UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
[FEE REQUIRED]
For the fiscal year ended: JUNE 30, 1999
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
[NO FEE REQUIRED]
For the transition period N/A to N/A
Commission File number: 0-24974
DIASYS CORPORATION
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Exact name of small business issuer as specified in its charter)
DELAWARE 06-1339248
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(State or other jurisdiction of (IRS Employer ID #)
incorporation or organization)
49 LEAVENWORTH STREET, WATERBURY, CT 06702
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(Address of principal executive offices)
(203) 755-5083
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(Issuer's Telephone number including area code)
NONE
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(Former name, address and/or fiscal year if changed from last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days:
YES |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
Registrant's revenues for the most recent fiscal year were $589,990
As of October 1, 1999, the aggregate market value of the registrant's voting
stock held by non-affiliates was $27,456,121 based upon an average closing price
of $9 1/8 for the five trading days immediately prior thereto.
As of October 1, 1999, the Registrant had 3,008,890 shares of common stock
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PART 1
ITEM 1. DESCRIPTION OF BUSINESS
THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE CONTAIN FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS,
ESTIMATES AND PROJECTIONS ABOUT THE COMPANY'S INDUSTRY, MANAGEMENT'S BELIEFS AND
CERTAIN ASSUMPTIONS MADE BY MANAGEMENT. ALL STATEMENTS, TRENDS, ANALYSES, AND
OTHER INFORMATION CONTAINED IN THIS REPORT RELATIVE TO TRENDS IN NET SALES,
GROSS MARGIN, ANTICIPATED EXPENSE LEVELS AND LIQUIDITY AND CAPITAL RESOURCES, AS
WELL AS OTHER STATEMENTS INCLUDING, BUT NOT LIMITED TO WORDS SUCH AS
"ANTICIPATE", "BELIEVE", "PLAN", "ESTIMATE", "EXPECT", "SEEK", "INTEND", AND
OTHER SIMILAR EXPRESSIONS, CONSTITUTE FORWARD LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT.
ACCORDINGLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED OR
EXPRESSED IN SUCH STATEMENTS. POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, AMONG
OTHERS, THOSE SET FORTH HEREIN UNDER "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE
RESULTS",, AS WELL AS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--OVERVIEW" AND "--LIQUIDITY AND CAPITAL
RESOURCES". PARTICULAR ATTENTION SHOULD BE PAID TO THE CAUTIONARY STATEMENTS
INVOLVING THE COMPANY'S LIMITED OPERATING HISTORY, THE UNPREDICTABILITY OF ITS
FUTURE REVENUES, THE UNPREDICTABLE AND EVOLVING NATURE OF ITS BUSINESS MODEL,
THE INTENSELY COMPETITIVE ONLINE COMMERCE AND RETAIL BOOK ENVIRONMENTS AND THE
RISKS ASSOCIATED WITH CAPACITY CONSTRAINTS, SYSTEMS DEVELOPMENT, MANAGEMENT OF
GROWTH AND BUSINESS EXPANSION. EXCEPT AS REQUIRED BY LAW, WHETHER AS A RESULT OF
NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. READERS, HOWEVER, SHOULD CAREFULLY
REVIEW THE FACTORS SET FORTH IN OTHER REPORTS OR DOCUMENTS THAT THE COMPANY
FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION (`SEC").
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.
In January of 1995, the Company completed an initial public offering
("Offering") of 1,000,000 shares of its Common Stock, par value $.001 ("Common
Shares") and 500,000 Common Stock Purchase Warrants, each exercisable at a fixed
price into one Common Share ("Warrants"). The Company received net proceeds
after expenses of $3,961,179 from the Offering. In addition, on February 2,
1995, the Company's underwriter exercised its option to purchase 130,000
additional Common Shares and 70,000 Warrants from the Company pursuant to an
over-allotment option granted to the underwriter as part of the Offering. The
Company received an additional $561,425 in net proceeds from the exercise.
Accordingly, the Company realized $5,735,500 in proceeds from its Offering with
net proceeds after expenses of $4,522,604.
On July 24, 1997 the Company filed a post effective amendment consisting of
566,000 shares of Common Stock, par value $.001 (the "Common Stock"), issuable
upon the exercise of 566,000 Redeemable Common Share Purchase Warrants (the
"Redeemable Warrants"). The Redeemable Warrants were issued in connection with a
public offering of the Company's securities in January 1995 and subsequently
amended as to the expiration date and exercise price. Each Redeemable Warrant
entitled the registered holder thereof to purchase one share of Common Stock at
a price of $4.50 per share, subject to adjustment in certain circumstances.
552,640 Redeemable Warrants were exercised prior to their expiration date of
April 10, 1998. Accordingly, the Company received $2,497,068 in proceeds from
the exercise of such Warrants.
Since inception, the Company has: (i) developed and patented several new
proprietary technologies; (ii) erected the infrastructure needed to support
global manufacturing and distribution operations; (iii) established market and
technical acceptance of its initial products among the medical laboratory
community; (iv) attracted significant strategic selling partners in major
markets; and, (v) implemented a plan for long term market penetration. As
such, the Company has operated at a loss. The Company believes that it has
successfully completed its developmental stage.
PRODUCTS
The Company develops products which increase accuracy of and reduce the costs to
analyze human body fluids. Each current product family is described below. Over
the ensuing years, the Company expects to announce additional workstation
products designed to automate and standardize the testing of most human and some
non-human fluids.
"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 three models: The R/S 1000 serves the needs of
laboratories conducting fewer than 20 urine tests at a time 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: (i) large scale clinical
laboratory chains performing in excess of 20,000 urine tests per night; (ii)
major medical centers performing hundreds of urine tests per day; and, (iii)
local hospital laboratories performing as few as 100 tests per week. The "R/S"
series workstations have also been the subject of numerous favorable evaluations
and publications including the Journal of Laboratory Medicine, Clinical Lab
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Products magazine, American Clinical Laboratory magazine, European Clinical
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Laboratory magazine, College Of American Pathology Today, and Urinalysis News.
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The "R/S" series workstations are the preferred practice for major laboratory
networks and health maintenance in organizations (HMO's) such as SmithKline
Beecham and Kaiser Permanente, and was profiled in 1997 Spin-off, the annual
report of technology published by the National Aeronautical And Space
Administration (NASA).
The Company has also entered into a strategic cooperation agreement regarding
the promotion and sale of its "R/S" series workstations with and by Bayer
Corporation in the United States, Bayer Incorporated in Canada, and Hua Sin
Science Co. LTD, the exclusive distributor of BAYER's urinalysis instruments in
China (See: STRATEGIC RELATIONSHIPS below).
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"FE" SERIES:
The Company's fourth workstation product, the FE-2, is the first of a family of
products designed by the Company for use in microbiology. More specifically, the
FE-2 is a counter top instrument which automates and reduces the cost of
microscopic analysis of fecal concentrates. Microscopic analysis of feces is
performed by thousands of hospital, public health and private commercial
laboratories world wide in order to detect the presence of ova (eggs), cysts,
and parasites in the lower intestinal tract of humans and animals. The presence
of such organisms is critical to the proper care of the patient. The test is
non-invasive, can be performed on an out-patient basis, and quickly provides
confirmatory results.
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 noxious nature of the fecal material.
THE CYTOSYS:
The Company has developed a new methodology for cell counting, sorting and
analysis for research applications, especially with regard to the study of human
diabetes. Work with cultured cells often requires a precise knowledge of the
cell count both to standardize conditions and to carry out quantitative
experiments. The Company expects to release the product to market upon receipt
of FDA clearance.
ADDITIONAL WORKSTATION PRODUCTS:
The Company is developing several additional workstation products which automate
and standardize routine analysis of human and non-human fluids, one of which is
currently being tested in Germany. Each workstation is or will be designed to
increase the precision and reduce the cost of performing an otherwise labor
intensive, manually oriented laboratory procedure.
SALES, MARKETING, AND DISTRIBUTION
NORTH AMERICA:
The Company sells and services its workstation-products through its headquarter
offices in Waterbury, Connecticut. North America is organized into five distinct
sales regions. Each region is staffed by a manager and each manager is
responsible for sales and service of the Company's products in his/her region.
North American sales efforts are supported by a Director Of Strategic Markets, a
Manager of Field Services, and a Field Services Associate, each located at the
Company's headquarter offices.
Each sales manager earns a base salary, commissions and bonuses based upon
achievement of monthly, quarterly and yearly quota objectives. The Company does
not rely on independent sales representatives and/or dealers to promote and/or
distribute the Company's workstation products in North America. 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 promotes and sells its workstation products through distributors in
parts of Europe, Central America, China and Pacific-Asia. European operations
are supported by a Country Manager based in England. The Country Manager is paid
a monthly retainer and an incentive bonus based upon achievement of certain
goals. He is not an employee of the Company. Chinese and Pacific Asian
operations are managed by local distributors under the direction and guidance of
the Company's President.
STRATEGIC RELATIONSHIPS
BAYER CORPORATION:
The Company has entered into a Strategic Cooperation Agreement with the
Diagnostics Division of Bayer Corporation, the United States subsidiary of the
international chemical and health care conglomerate, Bayer AG headquartered in
Germany. Under the Cooperation Agreement, Bayer and DiaSys recommend and refer
each other's urinalysis workstations to hospital and commercial laboratory
customers in the United States. The companies also confer on account strategy
and provide unified network standardization plans through Bayer at the request
of the customer. Each company installs and services its own equipment.
The Company has started to recognize sales of its workstations through its
strategic relationship with Bayer. The Company's activities have also assisted
Bayer with the sale of its urine chemistry analyzers.
As of September 1, 1999, there were over 125 customers using one or more
Bayer/DiaSys systems in North America.
BAYER INCORPORATED:
On June 27, 1996 the Company entered into a strategic cooperation agreement with
Bayer Inc., the Canadian subsidiary of the international chemical and health
care giant, Bayer AG (Germany). Under the agreement, Bayer's Health Care
Division and the Company 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.
The parties renewed their agreement for an additional two years on June 30,
1999.
HUA SIN SCIENCE CO. LTD:
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Effective March 1, 1999, the Company entered into a multi-year sales and service
agreement with Hua Sin Science Co. LTD, located in Guangzhou China. Hua Sin
manufactures and distributes instruments and reagents to China's 60,000 hospital
and medical laboratories. Hua Sin is also the exclusive distributor of BAYER's
CLINITEK series urine chemistry analyzers in China. The Company officially
commenced joint operations with Hua Sin in Guangzhou during the week of April
12, 1999. As of September 1, 1999, Hua Sin ordered sixty (60) R/S 2003 urine
sediment workstations, 42 of which have been delivered.
KAISER PERMANENTE:
Effective April 1, 1999, the Company entered into a three year product supply
agreement with Kaiser Foundation Health Plan, Inc., the nations leading not for
profit integrated health system. The DiaSys Urine Sediment Analyzer was selected
by the Kaiser Permanente Standards and Sourcing Team for Hematology as the
recommended product to be used in conjunction with their standard urinalysis
analyzers whenever a microscopic urine test is required. The agreement does not
include minimum commitments. However, as of September 1, 1999, there were 14
Kaiser-managed laboratory facilities using one or more DiaSys workstations.
LENTA LTD:
Effective August 1, 1999, the Company entered into a multiple year Sales and
Service agreement with Lenta Teshis Orunleri Ticaret ve Sanayi Ltd. St. (Lenta).
Lenta is a leading distributor of urinalysis and diagnostic equipment with
headquarter offices in Istanbul and 14 correspondent offices throughout Turkey.
The Company officially commenced joint operations with Lenta on September 7,
1999 in Istanbul. As of September 30, 1999, Lenta has ordered fifty (50) R/S
series urine sediment workstations, 20 of which have been delivered. Lenta has
also commenced promotion of the Company's FE-2 workstations for fecal
concentrates.
OTHER SIGNIFICANT RELATIONSHIPS:
The Company has established a number of important relationships with large scale
customers. These relationships include: SMITHKLINE BEECHAM CLINICAL
LABORATORIES; AMERINET INC. of St. Louis Missouri; MID-ATLANTIC GROUP NETWORK OF
SHARED SERVICES, INC. (MAGNET); and, the PURCHASE CONNECTION of California. The
Company has also been awarded a Federal Supplier's Schedule by the GENERAL
SERVICES ADMINISTRATION (GSA) of the United States of America. The Company is
continuously seeking and negotiating additional strategic relationships, both
domestic and abroad.
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, 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 instrument requires expensive
proprietary reagents to operate and costs between $85,000 and $200,000 to
acquire, the Company believes that only the largest laboratories with the most
liberal budgets can justify the purchase and/or use of such a system. The
laser-based system screens-out "normal" urines thereby reducing the number of
"abnormal" urines requiring manual analysis. In addition to still requiring
manual analysis of some samples, the laser based system costs approximately
$120,000. 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.
CYTOSYS:
The Company knows of no other workstation product which automates the
microscopic analysis of multiple body fluids for under $50,000.
The Company expects to encounter competition in the laboratory equipment
industry. While the Company believes that the "R/S", "FE" and CytoSys series
workstations are currently the only products of their type in the market, many
of the Company's competitors and potential competitors have substantially
greater resources, including capital, research and development, personnel and
manufacturing and marketing capabilities, and also may offer well established,
broad product lines and ancillary services. Some of the Company's competitors
have long-term or preferential supply arrangements with hospitals. Such
arrangements may act as a barrier to market entry to the Company's products.
Competing companies may succeed in developing products that are more efficacious
or less costly, and such companies may also be more successful than the Company
in production and marketing. Rapid technological development by others may
result in the Company's products becoming obsolete before the Company recovers a
significant portion of the research, development and commercialization expenses
incurred with respect to those products. There can be no assurance that the
Company will be able to compete successfully.
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MANUFACTURING AND WARRANTY OBLIGATION
The Company internally designs and manufactures its workstation products. The
Company purchases sub-assemblies and parts designed according to Company
specifications, and assembles and final tests the sub-assemblies and parts
within its own facility. The Company has developed alternate qualified vendors
for its critical raw material and supplies that could fulfill its requirements
if needed. Implementation of the plan has resulted in higher manufacturing
quality, reduced lead-time-to-delivery and reduced costs in manufacturing.
The Company provides its customers with a one year "swap out" warranty against
defects in parts or workmanship on all new or refurbished units from the date of
delivery, generally defined as FOB, DiaSys. This means that in the event a unit
fails from a defect in parts and/or workmanship during the warranty period, the
Company will replace the unit with a new or refurbished unit at the Company's
option. For service after the initial year of warranty, the Company offers an
optional extended warranty protection plan, a service plan, and also provides
repair and service at an hourly rate plus parts. The Company experiences minimal
additional costs associated with its warranty obligations.
TRADE SECRETS, PATENTS AND TRADEMARKS
Patents: The Company has been granted numerous patents on its "R/S" and "FE"
series technology. Three such patents have been issued by the United States
Department of Commerce both on the concept and specific architecture of the
Company's urine and feces workstation products. The Company has also been
granted similar patent protection in Canada, Brazil, Japan, Singapore, Taiwan,
Austria, Belgium, Denmark, England, France, Germany, Greece, Ireland, Italy,
Luxembourg, Liechtenstein, Monaco, the Netherlands, Portugal, Spain, Sweden and
Switzerland. The Company has additional applications for patents pending, both
domestic and abroad.
TRADE NAMES:
The Company has been granted trade name protection for DiaSys, UriZyme (an
enzyme based cleaning material) and Uriprep (a repair and maintenance kit). The
Company has additional applications pending for trade names in the United
States, Europe and Pacific Asia.
INSURANCE:
The Company has purchased patent insurance from the Reliance Insurance Company.
Under the policy, Reliance will provide the Company with up to $500,000 (with a
$500,000 aggregate policy) in legal fees and assistance in the event that
litigation is required to protect or prosecute the Company's proprietary rights
under its patents.
There can be no assurance that any future applications by the Company for patent
protection will result in patents being issued, or, if issued, that such patents
will provide a competitive advantage or will afford protection against
competitors, with similar technology, or that competitors of the Company will
not circumvent, or challenge the validity of any patents issued or licensed by
the Company. Moreover, there can be no assurance that the Company's
non-disclosure agreements and other safeguards will protect its proprietary
information and trade secrets or provide adequate remedies for the Company in
the event of unauthorized use or disclosure of such information, or that others
will not be able to independently develop such information.
GOVERNMENT REGULATION
The Company has obtained safety certifications for its workstation products
from: (i) Underwriters Laboratories (UL) and TUV Rhineland of North America,
Inc. as well as CS, VDE and CE.
On May 23, 1995, the Company received clearance from the Food and Drug
Administration (FDA) to release the R/S 2003 and related products to market. In
the same letter, the FDA stated that any of the Company's future products which
are substantially equivalent to the new workstations may be marketed directly
without first submitting pre-market notification.
Although the "R/S" series and FE-2 workstations are exempt from FDA 510(k)
pre-market notification requirements, the development, testing, manufacturing
and marketing of the Company's products in the United States are regulated by
the FDA, which generally requires clearance of such products before marketing.
Moreover, regulatory approval, if granted, may include significant limitations
on the indicated uses for which a product may be marketed. Failure to comply
with applicable regulatory requirements can result in, among other things,
fines, suspensions of approvals, product seizures, injunctions, recalls of
products, operating restrictions and criminal prosecutions. There can be no
assurance that the Company will be able to obtain the necessary regulatory
clearance for the manufacturing and marketing of other products which are
currently in the development stage, either in the United States or in foreign
markets on a timely basis or at all. Certain of the Company's future diagnostic
products may require submission to the FDA of an application for Pre-market
Approval. Delays in receipt of or failure to receive clearances to commence
clinical studies or to market products, or loss of previously received
clearances, would adversely affect the marketing of the Company's proposed
products and the results of future operations.
Commercial distribution in most foreign countries is also subject to varying
government regulations. In addition, federal, state and international government
regulations regarding the manufacture and sale of diagnostic devices are subject
to future change, and additional regulations may be adopted which may prevent
the Company from obtaining, or affect the timing of, future regulatory
clearances and may adversely affect the Company.
The Company's manufacturing process is subject to stringent federal, state and
local regulations governing the use, generation, manufacture, storage, handling
and disposal of certain materials and wastes, and regarding the manufacture,
testing, labeling , record keeping, and storage of diagnostic devices, including
current Good Manufacturing Practices regulations and similar foreign
regulations. Although the Company believes that it and its subcontractors have
complied in all material respects with such laws and regulations, there can be
no assurance that the Company will not be required to incur significant costs in
the future in complying with manufacturing and environmental regulations.
YEAR 2000 COMPLIANCE
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The Company believes that it will not be adversely effected by the year 2000
problem. The Company has specifically and purposefully designed its hardware and
software so as not to be date dependent. The Company's internal information
systems are LAN'ed, PC-based and run on highest revision level DOS and/or
Windows programs. The Company conducted a formal survey of its suppliers and
service providers requesting certifications that they are or will be year 2000
compliant. Any non-compliant vendor will be disqualified from further business.
The Company has developed alternate year 2000 compliant vendors for its critical
raw material and supplies for any non-compliant vendors.
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 its workstation-products improve laboratory
operations, increase procedural quality and reduce labor costs. Therefore, the
Company believes the CLIA regulations are likely to help rather than hinder its
sales efforts in the longer term.
BIOHAZARD CONTAINMENT
OSHA mandated that all necessary precautions be taken to ensure the safety of
clinical laboratory personnel handling biohazard materials including bodily
fluid specimens that may contain life-threatening, blood-borne infectious
pathogens such as tuberculosis, hepatitis B and human immunologic viruses. To
the Company's knowledge, OSHA has not published any comparisons or analysis of
manual versus automated or semi-automated urinalysis procedures. However, the
Company believes that while conventional urinalysis has not been barred by the
OSHA regulations, it does expose technicians to potentially infectious urine
several times during the procedure, including accidental spillage and splashing
in the course of a number of its manipulative steps. In the event of such
inadvertent contact, skin cuts and abrasions which may occur from sharp edges in
the handling of microscope slides, cover slips and chipped or broken glass and
plastic ware, may become infected.
The Company believes its workstation-products offer a contained method of
analyzing urine sediment and fecal concentrates and that each workstation
mitigates the risks associated with handling potentially biohazardous material.
MEDICARE/MEDICAID COST CONTAINMENT
The Company believes that the recent effort to contain costs have caused some
hospitals to reduce the number of urine sediment tests conducted, thus
diminishing the relative cost effectiveness of the Company's
workstation-products. 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 Company's
workstation-products, which address areas traditionally not requiring
significant capital investments.
However, laboratories must contend with the aforementioned new OSHA and CLIA
regulations. Since the Company's products are designed to reduce the amount of
labor required to perform laboratory tests and the specimen biohazard exposure,
as well as to standardize and improve the analytical quality of the urinalysis
procedure, the Company believes these factors could enhance its competitive
position in the market. There can be no assurance, however, that continued
reductions in reimbursements will not have a material adverse affect on sales
and Company operations.
Health Care reform continues to be top priority of the present administration.
At the present time, the Company is unable to predict what affect, if any, a
change in the health care system would have on the Company. While the Company
believes that the cost-effectiveness of its workstation-products should benefit
medical and clinical laboratories, medical and clinical laboratories may elect
to postpone important decisions regarding capital expenditures until any changes
in the health care system are completed and their full scope and effect known.
PRODUCT LIABILITY
The Company faces potential liability in connection with the use of its
products. The Company has purchased product liability insurance in the amount of
$2,000,000. The Company believes that its present insurance is sufficient for
its current level of business operations. There can be no assurance however that
such insurance will be sufficient to cover potential claims or that the present
level of coverage will be available in the future at a reasonable cost.
ENVIRONMENTAL COMPLIANCE
The Company believes that its manufacturing process conforms to all federal,
state and local environmental regulations. There can be no assurances, however,
that the Company will not be required to incur significant costs in the future
in complying with environmental regulations.
EMPLOYEES
As of September 30, 1999 the Company employed 18 persons, 8 of whom were engaged
in sales and marketing, 4 in research and development, 2 in manufacturing, and 4
in administrative, finance and other clerical support activities.
ITEM 2. PROPERTIES
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The Company leases 8,290 square feet of space at 49 Leavenworth Street,
Waterbury, Connecticut for its headquarters, research and development and
assembly operations. The Company's lease expires February 28, 2001. The Company
pays an annual rent of $64,488.00 inclusive of all management fees, real estates
taxes, common area charges and other such expenses normally incurred in a
leasehold facility. The Company pays rent in equal monthly installments of
$5,374.00.
ITEM 3. LEGAL PROCEEDINGS
As previously disclosed, the Company announced on November 19, 1996, that it
entered into a product integration agreement ("Agreement") with Intelligent
Medical Imaging, Inc. (NASD:IMII).IMI subsequently breached the agreement. On
January 12, 1998, the Company served IMI a formal notice and request for
arbitration seeking $2.7 million in damages. IMI counter claimed for damages of
$2.1 million. The matter was submitted to arbitration on October 5, 1998. On
December 15, 1998, the arbiters found that IMI in fact breached the Agreement
and committed liable against DiaSys. The Company subsequently agreed to a
$325,000 final settlement of the award. In accordance IMI paid $10,000 to the
company and agreed to pay $10,000 per month for seventeen consecutive months.
Payments are to be made on the first of each month with the last payment on
February 1, 2001. Payments would be accelerated if IMI obtained certain levels
of financing. Due to the financial condition of IMI, the Company recorded at
June 30, 1999 only the $20,000 received to date, in prepaid expenses and other
current assets. As of October 1, 1999, IMI was current with its payments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company is authorized to issue 10,000,000 shares of Common Stock, $0.001 par
value, of which 3,008,640 shares were issued and outstanding as of September 1,
1999.
Commencing January 10, 1995 the Company's Common Stock began trading on the
NASDAQ Small Cap Market System under the symbol DIYS for the Common Stock.
As of September 1, 1999 the Company's Common Stock was held by in excess of 600
beneficial holders.
The following table sets forth the high and low closing bid quotations for the
Company's Common Stock and Warrants as reported by NASDAQ for the periods
indicated. These quotations represent bid prices between dealers, do not include
retail mark-ups, markdowns or commissions, and do not necessarily represent
actual trade transactions.
COMMON STOCK
Year Ended June 30, 1999 High Low
- ------------------------ ---- ---
1st Quarter 12 1/8 8 1/4
2nd Quarter 9 8 5/8
3rd Quarter 9 8 5/8
4th Quarter 9 5/8 9 1/4
Year Ended June 30, 1998 High Low
- ------------------------ ---- ---
1st Quarter 6 5/8 6
2nd Quarter 6 1/2 6
3rd Quarter 7 1/16 7
4th Quarter 10 1/4 10 1/4
WARRANTS
Year Ended June 30, 1999 High Low
- ------------------------ ---- ---
1st Quarter n/a n/a
2nd Quarter n/a n/a
3rd Quarter n/a n/a
4th Quarter n/a n/a
Year Ended June 30, 1998 High Low
- ------------------------ ---- ---
1st Quarter 1 5/8 1 1/8
2nd Quarter 1 1/8 1/2
3rd Quarter 3 2 5/8
4th Quarter 2 5/8 2 1/2(*)
* All unexercised warrants expired on April 10, 1998 in accordance with
their terms.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
7
<PAGE>
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;
THE ABILITY OF THE COMPANY TO DEVELOP NEW AND TIMELY PRODUCTS; THE ABILITY OF
THE COMPANY TO MAINTAIN AND EXPAND ITS BUSINESS RELATIONSHIP WITH BAYER
CORPORATION AND BAYER INCORPORATED (SEE: STRATEGIC RELATIONSHIPS ABOVE); THE
EFFECT OF REGULATORY APPROVALS AND DEVELOPMENTS, ECONOMIC CONDITIONS, THE IMPACT
OF COMPETITION, THE OUTCOME OF THE COMPANY'S CLAIMS IN ARBITRATION AGAINST
INTELLIGENT MEDICAL IMAGING INC. (SEE: LEGAL PROCEEDINGS ABOVE); 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.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL
1999 1998
---- ----
(IN DOLLARS, EXCEPT FOR RATIOS)
TOTAL CURRENT ASSETS 1,437,664 2,552,268
TOTAL CURRENT LIABILITIES 107,120 56,154
WORKING CAPITAL 1,330,544 2,496,114
WORKING CAPITAL RATIO TO 1 13.4 45.5
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
Working capital decreased by $1,165,570 from June 30, 1998 to June 30, 1999.
Cash and equivalents decreased by $1,277,154 over the same period. The decrease
in cash, cash equivalents and working capital were anticipated by the Company as
those costs customarily associated with the development and introduction of new
technologies to medical markets.
Inventory decreased from $390,141 in fiscal year 1998 to $322,634 in fiscal year
1999.
The Company's fixed assets, net of depreciation, increased from $82,244 for 1998
to $123,187 in 1999. The increase was due primarily to expenses incurred in
connection with the cost of parts and subassemblies needed to construct certain,
non commercially available testing equipment specific to the Company's product
development plans.
As of June 30, 1999 the Company had no outstanding debt other than customary
trade payables.
The Company has sufficient funds and resources on hand to discharge its
obligations as they become due over the foreseeable future.
REVENUES
The Company's gross revenue increased by 35.5% or $154,625 from $435,365 for
fiscal year 1998 to $589,990 for fiscal year 1999. The increase in Net Revenue
was the result of continued implementation of the Company's over-all strategic
sales program.
COST OF GOODS
The Company's gross profit (Net Revenue less cost of goods sold) increased by
$91,435 from $283,438 for fiscal year 1999 to $374,873 for fiscal year 1999. The
Company's gross profit percentage (gross profit divided by net revenue)
decreased to 63.5% for fiscal year 1999 from 65.1% for fiscal year 1998. The
decrease in gross profit percentage was substantially due to reducing the value
of "first generation" R/S 2000 workstations manufactured in 1993 and 1994 to
salvage value. Without the effects of these inventory adjustments, the gross
margin percentage would have increased to 69.0%
SELLING, GENERAL, AND ADMINISTRATIVE (SG&A)
For the fiscal year ended June 30, 1999, the Company's SG&A expenses decreased
from $1,899,681 to $1,244,950, a decrease of $654,731 or 34.5%. The decrease in
SG&A was due to primarily to continued cost control.
RESEARCH AND DEVELOPMENT
For the fiscal year ended June 30, 1999, research and development expenses
decreased from $406,260 to $283,109. In addition, the Company elected to
capitalize $116,201 expended in 1999 in connection with the cost of parts,
subassemblies, software and labor needed to construct certain, non commercially
available testing equipment specific to the Company's product development plans.
NET (LOSS)
8
<PAGE>
The Company's net loss decreased 46% or $906,958, from $1,978,644 in fiscal year
1998 to $1,071,686 in fiscal year 1999. The decrease was due primarily to
continued cost control and adherence to the Company's strategic plan.
INFLATION
Although the Company believes that inflation has not had a material adverse
affect on the results of operations to date, any increases in costs of raw
materials or labor to the Company could affect the prices charged by the Company
to its clients.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
Working capital increased by $914,704 from June 30, 1997 to June 30, 1998. Cash
and equivalents increased by $878,083 over the same period. The increase in cash
and equivalents was substantially the product of proceeds from the exercise of
552,740 Redeemable Common Share Purchase Warrants (see: DESCRIPTION OF BUSINESS
above).
Inventory remained essentially the same from $366,106 in fiscal year 1997 to
$390,141 in fiscal year 1998.
The Company's fixed assets, net of depreciation, increased from $79,866 for 1997
to $82,244 for 1998. The increase was due to the purchase of certain tools and
equipment used in manufacturing.
As of June 30, 1998 the Company had no outstanding debt other than customary
trade payables.
The Company has sufficient funds and resources on hand to discharge its
obligations as they become over due over the foreseeable future.
REVENUES
The Company's gross revenue remained essentially flat for 1998 compared to 1997.
The lack of increase was due primarily to the termination of a product
integration agreement by Intelligent Medical Imaging Inc (NASD: IMII), the
negative impact to the Company's sales and reputation in connection therewith,
the diversion of management's focus to mitigate damage to the Company's
reputation, and time required to prepare for arbitration against IMI (see LEGAL
PROCEEDINGS above). $16,396 of revenue was also reclassified in a year-end
adjustment from "net sales" to "unearned income" reflecting interest related
proceeds from direct financing of capital leases and "use" related sales
programs.
COST OF GOODS
The Company's gross profit (Net Revenue less cost of goods sold) decreased by
$42,104 in fiscal year 1998 over 1997. The Company's gross profit percentage
(gross profit divided by net revenue) also decreased to 65.1% for fiscal year
1998 from 72.9% for fiscal year 1997. Management believes that the decrease in
gross profit and gross profit margins was substantially due to: (i) inspection
and re-manufacturing costs incurred with regard to certain workstation products
returned by Intelligent Medical Imaging Inc (see LEGAL PROCEEDINGS above); (ii)
the initial costs of expanding the Company's manufacturing facility and
capacity; (iii) reducing 18 units of "first generation" "R/S" workstations to
salvage value; (iv) reclassifying $16,396 from net sales to unearned income as
prescribed by Generally Accepted Accounting Principles (GAAP); and, (v) an
increase in international sales to distributors which traditionally results in
lower gross margins offset by lower costs of sales and service.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A)
For the fiscal year ended June 30, 1998, the Company's expenses decreased from
$2,015,548 to $1,899,681, a decrease of $115,867 or 5.7%. The decrease in SG&A
expenses was primarily "non-cash" and due to the effect of the completion of a
certain investment banking relationship made with Lester Morse, Esq. P.C., as
assigned to WR Consulting, Inc. all as disclosed below and in previous period
filings with the Securities And Exchange Commission.
RESEARCH AND DEVELOPMENT
For the fiscal year ended June 30, 1998, research and development expenses
decreased slightly from $408,214 to $406,260.
NET (LOSS)
The Company's net loss remained essentially flat: $2,004,575 in fiscal year 1997
compared to $1,978,644 in fiscal year 1998.
INFLATION
Although the Company believes that inflation has not had a material adverse
affect on the results of the operations to date, any increases in costs of raw
materials to the Company could affect the prices charged by the Company to its
clients.
ITEM 7 - FINANCIAL STATEMENTS AND SCHEDULES
See Schedules
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
9
<PAGE>
None
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the caption "Election of Directors and Officers" in the
Company's definitive Proxy Statement, to be filed pursuant to Regulation 14A for
the 1999 Annual Meeting of Shareholders, is hereby incorporated herein by
reference.
ITEM 10 - EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" in the Company's
Proxy Statement to be filed pursuant to Regulation 14A for the 1999 Annual
Meeting of Shareholders is hereby incorporated herein by reference.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Voting Securities and Principal Holders
Thereof" and the information as to beneficial ownership of the Company's Common
Stock and Warrants in the table under the caption "Election of Directors" in the
Company's definitive Proxy Statement, to be filed pursuant to Regulation 14A for
the 1999 Annual Meeting of Shareholders, is hereby incorporated herein by
reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 13 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
Form 8-K was filed on March 13, 1998
Form 8-K was filed on April 13, 1998
10
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
(Registrant)
- --------------------------------------------------------------------------------
By: (Signature and Title)* /s/ Todd M. DeMatteo
- --------------------------------------------------------------------------------
Date: President, CEO and Director
Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
- --------------------------------------------------------------------------------
Todd M. DeMatteo
President, CEO and Director Date:
- --------------------------------------------------------------------------------
Conard R. Shelnut
Secretary and Director Date:
- --------------------------------------------------------------------------------
Michael F. Primini
Chief Financial Officer; Date:
Assistant Secretary
- --------------------------------------------------------------------------------
Robert P. Carroll
Director Date:
- --------------------------------------------------------------------------------
Dr. Robert Engel
Director Date:
11
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 13
Financial Statements:
Balance sheet at June 30, 1999 14
Statements of operations for the years ended June 30, 1999
and 1998 15
Statements of changes in stockholders' equity for the years
ended June 30, 1999 and 1998 16
Statements of cash flows for the years ended June 30, 1999
and 1998 17
Notes to financial statements 18-22
12
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
DiaSys Corporation
We have audited the balance sheet of DiaSys Corporation as of June 30, 1999 and
the related statements of operations, changes in stockholders' equity and cash
flows for each of the two years in the period ended June 30, 1999. 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,
1999, and the results of its operations and its cash flows for each of the two
years in the period ended June 30, 1999, in conformity with generally accepted
accounting principles.
WISS & COMPANY, LLP
Livingston, New Jersey
October 1, 1999
13
<PAGE>
DIASYS CORPORATION
BALANCE SHEET
JUNE 30, 1999
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 724,415
Accounts receivable, less allowance for doubtful
accounts of $19,000 225,839
Finance receivables, net 106,027
Inventories 322,364
Prepaid expenses and other current assets 59,019
---------
Total Current Assets $1,437,664
EQUIPMENT, FURNITURE AND FIXTURES, LESS
ACCUMULATED DEPRECIATION 123,197
OTHER ASSETS:
Computer software, less accumulated amortization of
$8,692 43,458
Patents, less accumulated amortization of $155,131 61,113
Long-term finance receivables, net 105,716
---------
210,287
----------
$1,771,148
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES -
Accounts payable and accrued expenses $107,120
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 3,256,140
of which 250,000 were cancelled
on October 1, 1999 3,257
Additional paid-in-capital 8,767,308
Accumulated deficit (7,106,537)
----------
Total Stockholders' Equity 1,664,028
----------
$1,771,148
==========
See accompanying notes to financial statements.
14
<PAGE>
DIASYS CORPORATION
STATEMENTS OF OPERATIONS
Year Ended June 30,
-----------------------------
1999 1998
---- ----
NET SALES $ 589,990 $ 435,365
COST OF GOODS SOLD 215,117 151,927
----------- -----------
GROSS PROFIT 374,873 283,438
----------- -----------
OPERATING EXPENSES:
Selling 754,040 942,600
General and administrative 490,910 484,581
Investment banking advisory services -- 472,500
Research and development 283,109 406,260
----------- -----------
1,528,059 2,305,941
----------- -----------
LOSS FROM OPERATIONS (1,153,186) (2,022,503)
INTEREST INCOME 81,500 43,859
----------- -----------
NET LOSS $(1,071,686) $(1,978,644)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,026,349 2,578,127
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.35) $ (.77)
=========== ===========
See accompanying notes to financial statements.
15
<PAGE>
DIASYS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------- Paid-in Accumulated
Shares Par Value Capital Deficit
------ --------- ------- -------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997 2,364,000 $ 2,364 $ 5,802,036 $(4,056,207)
YEAR ENDED JUNE 30, 1998:
Issuance of 50,000 shares of common
stock for investment banking
advisory services 50,000 50 299,950 --
Issuance of 30,000 shares of common
stock for warrant underwriting
services 30,000 30 262,470 --
Valuation adjustment for stock
issued for services -- -- 172,500 --
Exercise of 250 warrants net of
expenses of $163 250 -- 1,150 --
Exercise of 548,390 warrants net of
expenses of $305,991 548,390 549 2,161,215 --
Exercise of 6,000 options 6,000 6 20,119 --
Net loss -- -- -- (1,978,644)
--------- ----------- ----------- -----------
BALANCE, JUNE 30, 1998 2,998,640 2,999 8,719,440 (6,034,851)
YEAR ENDED JUNE 30, 1999:
Issuance of 250,000 shares of common
stock for investment banking
advisory services 250,000 250 (250) --
Exercise of 7,500 options 7,500 8 48,118 --
Net loss -- -- -- (1,071,686)
--------- ----------- ----------- -----------
3,256,140 $ 3,257 $ 8,767,308 $(7,106,537)
========= =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
DIASYS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,071,686) $(1,978,644)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Amortization of patents and software 48,769 40,446
Depreciation of equipment, furniture and fixtures 37,080 22,785
Common stock issued for services -- 472,500
Changes in operating assets and liabilities:
Accounts receivable (113,795) 85,719
Inventories 67,777 (24,035)
Prepaid expenses and other current assets (43,656) 3,990
Accounts payable and accrued expenses 50,966 (69,144)
----------- -----------
Net cash flows from operating activities (1,024,545) (1,446,383)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures (78,033) (25,163)
Costs of computer software (52,150) --
Costs of patents (47,712) (21,010)
Increase in finance receivables (122,840) (88,903)
----------- -----------
Net cash flows from investing activities (300,735) (135,076)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Offering costs -- 14,003
Proceeds from issuance of common stock
and warrants 48,126 2,445,539
----------- -----------
Net cash flows from financing activities 48,126 2,459,542
----------- -----------
NET CHANGE IN CASH AND EQUIVALENTS (1,277,154) 878,083
CASH AND EQUIVALENTS, BEGINNING OF YEAR 2,001,569 1,123,486
----------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 724,415 $ 2,001,569
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- $ --
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
DIASYS CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF THE BUSINESS - DiaSys Corporation ("the Company"), designs,
develops, manufactures, and distributes proprietary products for medical and
clinical laboratory applications. The Company distributes its products primarily
through regional sales managers employed by the Company and through distributors
in North America, Europe and Pacific Asia.
The Company was a development stage enterprise from March 22, 1992,
(inception) to June 30, 1998. Activities through June 30, 1998, were primarily
directed toward organizational activities, development and marketing of
proprietary products used in routine laboratory analysis of human lower body
fluids, including urine and feces.
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, finance receivables, 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.
FINANCING TRANSACTIONS - Certain of the Company's lease and "use" based
receivables are recorded utilizing the sales-type method. When a finance
transaction is consummated, the Company records the minimum lease payments
receivable and the unearned income arising from the lease. The unearned income
is recognized over the term of the lease using the interest method.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out method) or market and consist of products manufactured by the Company,
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.
COMPUTER SOFTWARE - Computer software is recorded at cost and is amortized
over a 3 year life.
PATENT COSTS - The costs of obtaining patents are amortized over a 3 year
life.
WARRANTY COSTS - 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.
EARNINGS PER SHARE - Basic earnings per share is based upon the weighted
average of all common shares outstanding. The computation of diluted earnings
per share does not assume the conversion, exercise or contingent issuance of
securities that would have an antidilutive effect on earnings per share.
CASH EQUIVALENTS - The Company considers money market funds and all other
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
STOCK OPTIONS - The Company accounts for stock option grants using the
intrinsic value based method prescribed by APB Opinion No. 25. Since the
exercise price equaled or exceeded the estimated fair value of the underlying
shares at the date of grant, no compensation was recognized in 1999 and 1998.
Had compensation cost been based upon the fair value of the option on the
date of grant, as prescribed by SFAS No. 123, the Company's proforma net loss
and net loss per share would have been approximately $(1,354,272) ($.45 per
share) in 1999 and ($2,142,449) ($.83 per share) in 1998, using the
Black-Scholes option pricing model.
18
<PAGE>
DIASYS CORPORATION
NOTES TO FINANCIAL STATEMENTS
The fair value of options granted in 1999 were estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions, respectively: risk-free interest rates of 6.0%,
dividend yield of 0.0%, volatility factors of the expected market price of the
Company's Common Stock of 35.4% and a weighted-average expected life of the
options of 8 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of normal publicly traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
NOTE 2 - FINANCE RECEIVABLES:
Net investment in sales-type leases are summarized as follows:
Minimum lease payments receivable $ 230,462
Unearned income (18,719)
---------
Net investment in sales-type leases $ 211,743
=========
Minimum lease payments to be received under the above lease agreements as
of June 30, 1999, are as follows:
Year Ending June 30
- -------------------
2000 $116,501
2001 73,130
2002 40,831
--------
$230,462
========
NOTE 3 - INVENTORIES:
Inventories at June 30, 1999 consist of the following:
Raw material $163,265
Work-in-process 1,023
Finished goods 158,076
--------
$322,364
========
NOTE 4 - CONCENTRATION OF CREDIT RISK:
Included in cash and equivalents is a mutual fund consisting of U.S.
Treasury bill investments of approximately $738,000 maturing at weekly
intervals, bearing interest between 4.1% and 4.8% per annum.
NOTE 5 - EQUIPMENT, FURNITURE AND FIXTURES:
Equipment, furniture and fixtures at June 30, 1999 are summarized as
follows:
Machinery and equipment $169,626
Furniture and fixtures 50,406
--------
220,032
Less: Accumulated depreciation 96,835
--------
$123,197
========
19
<PAGE>
DIASYS CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - 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 $6,800,000 at
June 30, 1999 (including net losses for the six months ended June 30, 1999)
which can be used to offset future federal taxable income through 2019.
The significant components of the Company's deferred tax assets at June
30, 1999 are summarized below:
Allowance for doubtful accounts $ 8,000
Net operating loss tax carryforwards 2,711,000
-----------
2,719,000
Valuation allowance (2,719,000)
-----------
$ --
===========
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, based on the Company's recent net loss, that a full valuation
allowance is appropriate at June 30, 1999.
NOTE 7 - 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.
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 calendar year may not exceed $100,000. No Option
will be exercisable prior to two years from the date of grant and Options may
not be exercisable more than ten years after the date of grant (five years if
held by an employee holding more than 10% of total voting rights).
During February 1996, the Plan was amended to increase the number of
shares of common stock available for granting Options to purchase such shares to
a total of 200,000 shares. An additional amendment, approved at the 1997 annual
meeting, increased the number of shares to a total of 300,000. An additional
amendment, approved at a 1999 meeting of the Board of Directors, increased the
number of shares to a total of 500,000.
20
<PAGE>
DIASYS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Outstanding Options at June 30, 1999 are as follows:
Shares Exercise Price Expiration
Exercise Date Issuable Per Share Date
- ------------- -------- --------- ----
February 1996 30,000 $ 2.50 February 2004
February 1997 3,000 6.00 February 2005
September 1997 3,000 6.875 September 2005
February 1998 6,500 7.25 February 2006
June 1998 4,500 7.625 June 2006
September 1998 63,000 6.25 September 2006
November 1998 5,000 5.75 November 2006
February 1999 38,000 7.063 February 2007
June 1999 12,500 6.00 June 2007
January 2000 11,000 5.625 January 2008
February 2000 30,000 5.875 February 2008
May 2000 2,000 8.875 May 2008
September 2000 13,000 9.125 September 2008
January 2001 10,000 8.625 January 2009
February 2001 30,000 8.75 February 2009
May 2001 56,000 10.00 May 2009
--------
Total Options Outstanding 317,500 $2.50-10
========
Options under the Incentive Stock Option Plan are summarized as follows:
Year Ended June 30, 1999
------------------------------
Weighted-
Shares Average
Under Option Exercise Price
------------ --------------
Options outstanding at
beginning of year 241,000 $ 5.79
Options granted 109,000 9.43
Options expired/withdrawn (25,000) 6.60
Options exercised (7,500) 6.42
-----------
Options outstanding at end of year 317,500 6.45
===========
Option price per share $2.50-10.00
===========
Options exercisable:
Number of shares 104,250 5.43
===========
NOTE 9 - COMMITMENTS:
LEASES - The following is a schedule of future minimum rental payments
required for all non-cancellable operating leases:
Year Ending June 30,
- --------------------
2000 $ 64,476
2001 42,984
--------
$107,460
========
21
<PAGE>
DIASYS CORPORATION
NOTES TO FINANCIAL STATEMENTS
OFFICER'S COMPENSATION - One of the Company's officers has an employment
agreement for a one year term expiring January 1, 2000 which is renewable upon
mutual consent of the parties. For the years ended June 30, 1999 and 1998, the
officer earned annual base compensation of $150,000 and $142,500, respectively.
NOTE 10 - MAJOR CUSTOMERS:
Sales to foreign customers as a percentage of net sales totaled 14% in
1999 and 29% in 1998.
NOTE 11 - VENDOR CONCENTRATION:
Purchases from two unaffiliated suppliers comprised approximately 39% of the
Company's net purchases in 1999.
NOTE 12 - LITIGATION SETTLEMENT:
In December 1998, the Company won an arbitration award from Intelligent Medical
Imaging, Inc. (IMI). The Company subsequently agreed to a $325,000 final
settlement of the award. In accordance IMI paid $10,000 to the Company and
agreed to pay $10,000 a month beginning on October 1, 1999 for seventeen
consecutive months. Payments are to be made on the first of each month with the
last payment on February 1, 2001. Payments would be accelerated if IMI obtained
certain levels of financing. If this payment schedule is met, the $325,000 final
settlement would be satisfied. Due to the financial condition of IMI, the
Company recorded at June 30, 1999 only the $20,000 received to date, in prepaid
expenses and other current assets.
NOTE 13 - INVESTMENT ADVISORY AGREEMENT:
During fiscal 1999, the Company entered into an investment advisory
agreement pursuant to which an investment advisor was hired to assist the
Company in finding a suitable merger or acquisition candidate by September 30,
1999. The Company issued 250,000 shares of its common stock to the investment
advisor subject to cancellation if a suitable candidate was not identified. As a
satisfactory merger candidate was not located, the 250,000 shares were cancelled
by the Company on October 1, 1999, and were recorded at June 30, 1999 at par
value.
22
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