SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 25, 1998
----------------------
PREMIER LASER SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
California 0-25242 33-0472684
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
3 Morgan, Irvine, California 92660
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 859-0656
-----------------------------
Not Applicable
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(Former name or former address, if changed since last report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On February 25, 1998, Premier Laser Systems, Inc., a California
corporation ("Premier") entered into a Stock Purchase Agreement (the "Stock
Purchase Agreement") with Ophthalmic Imaging Systems, a California corporation
("Ophthalmic" or "OISI"), wherein, among other things Premier agreed to make an
offer to all Ophthalmic shareholders with a view to acquiring Ophthalmic and
Ophthalmic agreed to recommend Premier's offer and not to solicit any
acquisition proposals competing with Premier's proposal. A copy of the Stock
Purchase Agreement is attached hereto as Exhibit 99.1 and is hereby incorporated
by reference.
Under the Stock Purchase Agreement, Premier is committed to offering each
Ophthalmic shareholder, in exchange for each Ophthalmic share, $1.75 per share
in cash, $0.25 in value (measured by a formula in the Stock Purchase Agreement)
of Premier Class A Common Stock, one Class C Warrant and one Class D Warrant
(collectively, the "Warrants"), each exercisable for fractional shares of
Premier Class A Common Stock having a value (at the measurement dates) of $0.25,
but with the exercisability of such Warrants dependent on the achievement of
certain sales targets for Ophthalmic products. Premier, with the assistance of
its investment and financial advisor, valued the combination of the cash and
securities at $2.18 per Ophthalmic share (the "Offer Value"). A fuller
description of these targets and the terms of the Warrants is contained in each
of Exhibits 99.2 and 99.3.
Simultaneously with signing the Stock Purchase Agreement, Premier entered
into individual purchase agreements ("Private Purchase Agreement" or "Private
Purchase Agreements") with Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D.
(collectively, the "Blumenkranzes"); Stanley Chang, M.D. ("Chang") and JB
Oxford & Company ("JBO") providing for these parties to sell to Premier 421,052,
50,000 and 259,308 shares, respectively, of Ophthalmic common stock.
Additionally, JBO sold to Premier, pursuant to the terms of its Private Purchase
Agreement, warrants (the "JBO Warrants") to purchase 250,000 shares of
Ophthalmic common stock. Premier exercised the JBO Warrants on February 26,
1998. The above sales and the exercise of the JBO Warrants have resulted in
Premier's owning 2,131,758 shares, or approximately 51.3% of the Ophthalmic
shares as of February 26, 1998. The sales, which occurred on February 26, 1998,
together with the exercise of the JBO Warrants, resulted in an aggregate
consideration of $2,137,184.80, using the Offer Value. The Private Purchase
Agreement with the Blumenkranzes (Mark Blumenkranz being an Ophthalmic director)
provides for rescission if Premier fails to make, or withdraws, the offer to all
stockholders provided for in the Stock Purchase Agreement. The Private Purchase
Agreement with the Blumenkranzes and JBO provide for a purchase price adjustment
that will make the purchase consideration received thereunder equal to the
purchase consideration paid to Ophthalmic shareholders pursuant to the offer.
The Warrant Certificate representing the JBO Warrants, the Underlying Warrant
Agreement between JBO and Ophthalmic, and Ophthalmic's Consent to Transfer the
JBO Warrants are attached hereto as Exhibits 99.15, 99.17, and 99.16,
respectively.
To permit the offer contemplated by the Stock Purchase Agreement and the
sales of Ophthalmic shares to Premier accomplished by the Private Purchase
Agreements, Ophthalmic's board of directors, after considering the terms of the
Stock Purchase Agreement and an opinion as to the fairness of Premier's offer to
Ophthalmic's shareholders (other than Premier and its affiliates), rendered by
Ophthalmic's independent financial advisors, modified Ophthalmic's previously
adopted rights plan.
The Private Purchase Agreements with the Blumenkranzes, Chang and JBO are
attached as Exhibits 99.4, 99.8 and 99.12 and are incorporated herein by
reference. Each of the Private Purchase Agreements involved the granting of
warrants
-1-
and these documents are filed as Exhibits 99.5, 99.6, 99.9, 99.10, 99.13 and
99.14. Registration rights were granted pursuant to Registration Rights
Agreements with the Blumenkranzes, Chang and JBO and these documents are filed
as Exhibits 99.7, 99.11, and 99.18.
Premier intends to commence an offer for all Ophthalmic shares it does
not own as soon as practicable and to accept all shares validly tendered in
response to such offer as soon as possible after a registration statement being
filed with respect to the non-cash consideration becomes effective. Such offer
will be made only by a Prospectus/Offer to Exchange conforming to the Securities
Act of 1933 and any applicable state securities laws, and to the Securities
Exchange Act of 1934.
Prior to acquiring the Ophthalmic shares pursuant to the Private Purchase
Agreements and exercise of the JBO Warrants, Premier had acquired 1,151,398
Ophthalmic shares for cash in various open market transactions over the past
twelve months.
Premier's existing cash and other working capital were sufficient to
provide the funds required in connection with the acquisition of the Ophthalmic
shares pursuant the open market transactions and the Private Purchase
Agreements, and are sufficient to provide the funds required in connection with
the acquisition of the additional Ophthalmic shares pursuant to the offer
contemplated under the Stock Purchase Agreement without any borrowings.
Ophthalmic is engaged in the business of designing, developing,
manufacturing and marketing digital imaging systems and image enhancement
software for use by practitioners in the ocular health field.
-2-
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
A. Financial Statements of Ophthalmic.
----------------------------------
Financial Statements of Ophthalmic prepared in accordance with Regulation
S-X consisting of the Balance Sheet as of August 31, 1997 and 1996 and
Statements of Operations for the years ended August 31, 1997, 1996 and
1995, Statements of Stockholders' Equity for the years ended August 31,
1997, 1996 and 1995, and Statements of Cash Flows for the years ended
August 31, 1997, 1996 and 1995, together with the Reports of Independent
Auditors filed with this report are listed on the Index to Financial
Statements on Page F-1 of this report.
The unaudited financial statements of Ophthalmic prepared in accordance
with Regulation S-X consisting of the Condensed Balance Sheet as of
November 30, 1997, Condensed Statements of Operations for the three months
ended November 30, 1997 and 1996, and Condensed Statements of Cash Flows
for the three months ended November 30, 1997 and 1996 filed with this
report are listed in the Index to Financial Statements on page F-1 of this
report.
B. Pro Forma Financial Information.
-------------------------------
The pro forma combined financial statements for the combined companies
required to be filed pursuant to this item are listed in the Index to
Financial Statements on page F-1 of this report.
C. Exhibits.
--------
Exhibit No. Description
----------- -----------
Exhibit 99.1 Stock Purchase Agreement dated February 25, 1998 between
Premier and Ophthalmic.
Exhibit 99.2 Form of Class C Warrant.
Exhibit 99.3 Form of Class D Warrant.
Exhibit 99.4 Purchase Agreement dated February 25, 1998 between Premier
and Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D.
Exhibit 99.5 Class C Warrant dated February 25, 1998 issued by Premier to
Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D.
Exhibit 99.6 Class D Warrant dated February 25, 1998 issued by Premier to
Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D.
Exhibit 99.7 Registration Rights Agreement dated February 25, 1998
between Premier and Mark S. Blumenkranz, M.D. and Recia
Blumenkranz, M.D.
Exhibit 99.8 Purchase Agreement dated February 25, 1998 between Premier
and Stanley Chang, M.D.
-3-
Exhibit 99.9 Class C Warrant dated February 25, 1998 issued by Premier to
Stanley Chang, M.D.
Exhibit 99.10 Class D Warrant dated February 25, 1998 issued by Premier to
Stanley Chang, M.D.
Exhibit 99.11 Registration Rights Agreement dated February 25, 1998
between Premier and Stanley Chang, M.D.
Exhibit 99.12 Purchase Agreement dated February 25, 1998 between Premier
and JB Oxford & Company.
Exhibit 99.13 Class C Warrant dated February 25, 1998 issued by Premier to
JB Oxford & Company.
Exhibit 99.14 Class D Warrant dated February 25, 1998 issued by Premier to
JB Oxford & Company.
Exhibit 99.15 Series C Warrant Certificate dated November 21, 1995 issued
by Ophthalmic to JB Oxford & Company.
Exhibit 99.16 Consent to Transfer of Warrant dated February 25, 1998
between Ophthalmic and Premier.
Exhibit 99.17 Warrant Agreement dated November 21, 1995 between Ophthalmic
and JB Oxford & Company.
Exhibit 99.18 Registration Rights Agreement dated February 25, 1998
between Premier and JB Oxford & Company.
Exhibit 99.19 Premier press release dated February 26, 1998.
Exhibit 99.20 Premier press release dated February 27, 1998.
Exhibit 99.21 Consent of Ernst & Young LLP, Independents Auditors to
Ophthalmic.
-4-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PREMIER LASER SYSTEMS, INC.
Date: March 9, 1998 By: /s/ Michael L. Hiebert
------------------------------
Michael L. Hiebert
Chief Financial Officer
-5-
INDEX TO FINANCIAL STATEMENTS
TO CURRENT REPORT ON FORM 8-K
Page
----
(a) Financial Statements of Business Acquired
-----------------------------------------
Report of Ernst & Young LLP, Independent Auditors.................. F-2
Audited Balance Sheet as of August 31, 1997........................ F-3
Audited Statements of Operations for the years ended August 31,
1997 and 1996.................................................... F-4
Audited Statements of Stockholders' Equity for the years ended
August 31, 1997 and 1996......................................... F-5
Audited Statements of Cash Flows for the years ended August 31,
1997 and 1996.................................................... F-6
Notes to Audited Financial Statements for the years ended August
31, 1997 and 1996................................................ F-7
Report of Ernst & Young LLP, Independent Auditors.................. F-21
Audited Balance Sheet as of August 31, 1996........................ F-22
Audited Statements of Operations for the years ended August 31,
1996 and 1995.................................................... F-23
Audited Statements of Stockholders' Equity for the years ended
August 31, 1996 and 1995......................................... F-24
Audited Statements of Cash Flows for the years ended August 31,
1996 and 1995.................................................... F-25
Notes to Audited Financial Statements for the years ended August
31, 1996 and 1995................................................ F-26
Unaudited Condensed Balance Sheet as of November 30, 1997.......... F-37
Unaudited Condensed Statements of Operations for the three months
ended November 30, 1997 and 1996................................. F-38
Unaudited Condensed Statements of Cash Flows for the three months
ended November 30, 1997 and 1996................................. F-39
Notes to Unaudited Condensed Financial Statements for the three
months ended November 30, 1997 and 1996.......................... F-40
(b) Pro Forma Financial Information
-------------------------------
Unaudited Pro Forma Condensed Combined Financial Statements........ F-43
Unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 1997............................................... F-44
Unaudited Pro Forma Condensed Combined Statement of Operations
for the nine months ended December 31, 1997..................... F-45
Unaudited Pro Forma Condensed Combined Statement of Operations
for the year ended March 31, 1997............................... F-46
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements...................................................... F-47
F-1
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Ophthalmic Imaging Systems
We have audited the accompanying balance sheet of Ophthalmic Imaging Systems as
of August 31, 1997, and the related statements of operations, stockholders'
equity, and cash flows for the years ended August 31, 1997 and 1996. 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 Ophthalmic Imaging Systems at
August 31, 1997, and the results of its operations and its cash flows for the
years ended August 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Sacramento, California
October 21, 1997,
except for Note 10
as to which the date is
November 18, 1997
F-2
Ophthalmic Imaging Systems
Balance Sheet
August 31, 1997
ASSETS
Current assets:
Cash and equivalents $ 142,300
Accounts receivable, net of allowance for
doubtful accounts of approximately $100,000 1,644,541
Inventories 794,052
Prepaid expenses and other current assets 93,408
-----------
Total current assets 2,674,301
Furniture and equipment, net 380,782
Other assets 7,385
-----------
$ 3,062,468
===========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings $ 311,002
Accounts payable 816,509
Accrued liabilities 794,305
Accrued warrant appreciation right 251,497
Deferred extended warranty revenue 93,614
Customer deposits 125,538
Notes payable 2,234
-----------
Total current liabilities 2,394,699
Commitments
Stockholders' equity:
Preferred stock, no par value, 20,000,000 shares
authorized; none issued or outstanding -
Common stock, no par value, 20,000,000 shares authorized;
3,905,428 shares issued and outstanding 10,244,615
Deferred compensation (306,894)
Accumulated deficit (9,269,952)
-----------
Total stockholders' equity 667,769
-----------
$ 3,062,468
===========
SEE ACCOMPANYING NOTES.
F-3
Ophthalmic Imaging Systems
Statements of Operations
YEARS ENDED AUGUST 31,
1997 1996
---------------------------
Revenues:
Net sales $ 6,480,055 $ 6,672,667
Other revenue 145,561 200,984
----------- -----------
6,625,616 6,873,651
Cost of sales 4,885,004 4,797,324
----------- -----------
Gross profit 1,740,612 2,076,327
OPERATING EXPENSES:
Sales and marketing 1,624,470 1,652,965
General and administrative 1,089,670 722,462
Research and development 1,070,192 846,034
----------- -----------
Total operating expenses 3,784,332 3,221,461
----------- -----------
Loss from operations (2,043,720) (1,145,134)
OTHER INCOME (EXPENSE):
Interest income 13,912 20,618
Interest expense (80,746) (288,667)
----------- -----------
Net loss $(2,110,554) $(1,413,183)
=========== ===========
Net loss per share $ (.59) $ (.64)
=========== ===========
Shares used in the calculation of
net loss per share 3,597,879 2,204,506
=========== ===========
SEE ACCOMPANYING NOTES.
F-4
Ophthalmic Imaging Systems
Statements of Stockholders' Equity
Years ended August 31, 1997 and 1996
Common Stock Total
----------------------- Deferred Accumulated Stockholders'
Shares Amount Compensation Deficit Equity
--------- ----------- ------------ ------------ -------------
Balances at August 31, 1995 875,112 $ 6,674,639 $ - $(5,746,215) $ 928,424
Sale of common stock through
private placement 1,368,421 1,074,841 - - 1,074,841
Options exercised 11,000 10,230 - - 10,230
Issuance of common stock upon
exercise of warrants 1,052,631 1,180,486 - - 1,180,486
Net loss - - - (1,413,183) (1,413,183)
--------- ----------- --------- ----------- -----------
Balances at August 31, 1996 3,307,164 8,940,196 - (7,159,398) 1,780,798
Options exercised 52,400 152,286 - - 152,286
Issuance of common stock upon
exercise of warrants 545,864 757,097 - - 757,097
Deferred compensation related to
stock options granted to
non-employees - 395,036 (395,036) - -
Stock option compensation
expense - - 88,142 - 88,142
Net loss - - - (2,110,554) (2,110,554)
--------- ----------- --------- ----------- -----------
Balances at August 31, 1997 3,905,428 $10,244,615 $(306,894) $(9,269,952) $ 667,769
========= =========== ========= =========== ===========
SEE ACCOMPANYING NOTES.
F-5
Ophthalmic Imaging Systems
Statements of Cash Flows
Increase (Decrease) in Cash and Equivalents
YEARS ENDED AUGUST 31,
1997 1996
---------------------------
Operating activities:
Net loss $(2,110,554) $(1,413,183)
Adjustments to reconcile net loss to
net cash used in operating activities:
Accrued warrant appreciation right 27,215 211,782
Depreciation and amortization 142,148 102,156
Provision for doubtful accounts (6,116) (5,338)
Stock option compensation expense 88,142 -
Net changes in operating assets and liabilities:
Accounts receivable (566,421) 239,943
Inventories 786,483 (405,040)
Prepaid expenses and other current assets (28,460) (475)
Other assets 79,250 (79,797)
Accounts payable (120,950) (164,714)
Accrued liabilities 196,664 75,716
Deferred extended warranty revenue 12,417 6,100
Customer deposits 88,757 (27,610)
----------- -----------
Net cash used in operating activities (1,411,425) (1,460,460)
INVESTING ACTIVITY:
Capital expenditures for furniture and
equipment (161,735) (215,884)
FINANCING ACTIVITIES:
Proceeds from short-term borrowings 308,000 150,000
Repayment of short-term borrowings (546,998) -
Principal payments on notes payable (6,250) (5,093)
Issuance of common stock 909,383 2,265,557
----------- -----------
Net cash provided by financing activities 664,135 2,410,464
----------- -----------
Net (decrease) increase in cash and equivalents (909,025) 734,120
Cash and equivalents, beginning of year 1,051,325 317,205
----------- -----------
Cash and equivalents, end of year $ 142,300 $ 1,051,325
=========== ===========
SEE ACCOMPANYING NOTES.
F-6
Ophthalmic Imaging Systems
Notes to Financial Statements
August 31, 1997
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Ophthalmic Imaging Systems (the Company), was incorporated in California in July
1986. The Company is primarily engaged in the business of designing, developing,
manufacturing, and marketing digital imaging systems, image enhancements and
analysis software, and related products and services for use by practitioners in
the ocular healthcare field.
USE OF ESTIMATES
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which require the Company's management
to make estimates and assumptions that affect the amounts reported therein.
Actual results could vary from such estimates.
CONCENTRATIONS OF CREDIT RISK AND EXPORT SALES
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with high credit
quality financial institutions. Concentrations of credit risk with respect to
trade receivables are limited due to the Company's policy of requiring deposits
from customers, the number of customers and their geographic dispersion. The
Company maintains reserves for potential credit losses and such losses have
historically been within management's expectations. No single customer during
fiscal 1997 or 1996 comprised 10% or more of net sales.
Revenues from sales to customers located outside of the United States (primarily
Europe) accounted for approximately 30% and 29% of net sales during the years
ended August 31, 1997 and 1996, respectively.
INVENTORIES
Inventories, which consist primarily of purchased system parts, subassemblies
and assembled systems are stated at the lower of cost (determined using the
first-in, first-out method) or market.
F-7
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and depreciated or amortized on a
straight-line basis over the estimated useful lives of the assets. The estimated
useful lives generally range from three to seven years.
REVENUE RECOGNITION AND WARRANTIES
The Company recognizes revenue from the sale of its products when the goods are
shipped to its customers. The Company generally provides a one-year warranty
covering materials and workmanship and accruals are provided for anticipated
warranty expenses.
Customers may purchase extended warranty coverage for additional one or two year
periods. Revenues from the sale of these extended warranties are deferred and
recognized as other revenue on a straight-line basis over the term of the
extended warranty contract.
INCOME TAXES
Deferred income taxes are accounted for pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," as a result of
differences in the timing of recognition of certain revenues and expenses for
financial statement and income tax reporting purposes.
General business credits are accounted for as a reduction of federal income
taxes payable under the flow-through method.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares of
common stock outstanding. Common equivalent shares from stock options and
warrants are excluded from the computation because their effect is antidilutive.
F-8
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NET LOSS PER SHARE (CONTINUED)
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," which is required for both interim and annual periods
ending after December 15, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The impact of
Statement No. 128 on the calculation of primary and fully diluted earnings per
share is not expected to be material.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers highly liquid
investments with original maturities of three months or less as cash
equivalents.
Cash paid for interest amounted to approximately $64,000 and $67,000 during the
years ended August 31, 1997 and 1996, respectively. Cash paid for income taxes
amounted to approximately $800 for each of the years ended August 31, 1997 and
1996.
STOCK BASED COMPENSATION
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") which the
Company adopted in 1996, the Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for its stock option plans. Under APB 25,
if the exercise price of the Company's employee stock options equals or exceeds
the fair value of the underlying stock on the date of grant as determined by the
Company's Board of Directors, no compensation expense is recognized. See Note 7
for pro forma disclosures required by SFAS 123.
F-9
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LONG-LIVED ASSETS
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 requires impairment
losses to be recognized for long-lived assets used in operations when indicators
of impairment are present and the estimated undiscounted cash flows to be
generated by those assets are less than their carrying amounts. The impairment
loss is measured by comparing the fair value of the asset to its carrying
amount. The adoption of SFAS No. 121 had no effect on the Company's financial
position or results of operations for the year ended August 31, 1997.
2. INVENTORIES
Inventories consist of the following as of August 31, 1997:
Raw materials $ 526,090
Work-in-process 139,182
Finished goods 128,780
---------
$ 794,052
=========
3. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following as of August 31, 1997:
Research and manufacturing equipment $ 554,147
Office furniture and equipment 358,537
Demonstration equipment 183,938
Vehicles 58,991
----------
1,155,613
Less accumulated depreciation and amortization (774,831)
----------
$ 380,782
==========
F-10
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
4. SHORT-TERM BORROWINGS
The Company entered into a revolving line of credit agreement (the "Credit
Agreement") with a bank (the "Bank") which expired on November 7, 1997. The
maximum amount available under the terms of the Credit Agreement is $750,000 and
is based upon eligible outstanding accounts receivable balances. Borrowings
under the Credit Agreement bear interest at the Bank's prime lending rate plus
three percent (11% as of August 31, 1997) and are secured by substantially all
assets of the Company. The Credit Agreement contains certain restrictive
covenants which provide for, among other things, certain working capital and net
worth balances and ratios. The Company was not in compliance with the various
restrictive covenants as of August 31, 1997. In addition, the Credit Agreement
restricts the Company's ability to 1) enter into any merger or acquisition, 2)
pay dividends or repurchase stock, 3) mortgage existing assets or 4) loan money
or guarantee the loans of others without the Bank's prior approval. As of August
31, 1997, borrowings in the amount of $311,000 were outstanding related to the
Credit Agreement. Subsequent to year-end the Credit Agreement was converted to a
full recourse accounts receivable credit agreement (Note 10).
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of August 31, 1997:
Accrued compensation $402,389
Accrued warranty expenses 170,200
Other accrued liabilities 221,716
--------
$794,305
========
6. COMMITMENTS
LEASES
The Company leases its facility under a noncancelable operating lease which
expires in June 1998. The lease agreement provides for minimum lease payments
of approximately $84,000 for the year ended August 31, 1998.
Rental expense charged to operations for all operating leases was approximately
$126,000 and $88,000 during the years ended August 31, 1997 and 1996,
respectively.
F-11
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
6. COMMITMENTS (CONTINUED)
EMPLOYMENT AGREEMENTS
The Company has employment agreements with two of its executive officers. The
agreement with the chief executive officer calls for an annual salary of
$150,000 and a performance based bonus plan, which has yet to be determined by
the Company's compensation committee. The agreement with the president/chief
operating officer calls for an annual salary of $140,000 and an annual bonus not
to exceed $42,000. In addition, the Company's board of directors granted the
president/chief operating officer incentive stock options covering 100,000
shares of common stock. Both agreements have a 24 month term expiring in July
1999.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
Of the 16,094,572 shares of common stock authorized but unissued as of August
31, 1997, the following shares are reserved for issuance:
Common stock warrants 1,299,750
Stock option plans 1,338,267
---------
2,638,017
=========
PRIVATE PLACEMENT
In November 1995, the Company completed a private placement of 1,368,421 shares
of its common stock with detachable warrants. The net proceeds from this
offering was approximately $1,075,000. Along with each share of common stock
issued the purchasers were given an "A Warrant" and a "B Warrant" to purchase
shares of the Company's common stock. The A and B Warrants per share exercise
prices are $1.25 and $1.75, respectively. The number of shares exercisable as
well as the per share exercise prices of the A and B Warrants are subject to
adjustment upon the occurrence of certain events. The A and B Warrants expired
on February 19, 1997 as amended and November 21, 1997, respectively. In May
1996, 1,052,631 A Warrants were exercised resulting in net proceeds to the
Company of approximately $1,180,000. During the year ended August 31, 1997,
210,526 and 335,338 A and B warrants, respectively, were exercised resulting in
aggregate net proceeds to the Company of approximately $757,000.
F-12
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
PRIVATE PLACEMENT (CONTINUED)
The private placement underwriter was issued a warrant to purchase 250,000
shares of the Company's common stock at $.95 per share. The number of shares
exercisable as well as the per share exercise price are subject to adjustment
upon the occurrence of certain events. This warrant expires on November 21,
1999. In addition, the underwriter will receive as a commission, 10% of the
proceeds received by the Company upon exercise of the A and B Warrants described
above.
OTHER WARRANTS
In February 1993, the Company issued a warrant to the Bank that provided a line-
of-credit (Note 4). The warrant was amended several times in connection with
amendments to the line-of-credit as well as the current Credit Agreement. The
warrant is currently exercisable for 50,000 shares of common stock at an
exercise price of $1.73 per share and it expires in November 2000. This warrant
includes a provision wherein the Bank can require the Company to pay in cash the
difference between the fair market value (as defined) of the underlying common
stock of the warrant and the exercise price (the "Appreciation Right"). The Bank
informed the Company of its intent to exercise the Appreciation Right on May 23,
1996. The Company has accrued the entire amount of the Appreciation Right and it
is reflected as a current liability on the accompanying balance sheet. For
purposes of the statement of operations, the amount has been recorded as
additional interest expense for the year ended August 31, 1996. The Appreciation
Right is due on April 1, 1998.
During February 1993, in consideration for providing bridge loans, each of the
two officers, then employed by the Company, was issued a warrant to purchase
16,667 shares of the Company's common stock at an exercise price of $18.00 per
share. These warrants expire in February 1998. During fiscal 1995, one of the
warrants to purchase 16,667 shares was canceled.
STOCK OPTION PLANS
At August 31, 1997, the Company has three stock-based compensation plans, which
are described below. The Company applies APB 25 and related Interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting
F-13
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
provided for under SFAS 123 requires use of option valuation models that were
not developed for use in valuing stock options. Under APB 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
During March 1992, the Company adopted a Stock Option Plan (the "Plan") under
which the board of directors is authorized to grant options to key directors,
executives, employees and others for the purchase of up to 116,667 shares of the
Company's common stock at prices not less than the fair market value of the
common stock on the date of grant. The term over which the options are
exercisable, which may not exceed five years, is determined by the board of
directors at the time of the grant. Pursuant to the Plan, options to purchase
100,000 shares of the Company's common stock at an exercise price of $3.00 per
share were granted (50,000 options each) to the Company's chief executive
officer and chief financial officer. The options granted were fully vested on
the grant date and expired in March 1997. During the year ended August 31, 1997,
prior to the expiration of these options, options to purchase 50,000 shares were
exercised. Options to purchase the remaining 50,000 shares of the Company's
common stock subsequently expired in March 1997. In April 1997, the board of
directors granted options to purchase 50,000 shares of the Company's common
stock at an exercise price of $2.75 to the Company's chief executive
officer/chief financial officer. The options granted vest 25,000 on the date of
grant and 25,000 in April 1998. These options expire in April 2002.
In December 1992 and January 1993, the Company's board of directors and
shareholders, respectively, approved a second Stock Option Plan (the "Option
Plan") under which all officers, employees, directors and consultants may
participate. The Plan expires December 2002. Options granted under the Option
Plan may be either incentive stock options or non-qualified stock options and
will generally have a term of ten years from the date of grant, unless otherwise
specified in the option agreement. The exercise prices of incentive stock
options granted under the Option Plan will be at 100% of the fair market value
of the Company's common stock on the date of grant. The exercise prices of non-
qualified stock options granted under the Option Plan cannot be less than 85% of
the fair market value of the Company's common stock on the date of grant. The
maximum number of shares of the Company's common stock which may be optioned and
sold under the Option Plan is 150,000, of which 13,608 remained available for
the granting of
F-14
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
options as of August 31, 1997. As of August 31, 1997, stock options to purchase
122,992 shares at exercise prices ranging from $.94 to $4.25 were granted and
outstanding under the Option Plan. During the year ended August 31, 1997 and
1996, 2,400 and 11,000 options were exercised, respectively.
In August 1995, the Company's board of directors approved a Nonstatutory Stock
Option Plan (the "Nonstatutory Plan") under which all officers, employees,
directors and consultants may participate. The Nonstatutory Plan expires
November 2005. Options granted under the Nonstatutory Plan are non-qualified
stock options and will generally have a term of five years from the date of
grant, unless otherwise specified in the option agreement. The exercise prices
under the Nonstatutory Plan will be at 100% of the fair market value of the
Company's common stock on the date of grant. The maximum number of shares of the
Company's common stock which may be optioned and sold under the Nonstatutory
Plan is 1,035,000, of which 50,000 options remained available for granting as of
August 31, 1997. As of August 31, 1997, stock options to purchase 985,000 shares
at exercise prices ranging from $0.94 to $4.50 were granted and outstanding
under the Nonstatutory Plan and none of the granted options were exercised.
A summary of the status of the Company's stock option plans and changes during
the periods is presented below:
Weighted Average
Options Exercise Price
--------------------------------
Balance at August 31, 1995 744,171 $ 1.54
Options granted 290,000 $ 2.53
Options canceled (250) $ .94
Options exercised (at $.94) (11,000) $ .94
---------
Balance at August 31, 1996 1,022,921 $ 1.83
Options granted 346,500 $ 2.70
Options canceled (59,029) $ 3.14
Options exercised
(at $.94 to $3.00) (52,400) $ 2.91
---------
Balance at August 31, 1997 1,257,992 $ 1.96
=========
The weighted average fair value of options granted during the years ended August
31, 1997 and August 31, 1996 was $2.26 and $.93, respectively.
F-15
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about the stock options outstanding
at August 31, 1997:
Options Outstanding Options Exercisable
--------------------------------------------- ------------------------
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise Prices Number Contractual Life Exercise Price Number Exercise Price
- --------------- --------------------------------------------- ------------------------
$0.94-$1.38 759,492 5.1 $1.30 330,513 $1.30
$1.38-$3.00 390,000 4.0 $2.59 167,708 $2.57
$3.00-$4.50 108,500 4.3 $4.34 21,531 $4.32
--------- -------
1,257,992 $1.96 519,752 $1.84
========= =======
Pro forma information regarding net loss and net loss per share is required by
SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
August 31, 1995 under the fair value method of that Statement. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions for the
years ended August 31, 1996 and 1997, respectively; dividend yield of zero;
volatility factors of the expected market price of the Company's common stock
ranged from 1.052 to 1.125 for both years; risk-free interest rate of 6%; and a
weighted-average expected life of 5 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 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.
F-16
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
YEARS ENDED AUGUST 31,
1997 1996
---------------------------
Pro forma net loss $(2,326,390) $(1,453,678)
=========== ===========
Pro forma net loss per share $ (.65) $ (.66)
=========== ===========
During the year ended August 31, 1997, the Company recorded deferred
compensation of approximately $395,000 for financial reporting purposes to
reflect the deemed fair value of the certain options granted to non-employees.
Deferred compensation is being amortized over the vesting period of the related
options. For the year ended August 31, 1997, the amortized deferred compensation
expense was approximately $88,000.
Since SFAS 123 is applicable only to options granted subsequent to August 31,
1995, its pro forma effect will not be fully realized until 2000.
F-17
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
8. INCOME TAXES
There was no provision (benefit) for income taxes during the years ended August
31, 1997 or 1996.
The significant components of the Company's deferred tax assets and liabilities
as of August 31, 1997 are as follows:
Deferred tax assets:
Net operating loss carryforwards $ 1,310,000
Inventory reserves 549,000
Accrued warrant appreciation right 99,000
Payroll related accruals 98,000
Warranty accrual 67,000
Sales and accounts receivable reserves 39,000
Uniform capitalization 29,000
Other 3,000
------------
Total deferred tax assets 2,194,000
Valuation allowance (2,192,000)
------------
Net deferred tax assets 2,000
Deferred tax liabilities:
Depreciation 2,000
------------
Total deferred tax liabilities 2,000
------------
Net deferred taxes $ -
============
The valuation allowance as of August 31, 1996 was approximately $1,473,000
resulting in a net increase in the allowance of approximately $719,000 for the
year.
F-18
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The principal reasons for the difference between the effective tax rate and the
federal statutory income tax rate are presented in the following table:
YEAR ENDED AUGUST 31,
1997 1996
-----------------------
Federal benefit expected at statutory rates $(718,000) $(480,000)
Net operating loss with no current benefit 718,000 480,000
-----------------------
$ - $ -
=======================
In connection with the Company's private placement of common stock (Note 7) a
change of ownership (as defined in Section 382 of the Internal Revenue Code of
1986, as amended) occurred. As a result of this change, the Company's federal
and state net operating loss carryforwards generated through November 21, 1996
(approximately $4,800,000 and $2,500,000, respectively) and the Company's
federal and state Research and Development credits (approximately $126,000 and
$79,000, respectively) will be subject to a total annual limitation in the
amount of approximately $107,000.
As a consequence of the limitation, as discussed above, the Company has at
August 31, 1997 a net operating loss carryover of approximately $3,580,000 for
federal income tax purposes which expires between 2007 and 2011, and a net
operating loss carryforward of approximately $1,521,000 for state income tax
purposes which expires between 1997 and 2002.
9. 401(k) PLAN
The Company has a tax deferred investment plan (the "401(k) Plan"). All full-
time employees are eligible to participate in the 401(k) Plan. The 401(k) Plan
originally required mandatory employer contributions of 10% of the participants
contributions. The 401(k) Plan was subsequently amended to provide for
discretionary employer contributions. The Company did not make any matching
contributions during either of the years ended August 31, 1997 or 1996.
F-19
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
10. SUBSEQUENT EVENT
On November 18, 1997, the Company entered into an accounts receivable credit
agreement (the "Agreement") with the Bank, and all amounts outstanding under the
Credit Agreement were considered to be the initial advance under the Agreement.
The Agreement allows for up to an 80% advance rate on eligible accounts
receivable balances, and the maximum borrowing base under the Agreement is $1.2
million. The Bank has full recourse against the Company. The Agreement expires
in November 1998. Borrowings under the Agreement bear interest at the Bank's
prime lending rate plus 4%. In addition, the Bank will charge monthly an
administrative fee equal to the greater of .5% of the average daily balance for
the month or $1,200. Under the terms of the Agreement, borrowings are secured by
substantially all of the Company's assets.
F-20
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Ophthalmic Imaging Systems
We have audited the accompanying balance sheet of Ophthalmic Imaging Systems as
of August 31, 1996, and the related statements of operations, stockholders'
equity, and cash flows for the years ended August 31, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ophthalmic Imaging Systems at
August 31, 1996, and the results of its operations and its cash flows for the
years ended August 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Sacramento, California
October 11, 1996
except for Note 10
as to which the date is
November 21, 1996
F-21
Ophthalmic Imaging Systems
Balance Sheet
August 31, 1996
ASSETS
Current assets:
Cash and equivalents $ 1,051,325
Accounts receivable, net of allowance for
doubtful accounts of approximately $106,000 1,072,004
Inventories 1,580,535
Prepaid expenses and other current assets 64,948
-----------
Total current assets 3,768,812
Furniture and equipment, net 361,195
Other assets 86,635
-----------
$ 4,216,642
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 550,000
Accounts payable 937,459
Accrued liabilities 597,641
Accrued warrant appreciation right 224,282
Current portion of deferred extended
warranty revenue 70,961
Customer deposits 36,781
Current portion of notes payable 5,002
-----------
Total current liabilities 2,422,126
Notes payable, less current portion 3,482
Deferred extended warranty revenue, less
current portion 10,236
Commitments (Note 6)
Stockholders' equity:
Preferred stock, no par value, 20,000,000
shares authorized; none issued or
outstanding -
Common stock, no par value, 20,000,000
shares authorized; 3,307,164 shares
issued and outstanding 8,940,196
Accumulated deficit (7,159,398)
-----------
Total stockholders' equity 1,780,798
-----------
$ 4,216,642
===========
See accompanying notes.
F-22
Ophthalmic Imaging Systems
Statements of Operations
YEARS ENDED AUGUST 31
1996 1995
--------------------------------
REVENUES:
Net sales $ 6,672,667 $ 6,724,339
Other revenue 200,984 234,900
----------- -----------
6,873,651 6,959,239
Cost of sales 4,797,324 4,616,322
----------- -----------
Gross profit 2,076,327 2,342,917
OPERATING EXPENSES:
Sales and marketing 1,652,965 1,545,390
General and administrative 722,462 441,245
Research and development 846,034 691,358
----------- -----------
Total operating expenses 3,221,461 2,677,993
----------- -----------
Loss from operations (1,145,134) (335,076)
OTHER INCOME (EXPENSE):
Interest income 20,618 10,657
Interest expense (288,667) (31,857)
----------- -----------
Net loss $(1,413,183) $ (356,276)
=========== ===========
Net loss per share $ (.64) $ (.41)
=========== ===========
Shares used in the calculation of
net loss per share 2,204,506 875,112
=========== ===========
See accompanying notes.
F-23
Ophthalmic Imaging Systems
Statements of Stockholders' Equity
Years ended August 31, 1996 and 1995
COMMON STOCK TOTAL
--------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
---------------------------------------------------------
Balance at August 31,
1994 875,112 $6,674,639 $(5,389,939) $ 1,284,700
Net loss - - (356,276) (356,276)
---------------------------------------------------------
Balance at August 31,
1995 875,112 6,674,639 (5,746,215) 928,424
Sale of common stock
through private
placement 1,368,421 1,074,841 - 1,074,841
Options exercised 11,000 10,230 - 10,230
Issuance of common
stock upon exercise
of warrants 1,052,631 1,180,486 - 1,180,486
Net loss - - (1,413,183) (1,413,183)
---------------------------------------------------------
Balance at August 31,
1996 3,307,164 $8,940,196 $(7,159,398) $ 1,780,798
=========================================================
See accompanying notes.
F-24
Ophthalmic Imaging Systems
Statements of Cash Flows
Increase (Decrease) in Cash and Equivalents
YEARS ENDED AUGUST 31
1996 1995
-------------------------------
OPERATING ACTIVITIES:
Net loss $ (1,413,183) $ (356,276)
Adjustments to reconcile net loss to
net cash used in operating activities:
Accrued warrant appreciation right 211,782 12,500
Depreciation and amortization 102,156 115,334
Provision for doubtful accounts (5,338) (42,200)
Gain on sale of assets - (4,294)
Net changes in operating assets and liabilities:
Accounts receivable 239,943 (300,832)
Inventories (405,040) (304,835)
Prepaid expenses and other current assets (475) (4,113)
Other assets (79,797) 313
Accounts payable (164,714) 394,865
Accrued liabilities 75,716 29,866
Deferred extended warranty revenue 6,100 (26,218)
Customer deposits (27,610) (296,748)
------------ -----------
Net cash used in operating activities (1,460,460) (782,638)
INVESTING ACTIVITIES:
Capital expenditures for furniture and equipment (215,884) (106,297)
Proceeds from the sale of furniture and equipment - 4,682
------------ -----------
Net cash used in investing activities (215,884) (101,615)
FINANCING ACTIVITIES:
Proceeds from short term borrowings 150,000 400,000
Principal payments on notes payable (5,093) (9,285)
Issuance of common stock 2,265,557 -
------------ -----------
Net cash provided by financing activities 2,410,464 390,715
------------ -----------
Net increase (decrease) in cash and equivalents 734,120 (493,538)
Cash and equivalents, beginning of year 317,205 810,743
------------ -----------
Cash and equivalents, end of year $ 1,051,325 $ 317,205
============ ===========
See accompanying notes.
F-25
Ophthalmic Imaging Systems
Notes to Financial Statements
August 31, 1996
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Ophthalmic Imaging Systems (the Company), was incorporated in California in July
1986. The Company is primarily engaged in the business of designing, developing,
manufacturing, and marketing digital imaging systems, image enhancements and
analysis software, and a glaucoma detection diagnostic instrument for use by
practitioners in the ocular healthcare field.
CONCENTRATIONS OF CREDIT RISK AND EXPORT SALES
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with high credit
quality financial institutions. Concentrations of credit risk with respect to
trade receivables are limited due to the Company's policy of requiring deposits
from customers, the number of customers and their geographic dispersion. The
Company maintains reserves for potential credit losses and such losses have
historically been within management's expectations. No single customer during
fiscal 1996 or 1995 comprised 10% or more of net sales.
Revenues from sales to customers located outside of the United States (primarily
Europe) accounted for approximately 29% and 25% of net sales during the years
ended August 31, 1996 and 1995, respectively.
INVENTORIES
Inventories, which consist primarily of purchased system parts, subassemblies
and assembled systems are stated at the lower of cost (determined using the
first-in, first-out method) or market.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and depreciated or amortized on a
straight-line basis over the estimated useful lives of the assets. The estimated
useful lives generally range from three to seven years.
F-26
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION AND WARRANTIES
The Company recognizes revenue from the sale of its products when the goods are
shipped to its customers. The Company generally provides a one-year warranty
covering materials and workmanship and accruals are provided for anticipated
warranty expenses.
Customers may purchase extended warranty coverage for additional one or two
year periods. Revenues from the sale of these extended warranties are deferred
and recognized as other revenue on a straight-line basis over the term of the
extended warranty contract.
INCOME TAXES
Deferred income taxes are accounted for pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," (SFAS 109) as a
result of differences in the timing of recognition of certain revenues and
expenses for financial statement and income tax reporting purposes.
General business credits are accounted for as a reduction of federal income
taxes payable under the flow-through method.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares of
common stock outstanding. Common equivalent shares from stock options and
warrants are excluded from the computation because their effect is antidilutive.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers highly liquid
investments with original maturities of three months or less as cash
equivalents.
Cash paid for interest amounted to approximately $67,000 and $19,000 during the
years ended August 31, 1996 and 1995, respectively. Cash paid for income taxes
amounted to approximately $800 during each of the years ended August 31, 1996
and 1995.
F-27
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company accounts for its stock option plans in accordance with the
provisions of the Accounting Principles Board's Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees." In 1995, the Financial Accounting
Standards Board released Statement of Financial Accounting Standard No. 123
(SFAS 123), "Accounting for Stock Based Compensation." SFAS 123 provides an
alternative to APB 25 and is effective for fiscal years beginning after December
15, 1995. The Company expects to continue to account for its stock plans in
accordance with APB 25. Accordingly, SFAS 123 is not expected to have any
material impact on the Company's financial position or results of operations.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying balance sheet for cash and
cash equivalents approximate their respective fair values. The carrying amounts
of the Company's borrowings under its debt agreements approximate their fair
value. The fair value was based on the Company's current incremental borrowing
rates for similar types of borrowing arrangements.
USE OF ESTIMATES
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which require the Company's management
to make estimates and assumptions that affect the amounts reported therein.
Actual results could vary from such estimates.
RECLASSIFICATIONS
Certain amounts in the fiscal 1995 financial statements have been reclassified
to conform with the presentation of the fiscal 1996 financial statements.
F-28
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
2. INVENTORIES
Inventories consist of the following as of August 31, 1996:
Raw materials $1,058,427
Work-in-process 196,840
Finished goods 325,268
----------
$1,580,535
==========
3. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following as of August 31, 1996:
Research and manufacturing equipment $ 423,296
Office furniture and equipment 329,247
Demonstration equipment 183,938
Vehicles 58,991
----------
995,472
Less accumulated depreciation and
amortization (634,277)
----------
$ 361,195
==========
4. SHORT-TERM BORROWINGS
The Company entered into a revolving line of credit agreement (the "Credit
Agreement") with a bank (the "Bank") which expired on October 5, 1996. The
maximum amount available under the terms of the Credit Agreement is $750,000,
and is based upon eligible outstanding accounts receivable balances. Borrowings
under the Credit Agreement bear interest at the Bank's prime lending rate plus
two and one-half percent (10.75% as of August 31, 1996) and are secured by
virtually all assets of the Company. The Credit Agreement contains certain
restrictive covenants which provide for, among other things, certain working
capital and net worth balances and ratios, and limitations on the amount of net
loss the Company may incur in a quarter. The Company was not in compliance with
the restrictive covenants for the quarter ending August 31, 1996. The Company
received a waiver from the Bank for the covenant violations. In addition, the
Credit Agreement restricts the Company's ability to 1) enter into any merger or
acquisition, 2) pay dividends or repurchase stock, 3) mortgage existing assets
or 4) loan money or guarantee the loans of others without the Bank's prior
approval. As of August 31, 1996, borrowings in the amount of $550,000 were
outstanding related to the Credit Agreement. Subsequent to year-end the Credit
Agreement was amended (Note 10).
F-29
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of August 31, 1996:
Accrued compensation $264,923
Accrued warranty expenses 105,700
Other accrued liabilities 227,018
--------
$597,641
========
6. COMMITMENTS
LEASES
The Company leases its facility under a noncancelable operating lease, which
expires in June 1998. The lease agreement provides for minimum lease payments
of approximately $101,000 and $84,000 for the years ended August 31, 1997 and
1998, respectively.
Rental expense charged to operations for all operating leases was approximately
$88,000 and $89,000 during the years ended August 31, 1996 and 1995,
respectively.
EMPLOYMENT AGREEMENTS
During March 1992, the Company entered into employment agreements with its
president and its chief financial officer. The employment agreements had a
36-month term, expiring in March 1995, and provided, among other things, for
annual salaries of $115,000 for each officer and the payment of a royalty to
each officer of $250 per unit for sales of the Glaucoma-Scope. The royalty
payments survive the termination of the employment agreements and are to extend
indefinitely. During the years ended August 31, 1996 and 1995 the royalties
amounted to approximately $3,000 and $8,000, respectively.
During fiscal 1993, the Company restructured its executive management pursuant
to which the Company's president resigned that position to become vice president
in charge of International Sales. His employment contract was amended to a
36-month term expiring June 1996 which provides, among other things, for a
revised annual salary of $80,000 and a commission equal to one percent (1%) of
revenues generated from selected sales to purchasers outside of the United
States and Canada. Also, during fiscal 1993 the Company's chief financial
officer assumed the additional role of president. His
F-30
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
6. COMMITMENTS (CONTINUED)
EMPLOYMENT AGREEMENTS (CONTINUED)
employment agreement was subsequently amended to a 36-month term expiring April
1997, pursuant to which amendment the officer agreed, among other things, to
reduce his annual salary to $92,000 commencing retroactive to May 1993. During
1995, his annual salary was increased to $120,000, pursuant to the Company
having achieved certain performance goals stipulated in his employment
agreement. In addition, also pursuant to the amendment to his employment
contract, the Company's board of directors granted the new president incentive
stock options covering 33,333 shares of the Company's common stock pursuant to
the Company's second Option Plan (Note 7). In November 1995, the Company
extended his employment agreement which now expires in November 1998.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
Of the 16,692,836 shares of common stock authorized but unissued as of August
31, 1996, the following shares are reserved for issuance:
Common stock warrants 2,024,211
Stock option plans 1,290,667
---------
3,314,878
=========
PRIVATE PLACEMENT
In November 1995, the Company completed a private placement of 1,368,421 shares
of its common stock with detachable warrants. The net proceeds from this
offering was approximately $1,075,000. Along with each share of common stock
issued the purchasers were given an "A Warrant" and a "B Warrant" to purchase
shares of the Company's common stock. The A and B Warrants per share exercise
prices are $1.25 and $1.75, respectively. The number of shares exercisable as
well as the per share exercise prices of the A and B Warrants are subject to
adjustment upon the occurrence of certain events. The A and B Warrants expire on
February 19, 1997 as amended and November 21, 1997, respectively. In addition,
the A and B Warrants are subject to redemption by the Company at $.10 per
warrant commencing May 21, 1996 and May 21, 1997 (the "Redemption Dates"),
respectively. The A and B Warrant redemption provisions are only available if
the Company's common stock price exceeds $2.25 and $2.50, respectively for the
twenty trading days immediately preceding the corresponding Redemption Dates.
F-31
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
PRIVATE PLACEMENT (CONTINUED)
The private placement underwriter was issued a warrant to purchase 250,000
shares of the Company's common stock at $.95 per share. The number of shares
exercisable as well as the per share exercise price are subject to adjustment
upon the occurrence of certain events. This warrant expires on November 21,
1999. In addition, the underwriter will receive as a commission, 10% of the
proceeds received by the Company upon exercise of the A and B Warrants described
above.
In May 1996, 1,052,631 A Warrants were exercised resulting in net proceeds to
the Company of approximately $1,180,000.
OTHER WARRANTS
During May 1992, the Company issued a warrant to purchase 23,333 shares of its
common stock to the underwriter of the Company's initial public offering. The
exercise price of the warrant is $21.60 per share. The warrant is exercisable
between May 1993 and May 1997.
In February 1993, the Company issued a warrant to the Bank that provided a line-
of-credit (Note 4). The warrant has been amended several times in connection
with amendments to the line-of-credit as well as the current Credit Agreement.
The warrant is currently exercisable for 50,000 shares of common stock at an
exercise price of $1.73 per share and it expires in November 2000. This warrant
includes a provision wherein the share and it expires in November 2000. This
warrant includes a provision wherein the Bank can require the Company to pay in
cash the difference between the fair market value (as defined) of the underlying
common stock of the warrant and the exercise price (the "Appreciation Right").
The Bank informed the Company of its intent to exercise the Appreciation Right
on May 23, 1996. The Company has accrued the entire amount of the Appreciation
Right and it is reflected as a current liability on the accompanying balance
sheet. For purposes the statements of operations, the amount has been recorded
as additional interest expense.
During February 1993, in consideration for providing bridge loans, each of the
two officers was issued a warrant to purchase 16,667 shares of the Company's
common stock at an exercise price of $18.00 per share. These warrants expire in
February 1998. During fiscal 1995, one of the warrants to purchase 16,667
shares was canceled.
F-32
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (continued)
STOCK OPTION PLANS
During March 1992, the Company adopted a Stock Option Plan (the "Plan") under
which the board of directors is authorized to grant options to key directors,
executives, employees and others for the purchase of up to 116,667 shares of the
Company's common stock at prices not less than the fair market value of the
common stock on the date of grant. The term over which the options are
exercisable, which may not exceed five years, is determined by the board of
directors at the time of the grant. Pursuant to the Plan, options to purchase
100,000 shares of the Company's common stock at an exercise price of $3.00 per
share were granted (50,000 options each) to the Company's chief executive
officer and chief financial officer. The options granted were fully vested on
the grant date and expire in March 1997.
In December 1992 and January 1993, the Company's board of directors and
shareholders, respectively, approved a second Stock Option Plan (the "Option
Plan") under which all officers, employees, directors and consultants may
participate. The Plan expires December 2002. Options granted under the Option
Plan may be either incentive stock options or non-qualified stock options and
will generally have a term of ten years from the date of grant, unless otherwise
specified in the option agreement. The exercise prices of incentive stock
options granted under the Option Plan will be at 100% of the fair market value
of the Company's common stock on the date of grant. The exercise prices of
non-qualified stock options granted under the Option Plan cannot be less than
85% of the fair market value of the Company's common stock on the date of grant.
The maximum number of shares of the Company's common stock which may be
optioned and sold under the Option Plan is 150,000. As of August 31, 1996,
stock options to purchase 97,921 shares at exercise prices ranging from $.94 to
$1.38 were granted under the Option Plan. During the year ended August 31,
1996, 11,000 of the granted options have been exercised.
In August 1995, the Company's board of directors approved a Nonstatutory Stock
Option Plan (the "Nonstatutory Plan") under which all officers, employees,
directors and consultants may particpate. The Nonstatutory Plan expires
November 2005. Options granted under the Nonstatutory Plan are non-qualified
stock options and will generally have a term of five years from the date of
grant, unless otherwise specified in the option agreement. The exercise prices
under the Nonstatutory Plan will be at 100% of the fair market value of the
Company's common stock on the date of grant. The maximum
F-33
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
number of shares of the Company's common stock which may be optioned and sold
under the Nonstatutory Plan is 1,035,000. As of August 31, 1996, stock options
to purchase 825,000 shares at exercise prices ranging from $1.38 to $3.00 were
granted under the Nonstatutory Plan, and none of the granted options have been
exercised.
8. INCOME TAXES
There was no provision (benefit) for income taxes during the years ended August
31, 1996 or 1995.
The significant components of the Company's deferred tax assets and liabilities
as of August 31, 1996 are as follows:
Deferred tax assets:
Net operating loss carryforwards $ 809,000
Inventory reserves 329,000
Accrued warrant appreciation right 93,000
Uniform capitalization 81,000
Payroll related accruals 64,000
Sales and accounts receivable reserves 49,000
Warranty accrual 43,000
Other 11,000
-----------
Total deferred tax assets 1,479,000
Valuation allowance (1,473,000)
-----------
Net deferred tax assets 6,000
Deferred tax liabilities:
Accelerated depreciation for tax purposes 1,000
State franchise taxes 5,000
-----------
Total deferred tax liabilities 6,000
-----------
Net deferred taxes $ -
===========
The valuation allowance as of August 31, 1995 was approximately $2,325,000
resulting in a net decrease in the allowances of approximately $851,000 for the
year.
F-34
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The principal reasons for the difference between effective tax rate and the
federal statutory income tax rate are presented in the following table:
YEAR ENDED AUGUST 31
1996 1995
-----------------------
Federal benefit expected at statutory rates $(480,000) $(121,000)
Net operating loss with no current benefit 480,000 121,000
-----------------------
$ - $ -
=======================
In connection with the Company's private placement of common stock (Note 7) a
change of ownership (as defined in Section 382 of the Internal Revenue Code of
1986, as amended) occurred. As a result of this change, the Company's federal
and state net operating loss carryforwards generated through November 21, 1995
(approximately $4,800,000 and $2,500,000, respectively) and the Company's
federal and state Research and Development credits (approximately $126,000 and
$79,000, respectively) will be subject to a total annual limitation in the
amount of approximately $107,000.
As a consequence of the limitation, the Company has at August 31, 1996 a net
operating loss carryover of approximately $2,226,000 for federal income tax
purposes which expires between 2007 and 2010, and a net operating loss
carryforward of approximately $845,000 for state income tax purposes which
expires between 1997 and 2001.
9. 401(k) PLAN
The Company has a tax deferred investment plan (the "401(k) Plan"). All full-
time employees are eligible to participate in the 401(k) Plan. The 401(k) Plan
originally required mandatory employer contributions of 10% of the participants
contributions. The 401(k) Plan was subsequently amended to provide for
discretionary employer contributions. The Company did not make any matching
contributions during the year ended August 31, 1996 and approximately $8,500
during the year ended August 31, 1995.
F-35
Ophthalmic Imaging Systems
Notes to Financial Statements (continued)
10. SUBSEQUENT EVENT
On November 21, 1996, the Company and the Bank amended the Credit Agreement
(Note 4). The amendment to the Credit Agreement included extending the maturity
date to March 5, 1997, and establishing limitations on the amount of net loss
the Company may incur in a quarter. The amended Credit Agreement also requires
the Company to obtain at a minimum $500,000 in new equity by December 6, 1996,
and an additional $250,000 by January 6, 1997.
F-36
OPHTHALMIC IMAGING SYSTEMS
CONDENSED BALANCE SHEET
NOVEMBER 30, 1997
(UNAUDITED)
ASSETS
CURRENT ASSETS:
CASH AND EQUIVALENTS $ 227,513
ACCOUNTS RECEIVABLE, NET 1,662,224
INVENTORIES, NET 936,309
PREPAID EXPENSES AND OTHER CURRENT ASSETS 60,073
-----------
TOTAL CURRENT ASSETS 2,886,119
FURNITURE AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION AND AMORTIZATION OF $804,290 369,849
OTHER ASSETS 9,216
-----------
$ 3,265,184
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
BORROWINGS UNDER LINE OF CREDIT $ 397,932
ACCOUNTS PAYABLE 687,326
ACCRUED LIABILITIES 1,185,215
ACCRUED WARRANT APPRECIATION RIGHT 251,497
DEFERRED EXTENDED WARRANTY REVENUE 127,673
CUSTOMER DEPOSITS 315,743
CURRENT PORTION OF NOTES PAYABLE 700
-----------
TOTAL CURRENT LIABILITIES 2,966,086
NOTES PAYABLE, LESS CURRENT PORTION --
COMMITMENTS
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, NO PAR VALUE, 20,000,000
SHARES AUTHORIZED; NONE ISSUED OR OUTSTANDING --
COMMON STOCK, NO PAR VALUE, 20,000,000 SHARES
AUTHORIZED; 3,905,428 ISSUED AND OUTSTANDING 10,278,615
DEFERRED COMPENSATION (312,213)
ACCUMULATED DEFICIT (9,667,304)
-----------
TOTAL STOCKHOLDERS' EQUITY 299,098
-----------
$ 3,265,184
===========
SEE ACCOMPANYING NOTES.
F-37
OPHTHALMIC IMAGING SYSTEMS
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NOVEMBER 30,
1997 1996
------------------------------
NET REVENUES $1,901,877 $ 884,246
COST OF SALES 1,181,996 621,532
----------------------------
GROSS PROFIT 719,881 262,714
OPERATING EXPENSES:
SALES AND MARKETING 572,418 496,978
GENERAL AND ADMINISTRATIVE 323,418 282,768
RESEARCH AND DEVELOPMENT 212,268 264,781
----------------------------
TOTAL OPERATING EXPENSES 1,108,104 1,044,527
----------------------------
LOSS FROM OPERATIONS (388,223) (781,813)
OTHER EXPENSE, NET (9,129) (13,722)
----------------------------
NET LOSS $ (397,352) $ (795,535)
============================
SHARES USED IN THE CALCULATION OF
NET LOSS PER SHARE 3,905,428 3,320,969
============================
NET LOSS PER SHARE $ (0.10) $ (0.24)
============================
SEE ACCOMPANYING NOTES.
F-38
OPHTHALMIC IMAGING SYSTEMS
CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
(UNAUDITED)
THREE MONTHS ENDED NOVEMBER 30,
1997 1996
-------------------------------
OPERATING ACTIVITIES:
NET LOSS $(397,352) $ (795,535)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 29,459 31,622
STOCK OPTION COMPENSATION EXPENSE 28,681 --
NET (INCREASE) DECREASE IN
CURRENT ASSETS OTHER THAN CASH
AND EQUIVALENTS (126,605) 190,107
NET INCREASE IN CURRENT LIABILITIES
OTHER THAN SHORT-TERM BORROWINGS 485,991 247,986
-----------------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 20,174 (325,820)
INVESTING ACTIVITIES:
PURCHASES OF FURNITURE AND EQUIPMENT (18,526) (104,668)
NET (INCREASE) DECREASE IN OTHER ASSETS (1,831) 23,462
-----------------------------
NET CASH USED IN INVESTING ACTIVITIES (20,357) (81,206)
FINANCING ACTIVITIES:
PRINCIPAL PAYMENTS ON NOTES PAYABLE (1,534) (1,386)
NET PROCEEDS FROM (REPAYMENTS OF)
LINE-OF-CREDIT BORROWINGS 86,930 (269,000)
NET PROCEEDS FROM SALE OF COMMON STOCK -- 85,491
-----------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 85,396 (184,895)
-----------------------------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS 85,213 (591,921)
-----------------------------
CASH AND EQUIVALENTS AT BEGINNING OF
PERIOD 142,300 1,051,325
-----------------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 227,513 $ 459,404
=============================
SEE ACCOMPANYING NOTES.
F-39
Ophthalmic Imaging Systems
Notes to Condensed Financial Statements
Three Month Periods ended November 30, 1997 and 1996
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
THE ACCOMPANYING UNAUDITED CONDENSED BALANCE SHEET AS OF NOVEMBER 30, 1997,
CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED NOVEMBER
30, 1997 AND 1996 AND THE CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH
PERIODS ENDED NOVEMBER 30, 1997 AND 1996 HAVE BEEN PREPARED IN ACCORDANCE WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR INTERIM FINANCIAL INFORMATION AND
WITH THE INSTRUCTIONS TO FORM 10-QSB AND ITEM 310(B) OF REGULATION S-B.
ACCORDINGLY, THEY DO NOT INCLUDE ALL OF THE INFORMATION AND FOOTNOTE DISCLOSURES
REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE FINANCIAL
STATEMENTS. IT IS SUGGESTED THAT THESE CONDENSED FINANCIAL STATEMENTS BE READ IN
CONJUNCTION WITH THE AUDITED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN
THE REGISTRANT'S (THE COMPANY'S) ANNUAL REPORT FOR THE FISCAL YEAR ENDED AUGUST
31, 1997 ON FORM 10-KSB. IN THE OPINION OF MANAGEMENT, THE ACCOMPANYING
CONDENSED FINANCIAL STATEMENTS INCLUDE ALL ADJUSTMENTS, CONSISTING ONLY OF
NORMAL RECURRING ADJUSTMENTS, NECESSARY FOR A FAIR PRESENTATION OF THE COMPANY'S
FINANCIAL POSITION AND RESULTS OF OPERATIONS FOR THE PERIODS PRESENTED. THE
RESULTS OF OPERATIONS FOR THE PERIOD ENDED NOVEMBER 30, 1997 ARE NOT NECESSARILY
INDICATIVE OF THE OPERATING RESULTS FOR THE FULL YEAR.
CERTAIN AMOUNTS IN THE FISCAL 1997 FINANCIAL STATEMENTS HAVE BEEN RECLASSIFIED
TO CONFORM WITH THE PRESENTATION IN THE FISCAL 1998 FINANCIAL STATEMENTS.
NOTE 2. NET LOSS PER SHARE
NET LOSS PER SHARE IS COMPUTED USING THE WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING. COMMON EQUIVALENT SHARES FROM STOCK OPTIONS AND
WARRANTS ARE EXCLUDED FROM THE COMPUTATION OF NET LOSS PER SHARE BECAUSE THEIR
EFFECT IS ANTIDILUTIVE.
F-40
Ophthalmic Imaging Systems
Notes to Condensed Financial Statements
Three Month Periods ended November 30, 1997 and 1996
(Unaudited)
NOTE 3. LINE OF CREDIT
IN APRIL 1995, THE COMPANY ENTERED INTO A REVOLVING LINE OF CREDIT AGREEMENT
(THE "CREDIT AGREEMENT") WITH A BANK (THE "BANK") WHICH, AFTER SEVERAL
AMENDMENTS, EXPIRED ON NOVEMBER 7, 1997. THE MAXIMUM AMOUNT AVAILABLE UNDER THE
TERMS OF THE CREDIT AGREEMENT WAS $750,000 AND WAS BASED UPON ELIGIBLE
OUTSTANDING ACCOUNTS RECEIVABLE BALANCES. BORROWINGS UNDER THE CREDIT AGREEMENT
BORE INTEREST AT THE BANK'S PRIME LENDING RATE PLUS THREE PERCENT AND WERE
SECURED BY VIRTUALLY ALL ASSETS OF THE COMPANY. THE CREDIT AGREEMENT ALSO
CONTAINED CERTAIN RESTRICTIVE COVENANTS WHICH PROVIDED FOR, AMONG OTHER THINGS,
CERTAIN WORKING CAPITAL AND NET WORTH BALANCE AND RATIOS. THE CREDIT AGREEMENT
WAS SUBSEQUENTLY CONVERTED TO A FULL RECOURSE ACCOUNTS RECEIVABLE CREDIT
AGREEMENT.
ON NOVEMBER 18, 1997, THE COMPANY ENTERED INTO AN ACCOUNTS RECEIVABLE CREDIT
AGREEMENT (THE "AGREEMENT") WITH THE BANK, AND ALL AMOUNTS OUTSTANDING UNDER THE
CREDIT AGREEMENT WERE CONSIDERED TO BE THE INITIAL ADVANCE UNDER THE AGREEMENT.
THE AGREEMENT ALLOWS FOR UP TO AN 80% ADVANCE RATE ON ELIGIBLE ACCOUNTS
RECEIVABLE BALANCES, AND THE MAXIMUM BORROWING BASE UNDER THE AGREEMENT IS $1.2
MILLION. THE BANK HAS FULL RECOURSE AGAINST THE COMPANY AND THE AGREEMENT
EXPIRES IN NOVEMBER 1998. BORROWINGS UNDER THE AGREEMENT BEAR INTEREST AT THE
BANK'S PRIME LENDING RATE PLUS 4%. IN ADDITION, THE BANK WILL CHARGE MONTHLY AN
ADMINISTRATIVE FEE EQUAL TO THE GREATER OF 1/2% OF THE AVERAGE DAILY BALANCE
FOR THE MONTH OR $1,200. UNDER THE TERMS OF THE AGREEMENT, BORROWINGS ARE
SECURED BY SUBSTANTIALLY ALL OF THE COMPANY'S ASSETS.
NOTE 4. PRIVATE PLACEMENT
IN NOVEMBER 1995, THE COMPANY COMPLETED A PRIVATE PLACEMENT OF 1,368,421 SHARES
OF ITS COMMON STOCK WITH DETACHABLE WARRANTS. THE NET PROCEEDS FROM THIS
OFFERING WAS APPROXIMATELY $1,075,000. ALONG WITH EACH SHARE OF COMMON STOCK
ISSUED, THE PURCHASERS WERE GIVEN AN "A WARRANT" AND "B WARRANT" TO PURCHASE
SHARES OF THE COMPANY'S COMMON STOCK. THE A AND B WARRANTS PER SHARE EXERCISE
PRICES WERE $1.25 AND $1.75, RESPECTIVELY. THE A AND B WARRANTS EXPIRED ON
FEBRUARY 19, 1997 AS AMENDED AND NOVEMBER 21, 1997, RESPECTIVELY.
THE PRIVATE PLACEMENT UNDERWRITER WAS ISSUED A WARRANT TO PURCHASE 250,000
SHARES OF THE COMPANY'S COMMON STOCK AT $.95 PER SHARE. THE NUMBER OF SHARES
EXERCISABLE AS WELL AS THE PER SHARE EXERCISE PRICE ARE SUBJECT TO ADJUSTMENT
UPON THE OCCURRENCE OF CERTAIN EVENTS. THIS WARRANT EXPIRES ON NOVEMBER 21,
1999. IN ADDITION, THE UNDERWRITER WILL RECEIVE AS A COMMISSION, 10% OF THE
PROCEEDS RECEIVED BY THE COMPANY UPON EXERCISE OF THE A AND B WARRANTS DESCRIBED
ABOVE.
F-41
Ophthalmic Imaging Systems
Notes to Condensed Financial Statements
Three Month Periods ended November 30, 1997 and 1996
(Unaudited)
NOTE 5. NONSTATUTORY STOCK OPTION PLAN
IN OCTOBER 1997, THE COMPANY'S BOARD OF DIRECTORS APPROVED THE 1997 NONSTATUTORY
STOCK OPTION PLAN (THE "PLAN") UNDER WHICH ALL OFFICERS, EMPLOYEES DIRECTORS AND
CONSULTANTS MAY PARTICIPATE. THE PLAN EXPIRES IN OCTOBER 2002. OPTIONS GRANTED
UNDER THE PLAN ARE NON-QUALIFIED STOCK OPTIONS AND WILL HAVE A TERM OF NOT
LONGER THAN TEN (10) YEARS FROM THE DATE OF GRANT, UNLESS OTHERWISE SPECIFIED IN
THE OPTION AGREEMENT. THE EXERCISE PRICES UNDER THE PLAN WILL GENERALLY BE AT
100% OF THE FAIR MARKET VALUE OF THE COMPANY'S COMMON STOCK ON THE DATE OF
GRANT. THE MAXIMUM NUMBER OF SHARES OF THE COMPANY'S COMMON STOCK WHICH MAY BE
OPTIONED AND SOLD UNDER THE PLAN IS 1,000,000, OF WHICH 861,500 OPTIONS REMAINED
AVAILABLE FOR GRANTING AS OF NOVEMBER 30, 1997. AS OF NOVEMBER 30, 1997, STOCK
OPTIONS TO PURCHASE 138,500 SHARES AT EXERCISE PRICES OF $1.09 WERE GRANTED AND
OUTSTANDING UNDER THE PLAN AND NONE OF THE GRANTED OPTIONS WERE EXERCISED.
F-42
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
give effect to Premier's cumulative purchases through February 26, 1998 of 51%
of OISI's outstanding common shares, accounted for as a purchase business
combination. The pro forma condensed combined statements of operations for the
year ended March 31, 1997 and the nine month period ending December 31, 1997
have been prepared as if the acquisition had occurred on April 1, 1996. The pro
forma condensed combined balance sheet as of December 31, 1997 has been prepared
as if the acquisition had occurred on December 31, 1997. Premier's condensed
financial information included in these pro forma condensed combined financial
statements was derived from the unaudited pro forma condensed combined financial
information included in its Form 8-K/A filed on November 14, 1997. Accordingly,
Premier's condensed statements of operations included in these pro forma
condensed combined statements of operations for the year ended March 31, 1997
and for the nine months ended December 31, 1997 give effect to Premier's
September 30, 1997 acquisition of EyeSys Technologies, Inc. as if it had
occurred on April 1, 1996 and April 1, 1997, respectively.
The unaudited pro forma adjustments are described in the accompanying notes.
The unaudited pro forma adjustments represent Premier's preliminary
determination of the necessary adjustments and are based upon certain
assumptions Premier considers reasonable under the circumstances. Final amounts
may differ from those set forth below.
The unaudited pro forma financial information presented does not consider
any future events which may occur. The unaudited pro forma financial information
presented does not attempt to quantify any operating expense synergies or cost
reductions of the combined operations of Premier and OISI that may be realized.
Nor does the unaudited pro forma financial information consider the incremental
expense, capital or conversion costs which may be incurred.
THE UNAUDITED PRO FORMA FINANCIAL INFORMATION IS PRESENTED FOR
INFORMATIONAL PURPOSES ONLY AND IS NOT NECESSARILY INDICATIVE OF THE OPERATING
RESULTS OR FINANCIAL POSITION THAT WOULD HAVE OCCURRED HAD THE ACQUISITION BEEN
CONSUMMATED AT THE DATES INDICATED, NOR IS IT NECESSARILY INDICATIVE OF FUTURE
OPERATING RESULTS OR FINANCIAL POSITION OF PREMIER FOLLOWING THE ACQUISITION.
The unaudited pro forma condensed financial information should be read in
conjunction with the consolidated financial statements of Premier and the
financial statements of OISI and the related notes thereto contained in (i)
Premier's Annual Report on Form 10-K for the fiscal year ended March 31, 1997,
as amended, and (ii) OISI's audited financial statements for the fiscal years
ended August 31, 1997, 1996 and 1995 included in this Form 8-K, and (iii)
Premier's Form 8-K/A filed on November 14, 1997.
F-43
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
PREMIER LASER SYSTEMS, INC.
As of December 31, 1997 (1)
------------------------------------------------------------------
Pro Forma
Pro Forma Condensed
Premier Laser OISI Adjustments Combined (3)
------------- ---------- ----------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 7,482,315 $ 227,513 $ (2,479,488) (2) $ 5,230,340
Short-term investments 9,737,929 - - 9,737,929
Restricted cash 2,150,000 - - 2,150,000
Accounts receivable, net 8,155,927 1,662,224 - 9,818,151
Inventories 6,817,980 936,309 - 7,754,289
Prepaid expenses and other
current assets 3,529,982 60,073 - 3,590,055
------------ ----------- ------------ ------------
Total Current Assets 37,874,133 2,886,119 (2,479,488) 38,280,764
------------ ----------- ------------ ------------
Property and equipment,
net 1,282,856 369,849 - 1,652,705
Intangibles, net 9,357,723 - 1,581,000 (2) 10,938,723
Goodwill 5,297,661 - 57,000 (2) 5,354,661
Other assets 1,152,641 9,216 (882,642)(4(a)) 279,215
------------ ----------- ------------ ------------
$ 54,965,014 $ 3,265,184 $ (1,724,130) $ 56,506,068
============ =========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,151,051 $ 687,326 $ - $ 3,838,377
Line of credit 1,935,529 397,932 - 2,333,461
Accrued compensation and
related costs 496,175 333,337 - 829,512
Accrued liabilities 2,351,796 1,546,791 835,320 (2) 4,733,907
Notes payable and current
portion of capital lease
obligations 204,301 700 - 205,001
------------ ----------- ------------ ------------
Total current liabilities 8,138,852 2,966,086 835,320 11,940,258
------------ ----------- ------------ ------------
Long-term liabilities:
Capital lease obligations 169,933 - - 169,933
Minority interest in
consolidated subsidiary - - 146,558 (4(b)) 146,558
------------ ----------- ------------ ------------
Total long-term liabilities 169,933 - 146,558 316,491
------------ ----------- ------------ ------------
Commitments and contingencies
Shareholders' equity
Common stock 69,561,989 10,278,615 (10,033,525)(2)(4(c)) 69,807,079
Common stock-Class E-1 4,769,878 - - 4,769,878
Common stock-Class E-2 4,769,878 - - 4,769,878
Class A warrants 2,295,328 - - 2,295,328
Class B warrants 1,491,797 - - 1,491,797
Warrants to purchase Class A
common stock 192,130 - - 192,130
Deferred compensation - (312,213) 312,213 (4(c)) -
Accumulated deficit (36,424,771) (9,667,304) 7,015,304 (2)(4(c)) (39,076,771)
------------ ----------- ------------ ------------
Total shareholders' equity 46,656,229 299,098 (2,706,008) 44,249,319
------------ ----------- ------------ ------------
$ 54,965,014 $ 3,265,184 $ (1,724,130) $ 56,506,068
============ =========== ============ ============
See notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-44
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
PREMIER LASER SYSTEMS, INC.
Pro Forma Nine Months Ended December 31, 1997 (1)
--------------------------------------------------------------------
Pro Forma
Pro Forma Condensed
Premier Laser OISI Adjustments Combined (3)
----------------- ----------- ----------- -------------
Net sales $ 13,407,609 $ 5,357,840 $ - $ 18,765,449
Cost of sales 7,810,533 4,083,260 - 11,893,793
------------ ----------- ---------- ------------
Gross profit 5,597,076 1,274,580 - 6,871,656
Selling and marketing expenses 4,110,067 1,374,040 5,484,107
Research and development expenses 2,288,182 785,034 22,950 (2) 3,096,166
General and administrative expenses 3,662,819 880,412 126,303 (2) 4,669,534
In-process research and development
related to EyeSys Technologies, Inc. 9,200,000 - - 9,200,000
acquisition
Merger related and integration costs 2,146,912 - - 2,146,912
------------ ----------- ---------- ------------
Loss from operations (15,810,904) (1,764,906) (149,253) (17,725,063)
Interest income (expense), net 401,929 (48,684) - 353,245
Other income (expense), net 1,263,212 - - 1,263,212
Minority interest in net loss of
consolidated subsidiary - - 888,659 (4(d)) 888,659
------------ ----------- ---------- ------------
Net income (loss) $(14,145,763) $(1,813,590) $ 739,406 $(15,219,947)
============ =========== ========== ============
Net loss per share $ (1.22) $ (0.48) $ (1.31)
============ =========== ============
Shares used in the computation of
net loss per share 11,550,210 3,810,604 11,577,232
============ =========== ============
See notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-45
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
PREMIER LASER SYSTEMS, INC.
Pro Forma Year Ended March 31, 1997 (1)
---------------------------------------------------------
Pro Forma
Premier Pro Forma Condensed
Laser OISI Adjustments Combined (3)
----------- ----------- ----------- ------------
Net sales $13,628,641 $ 5,963,625 $ - $ 19,592,266
Cost of sales 8,880,761 4,057,852 - 12,938,613
----------- ----------- --------- ------------
Gross profit 4,747,880 1,905,773 - 6,653,653
Selling and marketing expenses 6,444,437 1,622,063 - 8,066,500
Research and development expenses 2,786,237 975,612 30,600(2) 3,792,449
General and administrative expenses 3,665,213 892,277 168,404(2) 4,725,894
Write off of investment in Mattan
Corporation 881,010 - - 881,010
Termination of strategic alliance
with IBC 331,740 - - 331,740
In-process research and development
acquired in the Data.Site
acquisition 250,000 - - 250,000
----------- ----------- --------- ------------
Loss from operations (9,610,757) (1,584,179) (199,004) (11,393,940)
Interest income (expense), net (227,529) (226,887) - (454,416)
Minority interest in net loss of
consolidated subsidiary - - 887,422(4(d)) 887,422
------------ ----------- --------- ------------
Net income (loss) $(9,838,286) $(1,811,066) $ 688,418 $(10,960,934)
=========== =========== ========= ============
Net loss per share $ (1.39) $ (0.58) $ (1.54)
=========== =========== ============
Shares used in the computation of
net loss per share 7,069,994 3,107,293 7,097,016
=========== =========== ============
See notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-46
Notes To Unaudited Pro Forma
Condensed Combined Financial Statements
1. Basis of Presentation
Premier's condensed combined financial information included in these pro
forma condensed combined financial statements was derived from the
unaudited pro forma condensed combined financial information included in
its Form 8-K/A filed on November 14, 1997. Accordingly, Premier's condensed
statements of operations included in these pro forma condensed combined
statements of operations for the year ended March 31, 1997 and for the nine
months ended December 31, 1997 give effect to Premier's September 30, 1997
acquisition of Eyesys Technologies, Inc. as if it had occurred on April 1,
1996 and April 1, 1997, respectively.
The unaudited pro forma condensed financial information gives effect to
Premier's cumulative purchases through February 26, 1998 of 51% of OISI's
voting common stock, accounted for as a purchase business combination.
Accordingly, the pro forma financial information reflects the combination
of OISI's balances, the allocation of the excess purchase price over the
amount paid for Premier's 51% ownership interest (see Note 2) and a 49%
minority interest in OISI's net losses and net assets.
OISI's condensed financial information included in these pro forma
condensed combined financial statements was derived from its historical
financial statements which are based on a fiscal year ending August 31.
Accordingly, the results of operations for OISI included in the unaudited
pro forma condensed combined statements of operations for the year ended
March 31, 1997 and the nine month period ended December 31, 1997 were
derived from OISI's historical financial statements for the twelve months
ended February 28, 1997 and the nine months ended November 30, 1997; and,
the balance sheet amounts included in the unaudited pro forma condensed
combined balance sheet at December 31, 1997 were derived from OISI's
historical balance sheet at November 30, 1997.
2. Purchase Business Combination
Premier's aggregate purchase price for 51% of the outstanding common shares
of OISI amounted to $4,442,000 and consisted of cash of $3,362,000 (of
which $883,000 was paid prior to December 31, 1997), 27,022 shares of
Premier common stock valued at $245,000 and estimated related expenses of
$835,000. For purposes of allocating the purchase price, the carrying
values of OISI's recorded assets and liabilities were assumed to represent
their fair values. The excess of Premier's purchase price over its 51%
share of the carrying value of OISI's net assets amounted to $4,290,000 and
has been preliminarily allocated to the following intangible assets in the
pro forma condensed financial statements on the basis of 51% of the
estimated fair values:
In process research and development $2,652,000
==========
Developed technology (five year life) $ 153,000
Assembled work force (five year life) 357,000
Trade names and trademark (thirteen year life) 561,000
Customer related intangible assets (ten year life) 510,000
----------
$1,581,000
==========
Goodwill (twenty year life) $ 57,000
==========
The amount allocated to in process research and development was determined
in part by independent appraisal and is expected to be expensed entirely in
the quarter ending March 31, 1998. The amount is reflected in the pro forma
condensed combined balance sheet as a direct charge to the accumulated
deficit at December 31, 1997.
The amounts and lives above represent Premier management's preliminary
determinations and are based on certain assumptions considered by
management to be reasonable under the circumstances. Final amounts may
differ.
F-47
Notes to Unaudited Pro Forma
Condensed Combined Financial Statements (continued)
The pro forma condensed combined statements of operations include the
following amounts to reflect the amortization of the aforementioned
intangible assets for the periods indicated:
Nine-months ended Year ended
December 31, 1997 March 31, 1997
----------------- --------------
Developed technology $ 22,950 $ 30,600
======== ========
Assembled workforce $ 53,550 $ 71,400
Customer-related intangible 38,250 51,000
Trademarks and trade names 32,365 43,154
Goodwill 2,138 2,850
-------- --------
$126,303 $168,404
======== ========
3. Contingent Consideration
In connection with Premier's purchase of 980,360 shares of OISI common
stock, 1,960,720 warrants to purchase additional shares of Premier common
stock were issued. The warrants become exercisable in two equal increments
in 1998 and 1999 only in the event that net sales of qualified products, as
defined, exceed certain defined amounts for each period. In the event that
the sales targets are achieved for both years, additional purchase price of
$490,000 would be recorded as an increase to goodwill. The unaudited pro
forma condensed combined financial statements do not include adjustments
for the contingent consideration. The effect of including the contingent
consideration in the purchase allocation would not be material to pro forma
total assets, pro forma amortization expense, pro forma net loss, or pro
forma net loss per share for the nine months ended December 31, 1997 and
the year ended March 31, 1997.
4. Pro Forma Combination Eliminations and Minority Interest
The following pro forma adjustments were made to reflect the combination
of OISI's balances with Premier's and the 49% minority interest in OISI's
net assets and net losses:
(a) Reflects the elimination of Premier's existing investment in OISI at
December 31, 1997.
(b) Reflects the 49% minority interest in OISI's net assets at December
31, 1997.
(c) Reflects the elimination of the equity of OISI upon the consolidation
with Premier.
(d) Reflects the 49% minority interest in the net loss of OISI.
F-48
Notes to Unaudited Pro Forma
Condensed Combined Financial Statements (continued)
5. Net Loss Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement No. 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes the dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement No. 128 requirements. The pro forma condensed combined
shares used in the computation of net loss per share have been increased by
27,022 shares of Premier common stock (See Note 2).
F-49
INDEX TO EXHIBITS
Exhibit 99.1 Stock Purchase Agreement dated February 25, 1998 between Premier
and Ophthalmic.
Exhibit 99.2 Form of Class C Warrant.
Exhibit 99.3 Form of Class D Warrant.
Exhibit 99.4 Purchase Agreement dated February 25, 1998 between Premier and
Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D.
Exhibit 99.5 Class C Warrant dated February 25, 1998 issued by Premier to Mark
S. Blumenkranz, M.D. and Recia Blumenkranz, M.D.
Exhibit 99.6 Class D Warrant dated February 25, 1998 issued by Premier to Mark
S. Blumenkranz, M.D. and Recia Blumenkranz, M.D.
Exhibit 99.7 Registration Rights Agreement dated February 25, 1998 between
Premier and Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D.
Exhibit 99.8 Purchase Agreement dated February 25, 1998 between Premier and
Stanley Chang, M.D.
Exhibit 99.9 Class C Warrant dated February 25, 1998 issued by Premier to
Stanley Chang, M.D.
Exhibit 99.10 Class D Warrant dated February 25, 1998 issued by Premier to
Stanley Chang, M.D.
Exhibit 99.11 Registration Rights Agreement dated February 25, 1998 between
Premier and Stanley Chang, M.D.
Exhibit 99.12 Purchase Agreement dated February 25, 1998 between Premier and
JB Oxford & Company.
Exhibit 99.13 Class C Warrant dated February 25, 1998 issued by Premier to
JB Oxford & Company.
Exhibit 99.14 Class D Warrant dated February 25, 1998 issued by Premier to
JB Oxford & Company.
Exhibit 99.15 Series C Warrant Certificate dated November 21, 1995 issued by
Ophthalmic to JB Oxford & Company.
Exhibit 99.16 Consent to Transfer of Warrant dated February 25, 1998 between
Ophthalmic and Premier.
Exhibit 99.17 Warrant Agreement dated November 21, 1995 between Ophthalmic
and JB Oxford & Company.
I-1
Exhibit 99.18 Registration Rights Agreement dated February 25, 1998 between
Premier and JB Oxford & Company.
Exhibit 99.19 Premier press release dated February 26, 1998.
Exhibit 99.20 Premier press release dated February 27, 1998.
Exhibit 99.21 Consent of Ernst & Young LLP, Independent Auditors to
Ophthalmic.
I-2