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, 2000
( ) 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
Exact name of small business issuer as specified in its charter)
DELAWARE 06-1339248
(State or other jurisdiction of incorporation or organization)(IRS Employer ID#)
49 Leavenworth Street, Waterbury, CT 06702
________________________________________________________________________________
(Address of principal executive offices)
(203) 755-5083
________________________________________________________________________________
(Issuer's Telephone number including area code)
None
________________________________________________________________________________
(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 XX 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 $940,830.
As of September 28, 2000, the aggregate market value of the registrant's voting
stock held by non-affiliates was $52,208,559 based upon an average closing
price of $8.306 for the five trading days immediately prior thereto.
As of September 28, 2000, the Registrant had 6,285,644 shares of common stock
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" 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. The Company completed its initial public
offering ("Offering") in January, 1995.
On February 25, 2000, the Board of Directors of DiaSys Corporation authorized a
two-for-one common stock split to stockholders of record on March 8, 2000.
The stock split has been retroactively reflected in the accompanying
financial statements.
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 Products magazine, American Clinical Laboratory
magazine, European Clinical Laboratory magazine, College Of American
Pathology Today, and Urinalysis News.
The "R/S" series workstations are the preferred practice for major laboratory
networks and health maintenance 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 strategic distribution agreements regarding
the promotion and sale of its "R/S" series workstations with and by Bayer
Corporation in the United States, Bayer Incorporated in Canada, Allegiance
Healthcare, a subsidiary of Cardinal Health (NYSE:CAH), and Hua Sin Science
Co. LTD, the exclusive distributor of BAYER's urinalysis instruments in China
(See: STRATEGIC RELATIONSHIPS below).
"FE" Series:
The Company's second family of products is the "FE" series of workstations for
fecal concentrates. More specifically, the FE-2 and FE-2i are counter top
instruments which automate and reduce 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" series workstations increase the level of safety and precision by
\automating the aspiration, resuspension, staining or diluting, transfer,
presentation and disposal of fecal concentrates. They also eliminate the
need and cost of disposable pipettes, microscope slides, and cover slips.
Each "FE" workstation 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 announced the CytoSys 1 at the
international meeting of American Association of Clinical Chemists/American
Society of Clinical Laboratory Scientists (AACC/ASCLS) in July. The CytoSys
received substantial interest from numerous domestic and international
customers. The Company expects to release "first" production CytoSys
workstations to market in January 2001.
Additional Workstation Products:
The Company is developing several additional workstation products which
automate and standardize routine analysis of human and non-human fluids.
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 six
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
Marketing Services and a Manager of Field Services, each located at the
Company's headquarter office.
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 28, 2000, there were over 250 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.
Allegiance:
On June 27, 2000, the Company entered into a multiple year distribution
agreement with Allegiance Healthcare Corp., a subsidiary of Cardinal Health,
Inc. (NYSE:CAH). Allegiance is America's leading provider of health-care
products and cost-management services needed by hospitals, laboratories and
others in health care. Under the terms of the agreement, Allegiance will
promote and distribute the Company's urine sediment workstations through its
120 sales reps and numerous supply relationships. The Company is in the
process of training Allegiance's rep's in the field.
Hua Sin Science Co. LTD:
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 28, 2000, Hua Sin ordered
107 R/S 2003 urine sediment workstations, 85 of which have been delivered.
Additionally, on May 4, 2000, the Health Ministry of China certified the
Company's urinalysis and fecal concentrate workstations for use by all 60,000
medical laboratories in China. The Health Ministry of China is the
equivalent of the Food and Drug Administration (FDA) in the United States.
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,
2000, 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 28, 2000, Lenta has
ordered 120 workstations, 71 of which have been delivered.
Government Contracts:
The Company has been awarded two Federal supply contracts: (i) one by the
General Services Administration (GSA), and (ii) one by the Department of
Veteran's Affairs (FSS). The GSA contract allows government agencies to
purchase workstations, and the FSS allows the network of veteran and military
hospitals to install workstations on a "cost-per-test" basis. As of
September 28, 2000, the Company has installed 35 workstations under these
awards.
Other Significant Relationships:
The Company has established a number of other important relationships with
large-scale national laboratory networks and buying groups. The Company's
workstations are used in multiple sites in each of the five largest
commercial laboratory networks in the nation.
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.
The "FE" Series:
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.
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.
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.
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 June 30, 2000 the Company employed 18 persons, 6 of whom were engaged in
sales and marketing, 4 in research and development, 3 in manufacturing, and 5
in administrative, finance and other clerical support activities.
ITEM 2. PROPERTIES
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 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.
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 ("IMI"). 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 arbiters also dismissed
IMI's counter claims in total. Due to the worsening financial condition of
IMI, the Company agreed subsequently to a stipulated settlement of $325,000.
On November 29, 1999, IMI filed for bankruptcy protection against the
Company and numerous other creditors. The Company has submitted its claim to
the bankruptcy court and has been approved as one of IMI's unsecured
creditors. In light of IMI's insolvency, the Company has elected not to
recognize a receivable in this matter, and to recognize any payment as and
when received.
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 99,900,000 shares of Common Stock, $0.001
par value, of which 6,274,768 shares were issued and outstanding as of June
30, 2000.
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 28, 2000 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, 2000
High Low
1st Quarter 4.875 4.500
2nd Quarter 5.875 4.500
3rd Quarter 9.219 5.000
4th Quarter 9.500 8.688
Year Ended June 30, 1999
High Low
1st Quarter 6.063 4.125
2nd Quarter 4.500 4.313
3rd Quarter 4.500 4.313
4th Quarter 4.813 4.625
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained herein are not based on historical facts, but are
forward-looking statements that are based upon numerous assumptions about
future conditions that could prove not to be accurate. Actual events,
transactions and results may materially differ from the anticipated events,
transactions or results described in such statements. The Company's ability
to consummate such transactions and achieve such events or results is subject
to certain risks and uncertainties. Such risks and uncertainties include,
but are not limited to: the existence of, demand for, and acceptance of the
Company's products and services; 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
2000 1999
(In dollars, except for ratios)
TOTAL CURRENT ASSETS $3,387,033 $1,437,664
TOTAL CURRENT LIABILITIES 115,161 107,120
WORKING CAPITAL 3,271,872 1,330,544
WORKING CAPITAL RATIO TO 1 29.4 13.4
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1999
FINANCIAL CONDITION
Working capital increased by $1,941,328 from June 30, 1999 to June 30, 2000.
Cash and equivalents increased by $1,690,841 over the same period. The
increase in cash, cash equivalents and working capital were mainly due to the
sale of 3,000 shares of convertible preferred in which the Company received net
proceeds of $2,645,949.
On February 7, 2000, the Company entered into an Agreement pursuant to which it
agreed to sell up to 4,000 Series "A" Convertible Preferred Shares (the
"Preferred") and accompanying 5 year warrants (the "Warrants") to purchase
common shares, to two unaffiliated accredited investors, B.H. Capital
Investments, L.P. and Excalibur Limited Partnership, both of Toronto,
Ontario, Canada. The terms of the Preferred are as provided for in
Certificate of Designations filed with the Secretary of the State of
Delaware. The Agreement provides that the investors will purchase the
Preferred and Warrants in three tranches: the first tranche of $1 million was
purchased on February 7th, 2000; the second tranche of $2 million was
purchased on June 28th, 2000; and the final tranche of $1 million is expected
to be purchased in October, 2000.
Inventory decreased slightly from $322,364 in fiscal year 1999 to $314,309 in
fiscal year 2000.
As of June 30, 2000 the Company had no outstanding debt other than customary
trade payables.
The Company has sufficient funds and resources on hand to discharge its
obligations atleast for the next twelve months.
RESULTS OF OPERATIONS
REVENUES
The Company's gross revenue increased by 59% or $350,840 from $589,990 for
fiscal year 1999 to $940,830 for fiscal year 2000. The increase in revenue
reflects continued implementation of the Company's strategic sales program and
strong international sales of the Company's workstation products.
GROSS PROFIT AND GROSS PROFIT MARGINS
The Company's gross profit (revenue less cost of goods sold) increased by 75%
or $280,976 from $374,873 for fiscal year 1999 to $655,849 for fiscal year
2000. The Company's gross profit margins (gross profit divided by revenue)
increased to 69.7% for fiscal year 2000 from 63.5% for fiscal year 1999. The
increase in gross profit percentage was mainly due to favorable pricing of
raw materials and added production efficiency.
SELLING, GENERAL, AND ADMINISTRATIVE (SG&A)
The Company's SG&A expenses decreased slightly from $1,244,950 for fiscal year
1999 to $1,239,935 for fiscal year 2000, a decrease of $5,015. The decrease
in SG&A was due primarily to continued cost control. In fiscal year 2000,
the Company had legal and accounting costs associated with its merger &
acquisition plan and offering costs. Without the effects of these costs,
SG&A would have decreased an additional $48,617 to $1,191,318.
RESEARCH AND DEVELOPMENT (R&D)
R&D expenses increased by 46% or $130,174 from $283,109 for fiscal year 1999 to
$413,283 for fiscal year 2000. The increase in R&D was mainly attributable to
the development of three new workstations, two of which have been announced
to the market.
NET (LOSS)
The Company's net loss decreased 12% or $125,920, from $1,071,686 in fiscal year
1999 to $945,766 in fiscal year 2000. The decrease was due primarily to
increased sales, continued cost control, and adherence to the Company's
strategic plan. Without the effects of legal and accounting costs associated
with the Company's merger & acquisition plan and offering costs, net loss
would have decreased 16% to $897,149 in fiscal year 2000 as compared to the
same period last year.
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, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
FINANCIAL CONDITION
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 50% or $40,953 from
$82,244 for 1998 to $123,197 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.
RESULTS OF OPERATIONS
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.
GROSS PROFIT AND GROSS PROFIT MARGINS
The Company's gross profit (Revenue less cost of goods sold) increased by
$91,435 from $283,438 for fiscal year 1998 to $374,873 for fiscal year 1999.
The Company's gross profit percentage (gross profit divided by 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)
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.
ITEM 7 - FINANCIAL STATEMENTS AND SCHEDULES
See Schedules
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the caption "Election of Directors and Officers" in the
Company's definitive Proxy Statement, to be filed pursuant to Regulation 14A
for the 2000 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 2000 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 2000 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 October 12, 2000
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)* 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:
________________________________________________________________________________
Marshall A. Smith
Chief Financial Officer, Date:
Assistant Secretary
________________________________________________________________________________
Conard R. Shelnut
Secretary and Director Date:
________________________________________________________________________________
Robert P. Carroll
Director Date:
________________________________________________________________________________
Dr. Robert Engel
Director Date:
________________________________________________________________________________
Anthony P. Towell
Director Date:
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report 16
Financial Statements:
Balance sheet at June 30, 2000 17
Statements of operations for the years ended
June 30, 2000 and 1999 18
Statements of changes in stockholders' equity
for the years ended June 30, 2000, 1999, and 1998 19
Statements of cash flows for the years ended
June 30, 2000 and 1999 20
Notes to financial statements 21-28
INDEPENDENT AUDITORS' REPORT
Board of Directors
DiaSys Corporation
We have audited the balance sheet of DiaSys Corporation as of June 30, 2000 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, 2000. 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, 2000, and the results of its operations and its cash flows for each of
the two years in the period ended June 30, 2000, in conformity with
generally accepted accounting principles.
WISS & COMPANY, LLP
Livingston, New Jersey
August 17, 2000 except for Note 14 for which the date is September 29, 2000
BALANCE SHEET
JUNE 30, 2000
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 2,415,256
Accounts receivable, less
allowance for doubtful accounts
of $40,000 426,267
Finance receivables, net 118,597
Inventories 314,309
Prepaid expenses and other
current assets 112,604
Total Current Assets $ 3,387,033
EQUIPMENT, FURNITURE AND FIXTURES,
LESS ACCUMULATED DEPRECIATION 88,032
OTHER ASSETS:
Computer software, less accumulated
amortization of $26,361 27,500
Patents, less accumulated
amortization of $192,154 43,687
Deferred acquisition costs 13,395
Long-term finance receivables, net 146,978
231,560
$ 3,706,625
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses $ 115,161
COMMITMENTS:
STOCKHOLDERS' EQUITY:
Preferred stock $.001 par value:
Authorized 100,000 shares,
issued 2,000 $ 2
Common stock $.001 par value:
Authorized 99,900,000 shares,
$6,274,768 issued 6,275
Additional paid-in-capital 11,657,434
Accumulated deficit (8,072,247)
Total Stockholders' Equity 3,591,464
$ 3,706,625
STATEMENTS OF OPERATIONS
Year Ended June 30,
2000 1999
NET SALES $ 940,830 $ 589,990
COST OF GOODS SOLD 284,981 215,117
GROSS PROFIT 655,849 374,873
OPERATING EXPENSES:
Selling 673,436 754,040
General and administrative 566,499 490,910
Research and development 413,283 283,109
1,653,218 1,528,059
LOSS FROM OPERATIONS (997,369) (1,153,186)
INTEREST INCOME 51,603 81,500
NET LOSS $ (945,766) $ (1,071,686)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 6,210,094 6,052,698
BASIC AND DILUTED LOSS PER COMMON
SHARE $ (.15) $ (.18)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Preferred
Stock Stock Paid-in Accumulated
Shares Par Value Shares Par Value Capital Deficit
BALANCE, JUNE
30, 1998: 5,997,280 $ 5,997 - $ - 8,716,441 (6,034,851)
YEAR ENDED JUNE
30, 1999:
Issuance of 500,000
shares of common
stock for investment
banking advisory
services 500,000 500 - - (500) -
Exercise of 15,000
options 15,000 15 - - 48,110 -
Net loss - - - - - (1,071,686)
BALANCE, JUNE
30, 1999 6,512,280 $ 6,512 - - $8,764,051 $(7,106,537)
YEAR ENDED JUNE
30, 2000:
Cancellation of
500,000 share
of common stock
for investment
banking advisory
services (500,000) (500) - - 500 -
Exercise of
28,500 options 28,500 29 - - 101,225 -
Exercise of
30,000 warrants 30,000 30 - - 125,970 -
Sale of Preferred
Stock - - 1,000 1 841,953 -
Conversion of 650
shares of preferred
stock to 132,224
shares of common
stock interest 132,224 132 (650) (1) (131) -
Conversion of 250
shares of preferred
stock to 51,200
shares of common
stock interest 51,200 51 (250) - (51) -
Conversion of 100
shares of preferred
stock to 20,564
shares of common
stock interest 20,564 21 (100) - (21) -
Sale of
Preferred - - 2,000 2 1,803,994 -
Common stock issued
as Additional Amount
payable to preferred
stockholders
(see Note 7) - - - - 19,944 (19,944)
Net Loss - - - - - (945,766)
6,274,768 $6,275 $2,000 $2 $11,657,434 $(8,072,247)
STATEMENTS OF CASH FLOWS
Year Ended June 30,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (945,766) $ (1,071,686)
Adjustments to reconcile net loss
to net cash flows from operating
activities:
Amortization of patents and
software 54,692 48,769
Depreciation of equipment,
furniture and fixtures 46,779 37,080
Bad debt expense 17,000 -
Changes in operating assets and
liabilities:
Accounts receivable (217,428) (113,795)
Inventories 8,055 67,777
Prepaid expenses and other
current asset (66,980) (43,656)
Accounts payable and accrued
expenses 8,040 50,966
Net cash flows from operating
activities (1,095,608) (1,024,545)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, furniture and
fixtures (11,614) (78,033)
Costs of computer software (1,711) (52,150)
Costs of patents (19,597) (47,712)
Increase in finance receivables (53,832) (122,840)
Net cash flows from investing
activities (86,754) (300,735)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of
preferred stock 2,645,949 -
Proceeds from issuance of
common stock and warrants 227,254 48,126
Net cash flows from financing
activities 2,873,203 48,126
NET CHANGE IN CASH AND EQUIVALENTS 1,690,841 (1,277,154)
CASH AND EQUIVALENTS, BEGINNING
OF YEAR 724,415 2,001,569
CASH AND EQUIVALENTS, END OF YEAR $ 2,415,256 $ 724,415
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 31 $ -
Income taxes paid $ - $ -
NONCASH FINANCING ACTIVITIES:
Common stock dividends issued to
preferred stockholders (19,944) -
Cancellation of common shares 500 -
(19,444) -
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 and the Middle East.
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 2000 and 1999.
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 $(1,376,898) $(.22) per
share in 2000 and ($1,354,272) ($.45) per share in 1999, using the Black-
Scholes option pricing model.
The fair value of options granted in 2000 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 6.5%, dividend yield
of 0.0%, volatility factors of the expected market price of the Company's
Common Stock of 31.0% 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.
Stock Split - On March 8, 2000, the Board of Directors declared a two-for-one
stock split on the Company's Common Stock to holders of record on March 28,
2000. All share and per share data presented reflect the two-for-one stock
split.
NOTE 2 - FINANCE RECEIVABLES:
Net investment in sales-type leases are summarized as follows:
Minimum lease payments receivable $298,361
Unearned income (32,786)
Net investment in sales-type leases $265,575
Minimum lease payments to be received under the above lease agreements as of
June 30, 2000, are as follows:
Year Ending June 30,
2001 $127,476
2002 100,635
2003 48,877
2004 10,637
2005 10,328
2006 408
$298,361
NOTE 3 - INVENTORIES:
Inventories at June 30, 2000 consist of the following:
Raw material $217,542
Finished goods 96,767
$314,309
NOTE 4 - CONCENTRATION OF CREDIT RISK:
Included in cash and equivalents is a mutual fund consisting of U.S. Treasury
bill investments of approximately $2,380,000 maturing at weekly intervals,
bearing interest between 5.1% and 5.9% per annum.
Net finance receivables due within one year total $118,597 excluding interest,
net long-term finance receivables due in more than one year total $146,978,
excluding interest. The Company performs credit evaluations and acquires a
security interest in each finance receivable pursuant to the Uniform
Commercial Code.
NOTE 5 - EQUIPMENT, FURNITURE AND FIXTURES:
Equipment, furniture and fixtures at June 30, 2000 are summarized as follows:
Machinery and equipment $178,461
Furniture and fixtures 53,186
231,647
Less: Accumulated depreciation 143,615
$ 88,032
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 $7,700,000
at June 30, 2000 (including net losses for the six months ended June 30,
2000) which can be used to offset future federal taxable income through 2020.
The significant components of the Company's deferred tax assets at June 30,
2000 are summarized below:
Allowance for doubtful accounts $ 16,000
Net operating loss tax carryforwards 3,090,000
3,106,000
Valuation allowance (3,106,000)
$ -
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, 2000.
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.
Of the 100,000 shares of authorized but undesignated Preferred Stock, 4,000
shares are Series A Convertible Preferred Stock, with a par value of $.001
per share. On February 7, 2000 two investor groups entered into a Stock
Purchase Agreement to purchase these 4,000 shares of Series A Convertible
Preferred Stock and accompanying five year warrants to purchase the Company's
Common Stock. The Series A Convertible Preferred Stock does not carry any
voting rights, nor does it bear any dividends. The holders of shares of
Series A Convertible Preferred Stock, shall have the right to convert each
share of Series A Convertible Preferred Stock into Common Stock. Each holder
is required to convert all shares of Series A Convertible Preferred Stock
outstanding on the date that is three years after the Issuance Date for a
price per share equal to the conversion price on the maturity date. As per
the Certificate of Designations, the Series A Convertible Preferred Stock
will be issued in three tranches: the first tranch of 1,000 shares was sold on
February 7, 2000; the second tranch of 2,000 shares was sold on June 28,
2000; and the third tranch of 1,000 shares, provided certain conditions are
met, will be sold 90 days after a registration statement filed by the
Registrant with the Securities and Exchange Commission registering the common
shares underlying the Series A Convertible Preferred Stock is declared
effective by the SEC.
The holder of the Series A Convertible Preferred Stock is entitled to an 8%
per annum Additional Amount in common stock from the time the preferred stock
was acquired until conversion.
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).
An additional amendment, approved at a 2000 meeting of the Board of Directors,
increased the number of shares available for granting Options to purchase such
shares to a total of 1,000,000.
Outstanding Options at June 30, 2000 are as follows:
Exercise Shares Exercise Price Expiration
Date Issuable Per Share Date
February 1996 60,000 $1.25 February 2004
February 1997 4,000 3.00 February 2005
September 1997 6,000 3.44 September 2005
February 1998 8,000 3.63 February 2006
September 1998 126,000 3.06 September 2006
November 1998 10,000 2.88 November 2006
February 1999 66,000 3.53 February 2007
June 1999 20,000 3.00 June 2007
September 1999 10,000 3.50 September 2007
January 2000 10,000 2.81 January 2008
February 2000 60,000 2.94 February 2008
May 2000 4,000 4.44 May 2008
September 2000 26,000 4.56 September 2008
January 2001 10,000 4.31 January 2009
February 2001 60,000 4.38 February 2009
May 2001 78,000 5.00 May 2009
September 2001 14,000 4.56 September 2009
October 2001 20,000 4.50 October 2009
December 2001 10,000 4.81 December 2009
February 2002 60,000 6.25 February 2010
March 2002 91,000 9.13 March 2010
April 2002 50,000 9.19 April 2010
Total Options
Outstanding 803,000 $1.25-9.19
Options under the Incentive Stock Option Plan are summarized as follows:
Year Ended June 30, 2000
Weighted-
Shares Average
Under Option Exercise Price
Options outstanding at
beginning of year 635,000 $3.23
Options granted 279,000 7.31
Options expired/withdrawn (82,500) 4.91
Options exercised (28,500) 3.55
Options outstanding at end of year 803,000 4.48
Option price per share $1.25-9.19
Options exercisable:
Number of shares 342,000 2.84
The following table summarizes option data as of June 30, 2000:
Weighted -
Average Weighted - Weighted -
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
$1 to 2.50 60,000 $1.66 $1.25 60,000 $1.25
$2.51 to 5.00 542,000 5.52 3.77 282,000 3.18
$5.01 to 7.50 60,000 7.65 6.25 - -
$7.51 to 10.00 141,000 7.76 9.15 - -
803,000 342,000
NOTE 9 - COMMITMENTS:
Leases - The following is the future minimum rental payment required for all
non-cancellable operating leases:
Year Ending June 30,
2001 $ 42,984
Officer's Compensation - One of the Company's officers has an employment
agreement for a one year term expiring January 1, 2001 which is renewable
upon mutual consent of the parties. For the years ended June 30, 2000 and
1999, the officer earned annual base compensation of $175,000 and $150,000,
respectively.
NOTE 10 - MAJOR CUSTOMERS:
Sales to foreign customers and one domestic customer as a percentage of net
sales totalled 27% and 11% in 2000 and 14% and 0% in 1999.
NOTE 11 - VENDOR CONCENTRATION:
Purchases from three unaffiliated suppliers comprised approximately 41% of the
Company's net purchases in 2000.
NOTE 12 - LITIGATION SETTLEMENT:
In December 1999, the Company won an arbitration award from Intelligent Medical
Imaging, Inc. (IMI). Due to the worsening financial condition of IMI,the
Company subsequently agreed to a $325,000 final settlement of the award. On
November 29, 1999, IMI filed for bankruptcy protection against the Company and
numerous other creditors. The Company has submitted its claim to the bankruptcy
court and has been approved as one of IMI's unsecured creditors. In light of
IMI's insolvency, the Company has elected not to recognize a receivable in this
matter, and to recognize any payment as and when received. As of June 30, 2000
the Company has recorded $29,833 received to date.
NOTE 13 - INVESTMENT ADVISORY AGREEMENT:
During fiscal 2000, 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, 2000.
The Company issued 500,000 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 500,000 shares were
cancelled by the Company on October 1, 2000, and were recorded at June 30,
2000 at par value.
NOTE 14 - SUBSEQUENT EVENTS:
On September 29, 2000 the Company acquired all of the capital stock of
Intersep Ltd., a United Kingdom based manufacturer of diagnostic laboratory
products. The proposed purchase price will be determined by multiplying the
manufacturer's audited fiscal year ending December 31, 2000 EBITDA, defined
as earnings before interest, taxes, depreciation and amortization by a
factor of 7.5. The purchase price will be paid with a cash payment of
$500,000 and any outstanding debt at the closing date, and the issuance of
DiaSys common shares for the purchase price in excess of the $500,000 cash
payment. Assuming other conditions are met, additional purchase price will be
paid in common stock over the next three years based on EBITDA for the given
year.
An officer of the manufacturer has an employment agreement which expires on
December 31, 2003 for $100,000 per annum which is renewable automatically at
the end of each year unless written notice of termination is provided by
either party.
DIASYS CORPORATION
FINANCIAL REPORT
JUNE 30, 2000
