.9% 3.14%
Dr. Robert H. Engel ................... (5) (6) (6)
Robert P. Carroll ..................... (5) (6) (6)
Michael F. Primini .................... 1,000 (6) (6)
All Directors and officers
as a group, 6 persons ............... 730,000 31.68% 25.4%
</TABLE>
- --------------
(1) c/o the Company, 49 Leavenworth Street, Waterbury, Connecticut
(2) For the purpose of the above table and the following notes, the Common
Stock shown as "beneficially owned" includes all securities which pursuant
to Rule 13d-3 under the Securities Exchange Act of 1934, as amended, may
be deemed to be "beneficially owned" including, without limitation, all
securities which the "beneficial owner" has the right to acquire within 60
days, as for example through the exercise of any option, warrant or right,
the conversion of convertible securities or pursuant to the power to
revoke a trust discretionary account or similar arrangement.
(3) Includes 90,000 shares of Common Stock owned by Mr. DeMatteo through
Professional Profile Corporation (see: Ownership of Common Stock by
Certain Beneficial Owners, below)
(4) Includes 90,000 shares of Common Stock owned by Mr. Shelnut through
Professional Profile Corporation (see: Ownership of Common Stock by
Certain Beneficial Owners, below)
(5) Does not include 10,000 vested by unexercised options to purchase Common
Stock.
(6) Indicates less than 1% ownership of outstanding Common Stock.
30
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
MARKET FOR THE REGISTRANT'S COMMON STOCK
The company has its Common Stock listed for trading on the NASDAQ SmallCap
Market System under the symbol DIYS, and DIYSW for the Warrants.
The following tables set 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.
Closing Sales Prices
--------------------
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
Quarter Ended March 31, 1997 High Low
---------------------------- ---- ---
1st Quarter 6 5/8 6
2nd Quarter 6 1/2 6
3rd Quarter 7 1/16 6 5/8
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 High Low
------------------------ ---- ---
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
Quarter Ended March 31, 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
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock, par
value $.001 per share. The holders of Common Stock are entitled to one vote for
each share held of record on all matters to be voted on by stockholders. There
is no cumulative voting with respect to the election of directors, with the
result that the holders of more than 50% of the shares voting for the election
of directors can elect all of the directors then up for election. The holders of
Common Stock are entitled to receive dividends when, as and if declared by the
Board of Directors out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining which are available
for distribution to them after payment of liabilities and after provision has
been made for
31
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
each class of stock, if any, having preference over the Common Stock. Holders of
shares of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock. All of the outstanding shares of Common Stock are, and the shares
of Common Stock offered hereby when issued against the consideration set forth
in this Prospectus will be, fully paid and nonassessable.
Section 203 of the Delaware General Corporation Law provides that if a
person acquires 15% or more of the stock of a Delaware corporation, the person
becomes an "interested stockholder" and may not engage in a "business
combination" with that corporation for a period of 3 years. The term "business
combination" includes a merger, a sale of assets or a transfer of stock. The 3
year moratorium may be terminated if any of the following conditions are met:
(1) the Board of Directors approved the acquisition of stock or the business
combination before the person became an interested stockholder, (2) the
interested stockholder acquired 85% of the outstanding voting stock, excluding
in the determination of outstanding stock any stock owned by individuals who are
officers and directors of the corporation and any stock owned by certain
employee stock plans, or (3) the business combination is approved after the
person became an interested stockholder by voting stock which is not owned by
the interested stockholder. Todd M. DeMatteo, Walter Greenfield, and Conard R.
Shelnut each own, either directly or beneficially, 15% or more of the Common
Stock of the Company and may be an interested stockholder.
REDEEMABLE WARRANTS
Each Redeemable Warrant entitled the registered holder thereof (the
"Warrantholder") to purchase one share of Common Stock at a price of $7.00,
subject to adjustment in certain circumstances. The Redeemable Warrants expire
on 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 are redeemable by the Company upon
notice of not less than 30 days, at a price of $.05 per Redeemable Warrant,
provided that the average closing bid quotation of the Common Stock for the 20
trading days ending on the third day prior to the day on which the Company gives
notice has been at least $8.00. See "Description of Securities." The
Warrantholders shall have the right to exercise their Redeemable Warrants until
the close of business on the date fixed for redemption.
The exercise price and the number of shares of Common Stock purchasable
upon the exercise of the Redeemable Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations, reclassification of the Common Stock or sales of Common Stock
below the higher of the exercise price or the then existing market price.
Additionally, an adjustment would be made in the case of a reclassification or
exchange of Common Stock, consolidation or merger of the Company with or into
another corporation or sale of all or substantially all of the assets of the
Company in order to enable Redeemable Warrant holders to acquire the kind and
number of shares of Common Stock that might otherwise have been purchased upon
the exercise of the Redeemable Warrants. No adjustments will be made until the
cumulative adjustments in the exercise price per share amount to $.05 or more.
No adjustment to the exercise price of the shares subject to the Warrants will
be made for dividends (other than stock dividends), if any, paid on the Common
Stock.
The Redeemable Warrants may be exercised upon surrender of the Redeemable
Warrant certificate on or prior to the expiration date at the offices of the
warrant agent, with the exercise form on the reverse side of the Redeemable
Warrant certificate completed and executed as indicated, accompanied by full
payment of the exercise price (by certified check payable to the Company) to the
warrant agent for the number of Redeemable Warrants being exercised. The
Redeemable Warrant holders do not have the rights or privileges of holders of
Common Stock.
No Redeemable Warrants will be exercisable unless at the time of exercise
the Company has filed with the Commission, a current prospectus covering shares
of Common Stock issuable upon exercise of such
32
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
Redeemable Warrants and such shares have been registered with the Commission or
deemed to be exempt under the securities laws of the state of residence of the
holder of such Redeemable Warrants. The Company will use its best efforts to
have all shares so registered or qualified on or before the exercise date and to
maintain a current prospectus relating thereto until the expiration of the
Redeemable Warrants, subject to the terms of the Redeemable Warrant Agreement
While it is the Company's intention to do so, there can be no assurance that it
will be able to maintain a current prospectus.
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, bid 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.
TRANSFER AND WARRANT AGENT
Continental Stock Transfer and Trust Company, Inc. New York, New York, will
serve as Warrant agent in connection with the exercise of the Redeemable
Warrants.
PENNY STOCK REGULATIONS
The Commission has adopted regulations under the Securities Exchange Act of
1934, as amended, which generally define a "penny stock" to be any equity
security that has a market price (as defined) of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to certain exceptions. If
the securities offered hereby are not listed on or are removed from the Nasdaq
SmallCap Market, the Company's securities may be deemed to be "penny stocks" and
become subject to rules that impose additional sales practice requirements on
broker-dealers who sell such securities. For any transaction involving a penny
stock, unless exempt, the rules require the delivery prior to the transaction of
a disclosure schedule prepared by the Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities, information on the limited market in penny stocks and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. In addition, the
broker-dealers must obtain a written acknowledgment from the customer that such
disclosure information was provided and must retain such acknowledgment for at
least three years. Further, monthly statements must be sent disclosing current
price information for the penny stock held in the account. While many Nasdaq
listed securities would otherwise be covered by the definition of penny stock,
transactions in a non-Nasdaq listed security would be exempt from all but the
sole market-makers provisions for (i) issuers who have
33
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
$2,000,000 in tangible assets; (ii) transactions in which the customer is an
institutional accredited investor; and (iii) transactions that are not
recommended by the broker-dealer. In addition, transactions in a Nasdaq-listed
security directly with a Nasdaq market-maker for such securities would be
subject only to the sole marketmaker disclosure, and the disclosure with respect
to commissions to be paid to the broker-dealer and the registered
representative.
The above-described rules may materially adversely affect the liquidity for
the market of the Company's securities. such rules may also affect the ability
of broker-dealers to sell the Company's securities and may impede the ability of
Selling Security Holders or subsequent holders of the Common Stock or the
Redeemable Warrants (including, specifically, the purchasers in this offering)
to sell such securities in the secondary market.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
2,870,000 shares of Common Stock (assuming all warrants are exercised). Of the
2,870,000 shares of Common Stock to be outstanding there 819,000 shares of
Common Stock presently outstanding that are "restricted securities," as defined
in Rule 144 under the Securitires Act, and under certain circumstances may be
sold without registration pursuant to Rule 144.
Restricted Shares may not be sold unless they are registered under the
Securities Act or are sold pursuant to an applicable exemption from
registration, such as under Rule 144. In general, under Rule 144 as currently in
effect beginning 90 days after the date of this Prospectus, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years, including affiliates of the Company, would be entitled to sell
in brokers' transactions or to market makers within any three-month period a
number of Restricted Shares that does not exceed the greater of 1% of the then
outstanding shares of the Company's Common Stock or the average weekly trading
volume in the over-the-counter market during the four calendar weeks preceding
the date on which notice of the sale is filed with the Commission. Sales under
Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. A person who is not an affiliate of the Company at any time during the
90 days preceding a sale, and who has beneficially owned Restricted Shares for
at least three years, is currently entitled to sell such Restricted Shares
without any of the restrictions above-mentioned. However, Restricted Shares held
by affiliates must continue, after the three-year holding period, to be sold in
a brokers' transaction or to market makers subject to the volume, manner of
sale, notice and availability of public information limitations described above.
The Company is unable to predict the affect that sales made under Rule 144, or
otherwise, may have on the then prevailing market price of the Common Stock. Any
substantial sales of restricted securities pursuant to Rule 144 may have an
adverse affect on the market price of the Common Stock.
QUALIFIED SMALL BUSINESS STOCK
A provision in the Omnibus Budget Reconciliation Act of 1993, which became
effective on August 10, 1993 provides a reduction in Federal capital gains tax,
in certain circumstances, for taxpayers, other than corporations, who acquire
"qualified small business stock" at its original issue and hold it for more than
five years. One-half of the gain (up to certain limits) on such stock is
generally excluded from taxable income for regular tax purposes and 25% of such
gain (up to certain limits) is generally excluded for alternative minimum tax
purposes.
The new law has many limitations, only two of which are described below.
Because it is not yet clear how this new tax provision will apply to the Company
and to purchasers of the Common Stock and
34
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
Redeemable Warrants, the Company makes no representation as to the availability
of the benefits of this law to prospective purchasers of the Common Stock and
Redeemable Warrants. Potential investors are recommended to consult tax counsel
for further details.
In order to qualify, the issuer must not have more than $50,000,000 in
gross assets, including amounts received on issuance of the Common Stock and
Redeemable Warrants, at the time of the issuance of the Common Stock and
Redeemable Warrants. Gross assets generally means cash and the adjusted tax
basis of other property of the Company. The Company believes the gross assets
test will be satisfied with respect to investors who purchase Common Stock and
Redeemable Warrants from the Company in this Offering. In addition, the issuer
must use at least 80% of its assets in the "active conduct" of one or more
qualified trades or businesses for substantially all of the holding period of
the Common Stock and Redeemable Warrants and the securities underlying the
Redeemable Warrants. In the event the issuer has been in existence for more than
two years, such as the Company, up to 50% of the issuer's assets may qualify as
being used in the "active conduct" of a business if reasonably required for
working capital needs or the issuer reasonably expects to use the assets within
two years to finance research and development The Company cannot determine at
this time whether the Company will meet this active conduct test after the
Offering. In order to qualify, the Company must meet the "active conduct" test
for substantially all of the taxpayer's holding period for the Unit.
The Company will use its best efforts to file the required reports if and
so long as it reasonably appears to the Company that investors may be able to
obtain the benefits of this provision; however there can be no assurance that
investors in the Common Stock and Redeemable Warrants being offered hereby will
be able to benefit from this tax provision. See "Risk Factors--Qualified Small
Business Stock."
SALES COMMISSION
A Sales Commission of 5% will be paid to Tasin & Company, Inc. the
Representative of the several underwriters in the Company's IPO for assisting
the Company in soliciting the exercise of the Redeemable Warrants.
DETERMINATION OF OFFERING PRICE
The offering price of the shares offered hereby, has been arbitrarily
determined by the Company. The price does not necessarily bear any relationship
to assets, earnings, book value of the Company, or other customary investment
criteria.
LEGAL MATTERS
Certain legal matters will be passed on for the Company by Moskowitz Altman
& Hughes LLP, 11 East 44th Street, Suite 504, New York, New York 10017.
35
<PAGE>
Draft for Discussion Purposes Only
----------------------------------
EXPERTS
The financial statements of the Company as at June 30, 1996 and 1995 and
related statements of operations, changes in stockholders' equity and cash
flows, have been included herein and in the Registration Statement by the
Company in reliance upon the report of Wiss & Company, LLP, Independent Public
Accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a registration statement on Form SB-2, its Annual Report on
Form 10KSB for the years ended June 30, 1995 and 1996 and its 1995 and 1996
Proxy Statements, and 10QSB Quarterly Reports under the Act with respect to the
Company and the Common Stock and Redeemable Warrants. Reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements and notes filed as a part thereof. Statements contained in this
Prospectus as to the contents of any contract or other documents are summaries
which are not necessarily complete and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the Reports, each
such statement herein being qualified in all respects by such reference. The
Reports and Registration Statement, including exhibits and schedules thereto,
may be inspected without charge at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
Room 1228, 75 Park Place, New York, New York 10007 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials may be obtained from the Public Reference Section of the
Commission, Room 1024, Judiciary Plaza, 450 Fifth Street. N.W., Washington. D.C.
20549, and its public reference facilities in New York, New York and Chicago,
Illinois, at prescribed rates.
36
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----------
Report of Independent Auditors ..................................... F-2
Financial Statements:
Balance sheet at March 31, 1997 and June 30, 1996 ................ F-3
Statements of operations for the nine months ended March 31, 1997
and 1996, the years ended June 30, 1996 and 1995 and the period
March 27, 1992 (date of inception) through March 31, 1997 ...... F-4
Statements of changes in stockholders' equity for the nine months
ended March 31, 1997 and years ended June 30, 1996 and 1995 .... F-5
Statements of cash flows for the nine months ended March 31, 1997
and 1996, the years ended June 30, 1996 and 1995 and the period
March 27, 1992 (date of inception) through March 31, 1997 ...... F-6
Notes to financial statements .................................... F-7 to F-13
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, 1996 and the related statements of operations,
changes in stockholders' equity and cash flows for the year then ended and the
year ended June 30, 1995. 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, 1996, and the results of its operations and its cash flows for the
aforementioned period, in conformity with generally accepted accounting
principles.
WISS & COMPANY, LLP
Livingston, New Jersey
July 31, 1996
F-2
<PAGE>
DIASYS CORPORATION
(A Development Stage Company)
BALANCE SHEETS
March 31, June 30,
1997 1996
----------- -----------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and equivalents $ 1,568,306 $ 2,772,468
Accounts receivable, less allowance for
doubtful accounts of $19,000 517,798 47,803
Inventories 365,964 291,447
Prepaid expenses and other current assets 39,371 27,967
----------- -----------
Total Current Assets 2,491,439 3,139,685
EQUIPMENT, FURNITURE AND FIXTURES, LESS
ACCUMULATED DEPRECIATION 81,973 58,235
PATENT, LESS ACCUMULATED AMORTIZATION 58,398 45,436
----------- -----------
$ 2,631,810 $ 3,243,356
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 73,190 $ 53,677
Accrued expenses 2,121 29,411
----------- -----------
Total Current Liabilities 75,311 83,088
----------- -----------
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
2,304,000 at March 31, 1997 and 2,240,000
at June 30, 1996 2,304 2,240
Additional paid-in capital 5,582,596 5,209,660
Deficit accumulated during the development
stage (3,028,401) (2,051,632)
Total Stockholders' Equity 2,556,499 3,160,268
----------- -----------
$ 2,631,810 $ 3,243,356
=========== ===========
See auditors' report and accompanying notes to financial statements.
F-3
<PAGE>
DIASYS CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended March 27, 1992
March 31, Year Ended June 30, (date of inception)
-------------------------- ------------------------- through
1997 1996 1996 1995 March 31, 1997
----------- ----------- ----------- ----------- --------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
SALES OF WORK STATIONS AND
RELATED SUPPLIES $ 705,331 $ 239,861 $ 234,837 $ 125,104 $ 1,534,354
RENTAL/LEASE REVENUE 20,713 -- -- -- 20,713
---------- ---------- ----------- ---------- -----------
NET SALES 726,044 239,861 234,837 125,104 1,555,067
COST OF GOODS SOLD 164,418 80,453 89,307 47,978 468,861
---------- ---------- ----------- ---------- -----------
GROSS PROFIT 561,626 159,408 145,530 77,126 1,086,206
---------- ---------- ----------- ---------- -----------
OPERATING EXPENSES:
Selling 674,013 431,358 654,754 316,428 1,793,451
General and administrative 352,267 321,543 450,403 325,770 1,426,618
Investment banking advisory
services 345,000 -- -- -- 345,000
Research and development 243,805 170,761 250,930 184,466 885,742
---------- ---------- ----------- ---------- -----------
1,615,085 923,662 1,356,087 826,664 4,450,811
---------- ---------- ----------- ---------- -----------
LOSS FROM OPERATIONS (1,053,459) (764,254) (1,210,557) (749,538) (3,364,605)
Interest expense to stockholders
and related party -- -- -- -- (4,500)
Interest expense (1,885) -- -- -- (1,885)
Interest income 78,575 151,450 171,531 92,483 342,589
---------- ---------- ----------- ---------- -----------
NET LOSS $ (976,769) $ (612,804) $(1,039,026) $ (657,055) $(3,028,401)
========== ========== =========== ========== ===========
NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES
DEEMED OUTSTANDING 2,304,000 2,240,000 2,240,000 2,240,000
========== ========== =========== ==========
NET LOSS PER COMMON AND
COMMON EQUIVALENTS SHARE:
Primary $(.42) $(.27) $(.46) $(.29)
===== ===== ===== =====
</TABLE>
See auditors' report and accompanying notes to financial statements.
F-4
<PAGE>
DIASYS CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock During the
---------------------- Paid-in Development
Shares Par Value Capital Stage
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994 2,005,000 $2,005 $ 662,336 $ (355,551)
YEAR ENDED JUNE 30, 1995:
Issuance of common stock and 570,000
warrants to purchase common stock for
cash in a public offering at $5.00 per
share and $.15 per warrant, less related
expenses of offering of $1,212,896 1,130,000 1,130 4,521,474 --
Issuance of common stock for finders fee
at $5.00 per share 5,000 5 24,950 --
Shares of stock of founding stockholders
returned on the effective date of the
offering at no cost and later cancelled (900,000) (900) 900 --
Net loss -- -- -- (657,055)
--------- ------ ---------- -----------
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)
NINE MONTHS ENDED MARCH 31, 1997 (Unaudited):
Issuance of common stock for investment
banking advisory services at $5.75 per
share, 60,000 shares issued 60,000 60 344,940 --
Conversion of 4,000 warrants at $7.00 per share 4,000 4 27,996 --
Net loss -- -- -- (976,769)
--------- ------ ---------- -----------
BALANCE, MARCH 31, 1997 2,304,000 $2,304 $5,582,596 $(3,028,401)
========= ====== ========== ===========
</TABLE>
See auditors' report and accompanying notes to financial statements.
F-5
<PAGE>
DIASYS CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
March 27, 1992
Nine Months Ended (date of
March 31, Year Ended June 30, inception)
-------------------------- ------------------------ Through
1997 1996 1996 1995 March 31, 1997
----------- ----------- ----------- ---------- --------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (976,769) $ (612,804) $(1,039,026 $ (657,055) $(3,028,401)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Compensation forgiven by officers -- -- -- -- 200,000
Investment banking advisory service 345,000 -- -- -- 345,000
Amortization of patent 16,600 2,175 24,052 12,230 53,591
Depreciation of equipment, furniture and
fixtures 9,000 3,375 12,217 6,100 30,200
Provision for losses on accounts receivable -- -- -- 11,500 19,000
Changes in operating assets and liabilities:
Accounts receivable (469,995) (47,443) 21,985 29,493 (536,798)
Inventories (74,517) (55,358) (83,841) (147,756) (365,964)
Prepaid expenses and other current assets (11,404) (15,873) (14,344) (10,902) (39,371)
Accounts payable and accrued expenses (7,778) (53,384) (18,629) 12,323 78,630
----------- ----------- ----------- ---------- -----------
Net cash flows from operating activities (1,169,863) (779,312) (1,097,586) (744,067) (3,244,293)
----------- ----------- ----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures (34,299) (8,310) (16,940) (47,229) (113,554)
Costs of patent -- -- (20,534) (37,800) (82,426)
----------- ----------- ----------- ---------- -----------
Net cash flows from investing activities (34,299) (8,310) (37,474) (85,029) (195,980)
----------- ----------- ----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Offering costs -- -- -- (1,162,896) (1,289,421)
Proceeds from issuance of common stock
and warrants -- -- -- 5,735,500 6,298,000
----------- ----------- ----------- ---------- -----------
Net cash flows from financing activities -- -- -- 4,572,604 5,008,579
----------- ----------- ----------- ---------- -----------
NET CHANGE IN CASH AND EQUIVALENTS (1,204,162) (787,622) (1,135,060) 3,743,508 1,568,306
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 2,772,468 2,915,303 3,907,528 164,020 --
----------- ----------- ----------- ---------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 1,568,306 $ 2,127,681 $ 2,772,468 $3,907,528 $1,568,306
=========== =========== =========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,885 $ -- $ -- $ -- $ --
=========== =========== =========== ========== ==========
Income taxes paid $ -- $ -- $ -- $ -- $ --
=========== =========== =========== ========== ==========
NONCASH FINANCING ACTIVITIES --
Issuance of common stock for finders
fees and expenses $ -- $ -- $ -- $ 25,000 $ 25,000
=========== =========== =========== ========== ==========
Application of deferred offering costs at
June 30, 1994 $ -- $ -- $ -- $ 25,000 $ 25,000
=========== =========== =========== ========== ==========
Issuance of common stock for investment
banking advisory services $ 345,000 $ -- $ -- $ -- $ 345,000
=========== =========== =========== ========== ==========
</TABLE>
See auditors' report and accompanying notes to financial statements.
F-6
<PAGE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Data for the nine months ended March 31, 1997 and 1996 are unaudited)
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
(Data for the nine months ended March 31, 1997 and 1996 are unaudited)
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.
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 and equivalent 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.
NEW ACCOUNTING PRONOUNCEMENTS - Effective in 1996, the Company will be
required to adopt Statement of the Financial Accounting Standards Board
FAS 121, (Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of) and FAS 123 (Accounting for
Stock-Based Compensation). The impact of the adoption is not expected
to have a material effect on the Company's financial statements.
UNAUDITED FINANCIAL INFORMATION - The information as of and for the
nine months ended March 31, 1997 and 1996 is unaudited, but includes
all of the adjustments, consisting only of normal recurring accruals,
which the management of the Company considers necessary for a fair
presentation thereof. Results of operations for the nine months ended
March 31, 1997 are not necessarily indicative of the results to be
expected for the year ended June 30, 1997.
F-8
<PAGE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Data for the nine months ended March 31, 1997 and 1996 are unaudited)
NOTE 2 - INVENTORIES:
Inventories consist of the following:
March 31, June 30,
1997 1996
-------- --------
Raw material ............... $118,367 $ 94,265
Work-in-process ............ 95,680 31,111
Finished goods ............. 151,917 166,071
-------- --------
$365,964 $291,447
======== ========
NOTE 3 - CONCENTRATION OF CREDIT RISK:
Included in cash and equivalents March 31, 1997 are U.S. Treasury bills
of approximately $1,567,681 maturing at weekly intervals bearing
interest between 4.95% and 5.33%.
NOTE 4 - EQUIPMENT, FURNITURE AND FIXTURES:
Equipment, furniture and fixtures are summarized as follows:
March 31, June 30,
1997 1996
--------- ---------
Machinery and equipment ........... $ 88,732 $ 63,741
Furniture and fixtures ............ 23,154 15,407
--------- ---------
111,886 79,148
Less: Accumulated depreciation ... 29,913 20,913
--------- ---------
$ 81,973 $ 58,235
========= =========
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
$1,750,000 at June 30, 1996 (including net losses for the six months
ended June 30, 1996) which can be used to offset future federal taxable
income through 2010.
F-9
<PAGE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Data for the nine months ended March 31, 1997 and 1996 are unaudited)
The significant components of the Company's deferred tax assets are
summarized below:
June 30,
1996
----------
Allowance for doubtful accounts ................ $ 5,000
Net operating loss tax carryforwards ........... 788,000
----------
793,000
Valuation allowance ............................ (793,000)
----------
$ --
==========
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, 1996 and March 31, 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
(Data for the nine months ended March 31, 1997 and 1996 are unaudited)
NOTE 7 - COMMON STOCK:
INITIAL PUBLIC OFFERING - During the fiscal year ended June 30, 1995
the Company filed its initial public offering for 1,130,000 shares of
common stock, and 570,000 redeemable common stock purchase warrants.
Each redeemable warrant entitles the registered holder to purchase one
share of common stock, at $7.00 subject to adjustment in certain
circumstances, expiring January 10, 1997. For certain services provided
in regard to the offering warrants to purchase 95,000 shares of common
stock were given expiring January 10, 1997 at $7 per share and warrants
to purchase 50,000 warrants at $.15 each. These warrants are
exercisable at $7 per share of common stock through January 10, 1997.
The Company received $5,735,500, less expenses of $1,140,281, from the
offering.
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 stock (determined at the date of the Option grant) for which
incentive stock options granted under the Plan may become first
exercisable in a
F-11
<PAGE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Data for the nine months ended March 31, 1997 and 1996 are unaudited)
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 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 300,000 shares.
Outstanding Options at March 31, 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 10,500 7.625 June 2006
September 1998 63,000 6.25 September 2006
November 1998 5,000 5.75 November 2006
February 1998 45,000 7.063 February 2007
--------
Total Options
Outstanding $178,500 $2.50-7.625
Options under the Incentive Stock Option Plan are summarized as
follows:
Nine Months Ended
March 31, 1997
-----------------
Options outstanding at
beginning of year ...................... $ 88,000
Options granted .......................... 113,000
Options expired/withdrawn ................ (22,500)
Options exercised ........................ --
-----------
Options outstanding at end of year ....... $178,500
-----------
Option price per share ................... $2.50-7.625
-----------
Options exercisable:
Number of shares ....................... --
-----------
At March 31, 1997, 39,000 options are exercisable.
F-12
<PAGE>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Data for the nine months ended March 31, 1997 and 1996 are unaudited)
NOTE 9 - COMMITMENTS:
LEASES - The following is a schedule of future minimum rental payments
required for all non-cancellable operating leases:
1997 $10,625
=======
Rent expense for the nine months ended March 31, 1997 and 1996, the
years ended June 30, 1996 and 1995, and the period March 27, 1992
(date of inception) through March 31, 1997 was $21,027, $17,438,
$21,250, $21,250 and $87,323, 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, 1996
and 1995 and for the period ending March 31, 1997 the two officers
earned annual base compensation of $135,000 and $70,000, respectively.
NOTE 10 - MAJOR CUSTOMERS:
Sales to major customers as a percentage of net sales are summarized
as follows:
Nine Months Year Ended June 30,
Ended -------------------
March 31, 1997 1996 1995
-------------- --------- -------
IMI .............................. 54% --% --%
Smith Kline Beechum Clinical
Laboratories ................... 4 11 41
Medical Arts Laboratories ........ -- -- 10
Unilab ........................... -- -- 10
Foreign Customers ................ 7 14 --
NOTE 11 - INVESTMENT BANKING SERVICES AGREEMENT (UNAUDITED):
The Company entered into an agreement with an investment banker to
provide services for one year commencing October 1, 1996 for up to
120,000 shares of the Company's common stock. Such stock was valued at
$5.75 per share. For the nine months ended March 31, 1997 the Company
has incurred $345,000 of expense because of this agreement.
F-13
<PAGE>
Draft for Discussion Purposes Only
===============================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus. Any information or representation not herein contained, if given or
made, must not be relied upon as having been authorized by the Company. This
Prospectus is not an offer to sell or solicitation of an offer to buy any
securities other than those specifically offered hereby, nor is it an offer or
solicitation in any jurisdiction in which such offer or solicitation is
unqualified to do so. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that the
information herein is correct as of any time subsequent to its date.
----------------------
TABLE OF CONTENTS
Prospectus Summary ........................................................
The Company ...............................................................
The Offering ..............................................................
Selected Financial Information ............................................
Risks Factors .............................................................
Dilution ..................................................................
Dividend Policy ...........................................................
Use of Proceeds ...........................................................
Capitalization ............................................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations .....................................
Business ..................................................................
Management ................................................................
Executive Compensation ....................................................
Principal Shareholders ....................................................
Market for Common Shares ..................................................
Description Of Securities .................................................
Transfer & Warrant Agent ..................................................
Penny Stock Regulations ...................................................
Shares Eligible For Future Sale ...........................................
Qualified Small Business Stock ............................................
Sales Commission ..........................................................
Legal Matters .............................................................
Experts ...................................................................
Additional Information ....................................................
Financial Statements ......................................................
----------------------
===============================================================================
===============================================================================
DIASYS CORPORATION
566,000 Shares of
Common Stock
------------
PROSPECTUS
------------
May __, 1996
===============================================================================
<PAGE>
PART II
Information Not Required in Prospectus
ITEM 24. Indemnification of Officers and Directors
Section 145 of the Delaware General Corporation Law authorizes corporations
organized thereunder, such as the Company, to indemnify directors and officers
against liabilities which they may incur in their capacities as such, including
judgements, fines expenses and amounts paid in settlement of litigation. Said
section provides that the indemnification authorized thereby is not exclusive of
any other rights to which a director or officer may be entitled under any
by-law, agreement, vote of shareholders or otherwise.
Under the terms of the Company's Certificate of Incorporation, no director
shall be personally liable to the corporation or its stockholders for monetary
damages for breach fiduciary duty as a director, except that this provision
shall not eliminate or limit the liability of any director: (i) For any breach
of the director's duty of loyalty to the corporation or its stockholders; (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of the law; (iii) under Section 174 of the General
Corporation Law of Delaware; or (iv) for any transaction from which the director
derived an improper personal benefit. This provision shall also not eliminate or
limit the liability of a director for any act or omission occurring prior to the
date when such provision becomes effective.
Under the terms of the Company's By-Laws, each person who was or is made a
party or is threatened to be made a party or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer,
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators.
II-1
<PAGE>
ITEM 25. Other Expenses of Issuance and Distribution
The expenses payable by Registrant in connection with the issuance and
distribution of the securities being offered are estimated as follows:
Printing Expenses ............................. $ 5,000.00
Legal Fees .................................... 20,000.00
Miscellaneous ................................. 10,000.00
----------
TOTAL ..................................... $35,000.00
II-2
<PAGE>
ITEM 26. Recent Sales of Unregistered Securities
All sales reported under this caption were exempt from the registration
requirements of the Securities Act of 1933, as amended, by reason of Section
4(2) and Rule 506 of Regulation D thereof and/or the rules and regulations
promulgated thereunder as sales of securities not involving a public offering.
The Company has not sold any Unregistered Securities during the past three
(3) years.
II-3
<PAGE>
ITEM 28. Undertakings
(a) Rule 415 Offering.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registrant Statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information
set forth in the Registration Statement;
(iii) include any additional material information on the plan of
distribution;
(2) For determining any liability under the Securities Act, each such
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(e) Request for acceleration on effective date.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
Rule 430A Undertakings
1. The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(b) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registrant statement relating to the
securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Waterbury and State of Connecticut, on the 16th day
of May, 1997.
DIASYS CORPORATION
By: /s/
--------------------------------------
Todd M. DeMatteo, President,
Chief Executive Officer,
and Director
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
/s/ President, Chief Executive May 21, 1997
- ----------------------------- Officer, and Director
Todd M. DeMatteo
/s/ Secretary and Director May 21, 1997
- -----------------------------
Conard R. Shelnut
/s/ Chief Scientist and May 21, 1997
- ----------------------------- Director
Walter Greenfield
Director May 21, 1997
- ----------------------------
Robert H. Engel
Director May 21, 1997
- ----------------------------
Robert P. Carroll
Vice President & May 21, 1997
- ---------------------------- Chief Financial Officer
Michael F. Primini Finance & Administration
Secretary
II-6
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in the Prospectus constituting a part of this
Post-Effective Amendment No. 1 to the Registration Statement on Form SB-2 of
DiaSys Corporation of our report dated July 31, 1996 for the fiscal years ending
June 30, 1996 and June 30, 1995.
We also consent to the reference to our firm under the heading "Experts" in
the Prospectus.
/s/
---------------------------
WISS & COMPANY, LLP
Livingston, New Jersey
May 21, 1997
<PAGE>
CONSENT OF COUNSEL
Moskowitz Altman & Hughes LLP hereby consents to the use of its name under
the caption "Legal Matters" in the Prospectus forming a part of the Registration
Statement and in any amendment thereto.
/s/
-----------------------------------------
Moskowitz Altman & Hughes LLP
New York, New York
May 21, 1997
