[OIS LETTERHEAD]
Martin James
Senior Assistant Chief Accountant
Division of Corporation Finance
Mail Stop 0306
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: OPHTHALMIC IMAGING SYSTEMS
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2004
SEC FILE NO. 1-11140
Dear Mr. James:
Set forth herein are the responses of Ophthalmic Imaging Systems (the
"COMPANY") to the comments contained in the comment letter of the staff of the
Securities and Exchange Commission (the "COMMISSION"), dated May 9, 2005, with
respect to the Company's Form 10-KSB for the year ended December 31, 2004 (the
"FORM 10-KSB"). Attached hereto as Exhibit A is a clean version of the proposed
Amendment to the Form 10-KSB (the "FORM 10-KSB/A").
Courtesy copies of this letter and clean and marked versions of the
proposed Form 10-KSB/A have been sent to the Staff's examiners via courier. The
marked copy of the Form 10-KSB/A indicates the changes from the Form 10-KSB as
previously filed with the Commission.
For your convenience, we have reprinted the Staff's written comments below
prior to the Company's responses.
FORM 10-KSB AS DECEMBER 31, 2004
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Financial Statements
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Note 1: Summary of Significant Accounting Policies
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Revenue Recognition
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1. We note your response to our prior comment 2 in which you state that you
typically require a deposit from the customer upon accepting an order.
Please tell us how you account for the deposits and when you recognize the
amounts into revenue.
The Company records the deposits it receives from customers as a liability on
the balance sheet until we ship the product to the customer. When the invoice is
generated for the shipment, the
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deposit amount is applied to total amount of the order shipped, thus reducing
the balance due from the customer to reflect the amount that exceeded the
deposit that was received.
The receipt of a deposit has no effect on when we recognize revenue. Our revenue
recognition policy follows the guidelines presented under SAB 101, SAB 104 and
EITF 00-21 as stated previously in our response letter filed on April 29, 2005
to comment 2 of your previous comment letter dated April 12, 2005.
2. In a related matter, you state that in order to assure collectibility you
assist customers in obtaining leasing terms when appropriate.
Supplementally address the following:
a) Identify the leased item or amount being financed in these
arrangements.
We refer our customers to a third party leasing company (preferred provider) to
finance their equipment over a period of time if they desire, or to pay us
directly under our normal credit terms. If a customer chooses, and the leasing
company accepts them, the agreement is between the customer and the third party
leasing company. The Company retains no credit risk nor receives any commission
in the leasing transactions. The customer typically finances the entire order if
they decide to lease.
b) Tell whether you act as lessor in these arrangements and, if so, tell
us whether these are capital leases or operating leases pursuant SFAS
13.
We do not act as lessor in these arrangements and as such SFAS 13 does not
apply.
c) Discuss how you account for revenues and any leased equipment under
these leasing arrangements and explain how your accounting complies
with SFAS 13 and related guidance.
The Company's revenue recognition policy is not affected by our customer's
decision to either pay us in full directly or to finance their equipment through
a third party lessor.
3. Please refer to your response to our prior comment 5 and address the
following:
a) We note that the Convertible Term Note agreement dated 4/27/04 and
filed as an exhibit with your Form 8-K dated 4/29/04 indicates that
the fixed conversion price was designated at $1.22 per share. Please
explain how that agreement differs from the term sheet to which you
refer in your response and explain why the term sheet supercedes the
note agreement.
The term sheet does not differ from the Investment Agreement. The term sheet is
the basis of understanding between the two parties in agreeing to the material
terms to be included in the Investment Agreement, Registration Rights Agreement
and other legal documents that encompass the entire agreement. Among the
material items that were defined in the term sheet was the method of determining
the conversion price that was to be set in the Investment Agreement between the
Company and Laurus. The intent of the two parties was to set the fixed
conversion price at a premium of 105% of the estimated fair value of the stock.
The estimated
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fair value was to be set based on the average closing price of the three trading
days with volume prior to the signing of the Investment Agreement. The 5%
premium was then added to the estimated fair value to establish the $1.22 fixed
conversion price. The term sheet does not supercede the Investment Agreement but
defines the mechanism that was used in computing the conversion price that is
included in the Investment Agreement.
b) In addition, clearly explain to us why a beneficial conversion feature
did not exist at the date of note issuance although even when the
terms of both the term sheet and note agreement resulted in a
conversion price of $1.22 per share and that price was less than the
$1.50 market value of your common stock on the same day.
The intent of the parties was to set the fixed conversion price at a 5% premium
over the estimated fair value of the Company's stock based on the mechanism in
the term sheet as described in our response to comment 3(a). The basis for
determining the fair value of a stock cannot be established by using one single
point in time. The closing price that the Commission suggests actually occurred
after the agreement was signed. If one point in time were to be used, it should
have been the opening price on the agreement date, the latest price available to
determine fair value, which was $1.05 per share. The premium would still have
been added to the per share price in establishing the fixed conversion price
which then would have been set at $1.10 per share.
The closing price of our stock after the agreement was signed was not indicative
of the average trading price of our stock and in management's opinion and
according to the agreement between the parties, was not equal to the fair value.
The closing price for that day was an anomaly. For the month of April 2004,
including and subsequent to the agreement date, the average closing trading
price of our stock was $1.18 per share. For the month of May 2004, the average
closing price of our stock was $1.10 per share. Additionally, the shares
associated with the agreement were not registered and therefore were not freely
transferable.
Based on the information provided, the company firmly believes that there was no
beneficial conversion feature that existed on the date the agreement was signed.
c) Provide us with a materiality analysis of the impact on your balance
sheet and statements of operations of correctly recording the
beneficial conversion feature on these notes as of April 27, 2004. We
may have further comments.
Based on the information provided in response to comments 3(a) and 3(b) above,
the Company believes that the Investment Agreement transaction was recorded
properly, thus there is no impact on our balance sheet or statement of
operations and therefore an analysis is not applicable.
Item 8, Controls and Procedures - Page 20
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4. Please refer to our prior comment 9. Note that the definition of disclosure
controls and procedures contains two parts:
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o Controls and other procedures of an issuer that are designed to ensure
that information required to be disclosed by the issuer in the reports
that it files or submits under the Act is recorded, processed,
summarized and reported, within the time periods specified in the
Commission's rules and forms.
o Controls and procedures are designed to ensure that information
required to be disclosed by an issuer in the reports that it files or
submits under the Act is accumulated and communicated to the issuer's
management, including its principal executive and principal financial
officers, or person performing similar functions, as appropriate to
allow timely decisions regarding required disclosures.
It appears that your proposed statement still refers only to timely
alerting management. See Exchange Act Rule 13a-15(e). If true, revise your
disclosure to simply state that the disclosure controls and procedures were
effective. Otherwise, you should include the full definition of disclosure
controls and procedures as provided in the Exchange Act.
The requested changes have been made in the Form 10-KSB/A.
* * * * * *
Thank you for your assistance in this matter. Please feel free to call me
at 916-646-2020 if you have any questions about this letter.
Sincerely,
/s/ Ariel Shenhar
Ariel Shenhar, Chief Financial Officer
cc: Heather C. Tress
U.S. Securities and Exchange Commission
Henry I. Rothman, Esq.
Troutman Sanders LLP
4
EXHIBIT A
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _____________
Commission File No. 1-11140
OPHTHALMIC IMAGING SYSTEMS
(Exact name of Registrant as specified in its charter)
California 94-3035367
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(State or other jurisdiction (I.R.S. Employer of incorporation or
organization) Identification No.)
221 Lathrop Way, Suite I, Sacramento, CA 95815
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (916) 646-2020
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par
value
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes /X/ No /
/.
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. Yes / / No /X/.
The issuer's revenues for its most recent fiscal year were $10,818,379
The aggregate market value of the voting and non-voting common stock of
the issuer held by non-affiliates as of February 18, 2005 was approximately
$4,136,898 based upon the average bid and ask price of the common stock as
quoted by Nasdaq OTC Bulletin Board on such date. As of February18, 2005, there
were 15,033,585 issued and outstanding shares of issuer's common stock.
Traditional Small Business Disclosure Format (check one):
Yes /X/ No / /
EXPLANATORY NOTE
Ophthalmic Imaging Systems (the "Company") is filing this Amendment No.
1 on Form 10-KSB/A to amend its Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2004, as filed with the Securities and Exchange Commission on
March 18, 2005 (the "Original Filing"). The purpose of this Amendment No. 1 is
to make certain amendments to Item 8A and to exhibits 31.1 and 31.2. This
Amendment No. 1 does not otherwise update information in the Original Filing to
reflect facts or events occurring subsequent to the date of the Original Filing.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) Business Development
Ophthalmic Imaging Systems (the "Company" or "OIS") was incorporated
under the laws of the State of California on July 14, 1986. The Company,
headquartered in Sacramento, California, is engaged in the business of
designing, developing, manufacturing and marketing digital imaging systems,
image enhancement and analysis software and informatics solutions for use by
practitioners in the ocular health field. The Company's products are used for a
variety of standard diagnostic test procedures performed in most eye care
practices.
Since its inception, the Company has developed products that have
addressed primarily the needs of the ophthalmic angiography markets, both
fluorescein and indocyanine green. The current flagship products in the
Company's angiography line are its WinStation digital imaging systems. These
WinStation products are targeted primarily at retinal specialists and general
ophthalmologists in the diagnosis and treatment of retinal diseases and other
ocular pathologies.
The Company believes, however, that as the U.S. healthcare system moves
toward managed care, the needs of managed care providers are changing the nature
of demand for medical imaging equipment and services. New opportunities in
telemedicine (i.e., the electronic delivery and provision of health care and
consultative services to patients through integrated health information systems
and telecommunications technologies), combined with lower cost imaging devices
and systems, are emerging to allow physicians and managed care organizations to
deliver a high quality of patient care while reducing costs. OIS is applying its
technology in the ophthalmic imaging field to the development of new ocular
imaging devices and exploring telemedicine/managed care applications targeted at
the mass markets of general ophthalmology and optometry.
The Company's objective is to become a leading provider of a diverse
range of complimentary ophthalmic products and services for the ocular health
care industry. The Company is currently focusing its development efforts on
related products for the ocular healthcare market, as well as features and
enhancements to its existing products.
The Company has also entered into the Electronic Medical Records
("EMR") and the Enterprise Practice Management ("EPM") markets. To that end, it
signed an agreement on June 30, 2003 with NextGen Healthcare Information
Systems, Inc., a subsidiary of Quality Systems Inc. (Nasdaq:QSII), a leading
provider of such software platforms to the practitioners market and sale of
their products to the ophthalmic market.
This strategic business alliance diversifies the product portfolio of
the Company, enabling it to offer a wider variety of products and comprehensive
solutions to its customer base of ophthalmology departments and practices. The
NextGen(R) EMR system creates and maintains complete medical records
with minimal effort while it streamlines workflow, controls utilization, and
manages critical data related to patient care outcomes. The NextGen(R) EPM
system is a complete physician management system that provides a common
registration system, enterprise-wide appointment scheduling, referral tracking,
clinical support, a custom report writer, and patient financial management based
on a managed care model.
(b) Business of Issuer
PRODUCTS
WinStation Systems
The Company's WinStation systems and products, delineated by
resolution, are primarily used by retina specialists and general
ophthalmologists to perform a diagnostic test procedure known as fluorescein
angiography. This procedure is used to diagnose and monitor pathology and
provide important information in making treatment decisions. Fluorescein
angiography is performed by injecting a fluorescent dye into the bloodstream. As
the dye circulates through the blood vessels of the eye, the WinStation system,
connected to a medical image capture device called a fundus camera, takes
detailed images of the patient's retina. These digital images can provide a
"road map" for laser treatment.
Over the past 35 years, fluorescein angiography has been performed
using photographic film, which requires special processing and printing. The
Company's WinStation systems allow for immediate diagnosis and treatment of the
patient. Images are automatically transferred to a database and permanently
stored on CD-ROM or DVD-ROM. The Company offers a variety of networking and
printer options.
The Company's WinStation systems also are used by ophthalmologists to
perform indocyanine green ("ICG") angiography. ICG angiography is a diagnostic
test procedure used in the treatment of patients with macular degeneration (a
leading cause of blindness afflicting over 5 million people in the United
States). ICG angiography, used for approximately 5% of patient angiography, is a
dye procedure that can only be performed using a digital imaging system.
Ophthamology Office
The Company has expanded its offerings in ophthalmic informatics to
provide comprehensive solutions for the ophthalmic industry. The Company
recently entered the Electronic Medical Records (EMR) and Enterprise Practice
Management (EPM) markets through a strategic alliance with NextGen Healthcare
Information Systems, Inc., a subsidiary of Quality Systems Inc. (Nasdaq:QSII), a
leading provider of EMR and EPM software platforms expanding its product
portfolio with Ophthalmology Office.
Digital Fundus Imager
The DFI is intended for use by a majority of eye care practitioners,
including most ophthalmologists and optometrists. The DFI is a significantly
lower cost alternative to currently available fundus cameras for use in color
fundus imaging and fluorescein angiography, with the emphasis on imaging the
back of the eye. The DFI is also capable of real-time video capture, database
management and archiving. These features can benefit practitioners, particularly
in the areas of patient screening, tracking and monitoring relative to certain
ocular pathologies, primarily retina, as well as patient record retention.
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Digital Slit Lamp Imager
The DSLI is targeted at a market similar to that of the DFI with an
emphasis on imaging the front of the eye. Slit lamps are imaging devices used in
virtually all ophthalmic and optometric practices. The DSLI adapts to most slit
lamp models and, similar to the DFI, is capable of real-time video capture,
database management and archiving. Similar to the DFI, the DSLI is intended for
use by a majority of eye care practitioners, including optometrists practicing
in retail optometry chain outlets in the United States, teaching institutions
and military hospitals.
Markets
Having reviewed a broad selection of third party sources, including
reports by American Medical Information, the Company believes there are
approximately 16,000 ophthalmologists in the United States and 28,000
ophthalmologists practicing medicine in countries outside the United States.
This group has been traditionally divided into two major groups: anterior
segment (front of the eye) and posterior segment (back of the eye). Within these
groups there are several sub-specialties including medical retina, retina and
vitreous, glaucoma, neurology, plastics, pediatric, cataract, cornea and
refractive surgery. There are approximately 29,000 practicing optometrists (OD)
in the United States, with the preponderance of practicing optometrists
worldwide located in the United States.
The WinStation market consists of current fundus camera owners and
anticipated purchasers of fundus cameras suitable for interfacing with the
Company's digital imaging system products. The Company believes there are now
over 8,500 fundus cameras in clinical use in the United States with an equal
number in the international market. It is estimated that new fundus camera sales
fluctuate between 800 and 1,200 units per year at an average per unit selling
price of approximately $24,000. Of total cameras worldwide, including new and
previously owned, a significant number are suitable to be interfaced with
Company digital imaging systems.
Currently the Company knows of five manufacturers of fundus cameras.
These manufacturers produce a total of 22 models, 9 current and 13 legacy models
for which the Company has designed optical and electronic interfaces for each of
them.
The primary target market for digital angiography systems are retinal
specialists who number approximately 2,000 in the United States. The Company's
digital imaging system sales have been driven in this segment by both
fluorescein and ICG angiography. The Company expects the demand for digital
angiography to continue, as it is becoming a standard of care. The primary
target markets for the DFI and DSLI products are optometrists, the majority of
whom are among the approximately 29,000 practicing in the United States, which
number includes those employed by or affiliated with retail optometry
organizations; retinal specialists and general ophthalmologists who, combined,
number approximately 16,000 in the United States; 5,000 retail optometry chain
outlets in the United States; and teaching institutions and military hospitals.
Sales, Marketing and Distribution
The Company utilizes a direct sales force in marketing its products
throughout the United States and Canada. At December 31, 2004, the Company's
sales and marketing organization consisted of a national sales manager as well
as 9 territory sales representatives and 7 product specialists located
throughout the United States. These regional representatives and product
specialists provide marketing, sales, maintenance, installation and training
services. The Company also utilizes Company-trained contractors to provide
certain installation and training services. Additionally, the Company
subcontracts service maintenance in several cities in the United States and
Canada for routine component replacement.
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Internationally, the Company utilizes ophthalmic distributors that sell
the Company's products in various foreign countries. Each country has trained
sales and technical service staff for their respective territories. MediVision,
the Company's parent, serves as the principal distributor of the Company's
products in Europe and certain other international markets.
To promote sales, the Company prepares brochures, data sheets and
application notes on its products, participates in industry trade shows and
workshops, and advertises in trade journals, press releases, direct mail
solicitations, journal articles, and scientific papers and presentations.
Manufacturing and Production
The Company is primarily a systems integrator with proprietary
software, optical interfaces and electronic fundus camera interfaces. The
Company also manufactures its DFI optical head. Certain components are
subcontracted to outside vendors and assembled at OIS. The Company inventories
and assembles components in a 10,200 square foot facility located in Sacramento,
California. For production of certain components of its products, the Company's
manufacturing strategy is to use subcontractors to minimize time and reduce
capital requirements.
The Company has been audited by the Food and Drug Administration (the
"FDA") and was deemed to conform to Good Manufacturing Practices ("GMP"). The
Company has 510(k)'s on file for its digital angiography products, including its
DFI and DSLI.
Components, Raw Materials and Suppliers
As a systems integrator, a significant number of the major hardware
components in the Company's products are procured from sole source vendors.
Whenever possible, however, the Company seeks multiple vendor sources from which
to procure its components. Moreover, the Company works closely with its
principal component suppliers, such as Dell Computer and Roper Scientific, and
the rest of its vendors to maintain dependable working relationships and to
continually integrate into the manufacturing of its products, whenever possible,
the most current, proven, pertinent technologies. But, as with any manufacturing
concern dependent on subcontractors and component suppliers, significant delays
in receiving products or unexpected vendor price increases could adversely
affect the Company.
Warranties
The Company generally provides a 12-month limited warranty for parts,
labor and shipping charges in connection with the initial sale of its products.
Peripheral products such as monitors, printers and computers also carry the
original manufacturer's warranty.
In the North American market, in order to ensure quality control and
the proper functioning of its products on-site at a doctor's office, the Company
generally installs the system and trains the doctor and the doctor's staff. The
Company also offers service plans for sale to its customers as a supplement to
the original manufacturer's warranties.
Competition
The healthcare industry is characterized by extensive research and
development efforts and rapid technological change. Competition for products
that can diagnose and evaluate eye disease is intense and is expected to
increase. With respect to its WinStation products, the Company is aware of two
primary competitors in the United States, which produce and are delivering
digital fundus imaging systems in volume, Topcon and Zeiss. In addition, there
are a few other small competitors. Both Topcon and Zeiss, however, manufacture
fundus cameras and produce angiography products that interface mostly with their
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own fundus cameras. In contrast, the Company's products interface with different
models of fundus cameras from a wide variety of manufacturers. Three other
companies are known to have systems in primarily the international market, and
the U.S. market to a limited extent, each with small market penetration.
The primary competition for the DFI comes from traditional fundus
cameras manufactured by Topcon, Kowa, Zeiss, Canon and Nidek. None of the
current digital fundus cameras include a digital imaging system or certain other
DFI features, including live motion imaging. These fundus cameras, when combined
with an imaging system comparable to the DFI, are significantly more expensive
than the DFI. The Company is aware of two companies that currently have
prototype units that could be similar in function to the DFI, one of these
companies (Zeiss) has started to sell such a product.
The Company is aware of five primary competitors for the DSLI, namely
Veatch, MVC, Kowa, Helioasis and Lombard. Additionally, there are approximately
four other companies which manufacture similar systems, but these systems
currently have minimal market presence.
Although the Company will continue to work to develop new and improved
products, many companies are engaged in research and development of new devices
and alternative methods to diagnose and evaluate eye disease. Introduction of
such devices and alternative methods could hinder the Company's ability to
compete effectively and could have a material adverse effect on its business,
financial condition and results of operations. Many of the Company's competitors
and potential competitors have substantially greater financial, manufacturing,
marketing, distribution and technical resources than does the Company.
Research and Development
The Company's net research and development expenditures in the years
ended December 31, 2004 and 2003 were approximately $988,000 and $702,000,
respectively. The Company has focused its recent research and development
efforts on new digital image capture products. The Company expects its research
and development expenditures to increase. Research and development is currently
conducted for the Company by MediVision and other outsourced consultants.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
On June 15, 1993, the Company was issued United States Letters Patent
No. 5,220,360 for "Apparatus and Method for Topographical Analysis of the
Retina." This patent relates to the Glaucoma-Scope(R) apparatus, and methods
used by the apparatus for topographically mapping the retina and comparing the
mapping to previous mappings.
Further, although the Company believes that its products do not and
will not infringe on patents or violate proprietary rights of others, it is
possible that its existing rights may not be valid or that infringement of
existing or future patents, trademarks or proprietary rights may occur or be
claimed to occur by third parties.
In the event that any of the Company's products, infringe patents,
trademarks or proprietary rights of others, the Company may be required to
modify the design of such products, change the names under which the products or
services are provided or obtain licenses. There can be no assurance that the
Company will be able to do so in a timely manner, upon acceptable terms and
conditions, or at all. The failure to do any of the foregoing could have a
material adverse effect on the Company. There can be no assurance that the
Company's patents or trademarks, if granted, would be upheld if challenged or
that competitors might not develop similar or superior processes or products
outside the protection of any patents issued to the Company. In addition, there
can be no assurance that the Company will have the
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financial or other resources necessary to enforce or defend a patent or
trademark infringement or proprietary rights violation action. Moreover, if the
Company's products infringe patents, trademarks or proprietary rights of others,
the Company could, under certain circumstances, become liable for damages, which
also could have a material adverse effect on the Company.
The Company also relies on trade secrets, know-how, continuing
technological innovation and other unpatented proprietary technology to maintain
its competitive position. Certain of the proprietary software, optical
interfaces and synchronization modules of the Company's digital imaging systems
are largely proprietary and constitute trade secrets, but the basic computer
hardware, software and video components are purchased from third parties. No
patent applications have been filed with respect thereto. The Company
anticipates aggressively defending its unpatented proprietary technology,
although there is no assurance that others will not independently develop
substantially equivalent proprietary information or techniques, or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its rights to its unpatented trade secrets
and other proprietary technology.
The Company seeks to protect its unpatented proprietary technology, in
part, through proprietary confidentiality and nondisclosure agreements with
employees, consultants and other parties. The Company's confidentiality
agreements with its employees and consultants generally contain industry
standard provisions requiring such individuals to assign to the Company without
additional consideration any inventions conceived or reduced to practice by them
while employed or retained by OIS, subject to customary exceptions. There can be
no assurance that proprietary information agreements with employees, consultants
and others will not be breached, that the Company would have adequate remedies
for any breach or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors.
GOVERNMENT REGULATION
The marketing and sale of the Company's products are subject to certain
domestic and foreign governmental regulations and approvals. Pursuant to Section
510(k) of the Federal Food, Drug and Cosmetic Act ("FDCA"), the Company is
required to file, and has submitted, a pre-marketing notification with the FDA
which provides certain safety and effectiveness information concerning the
Company's diagnostic imaging systems, including its DFI and DSLI. The FDA has
approved the Company's pre-marketing notification submittals, thereby granting
the Company permission to market its products, subject to the general controls
and provisions of the FDCA. The classification of the Company's products
require, among other things, annual registration, listing of devices, good
manufacturing practices, labeling and prohibition against misbranding and
adulteration. Further, because the Company is engaged in international sales,
the Company's products must satisfy certain manufacturing requirements and may
subject the Company to various filing and other regulatory requirements imposed
by foreign governments as a condition to the sale of such products.
The Company has registered its manufacturing facility with both the FDA
and certain California authorities as a medical device manufacturer and operates
such facility under FDA and California requirements concerning Quality System
Requirements ("QSR"). As a medical device manufacturer, the Company is required
to continuously maintain its QSR compliance status and to demonstrate such
compliance during periodic FDA and California inspections. If the facilities do
not meet applicable QSR regulatory requirements, the Company may be required to
implement changes necessary to comply with such regulations.
Although the FDA has made findings which permit the Company to sell its
products in the marketplace, such findings do not constitute FDA approval of
these devices, and the Company cannot predict the effect that future legislation
or regulatory developments may have on its operations.
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Additional regulations, reconsideration of approvals granted under current
regulations, or a change in the manner in which existing statutes and
regulations are interpreted or applied may have a material adverse impact on the
Company's business, financial condition and results of operations. Moreover, new
products and services developed by the Company, if any, also may be subject to
the same or other various federal and state regulations, in addition to those of
the FDA.
INSURANCE
The Company maintains general commercial casualty and property
insurance coverage for its business operations, as well as product liability
insurance. As of December 31, 2004, the Company has not received any product
liability claims and is unaware of any threatened or pending claims. To the
extent that product liability claims are made against the Company in the future,
such claims may have a material adverse impact on the Company.
EMPLOYEES
As of December 31, 2004, the Company had 46 employees of which 45 were
full-time. The Company also engages the services of consultants from time to
time to assist the Company on specific projects in the areas of research and
development, software development, regulatory affairs and product services, as
well as general corporate administration. Certain of these consultants
periodically engage contract engineers as independent consultants for specific
projects.
The Company has no collective bargaining agreements covering any of its
employees, has never experienced any material labor disruption, and is unaware
of any current efforts or plans to organize its employees. The Company considers
its relationship with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases under a noncancelable triple net lease expiring in
June 2007, approximately 10,200 square feet of office, manufacturing and
warehouse space in Sacramento, California. The Company also leases an
approximately 200 square foot sales office in Simsbury, Connecticut on a
month-to-month basis. Management believes that its existing facilities are
suitable and adequate to meet its current needs. The Company pays minimum
monthly lease payments, with respect to these properties, in the aggregate of
approximately $9,000. Management believes its existing leased facilities are
adequately covered by insurance. The Company has no current plans to
significantly renovate, improve or develop any of its leased facilities. The
Company does not have, and does not foresee acquiring, any real estate or
investments in real estate, and is not engaged in any real estate activities.
ITEM 3. LEGAL PROCEEDINGS.
On March 9, 2004, the Company filed a civil action in the United States
District Court for the Eastern District of California against several of its
former employees, led by former vice-president Mark Fukuhara, who have been
doing business for the last two years as Imaging Service Group (ISG) and Zeta
Development Laboratories in El Dorado Hills, California, and several affiliated
persons and companies, including Dale Brodsky, Eyepictures, Inc., Johnny Justice
Jr., and two of his ophthalmic equipment businesses, Zeta Development Labs, Inc.
(doing business as Justice Diagnostic Imaging) and Justice Ophthalmics, Inc. The
complaint alleges claims for misappropriation of trade secrets, violations of
the federal computer fraud and abuse act, copyright infringement, breach of
contract, interference with contract, and false advertising. The complaint seeks
monetary damages as well as injunctive relief against the defendants.
-7-
On August 20, 2004, the United States District Court for the Eastern
District of California granted in part the Company's application for a
preliminary injunction against certain of the defendants. In December 2004 the
Court dismissed Johnny Justice, Jr. as an individual and Justice Ophthalmics,
Inc. from the case. Trial in the matter currently is scheduled for November
2005.
Other than the action referred to above and immaterial claims in the
ordinary course, to the Company's knowledge, there are no material legal
proceedings presently pending or threatened to which the Company (or any of its
directors or officers in their capacity as such) are, or may be, a party or to
which the Company's property is, or may be, subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's 2004 Annual Meeting of Shareholders held on December
22, 2004, the following matters were voted upon and adopted by the votes
indicated:
For Withheld Against Abstain
To elect five individuals to serve as the Board of
Directors of the Company until the next annual 13,750,938 5,528 -- --
meeting of shareholders and until their successors
are elected and qualified.(1) (2)
To ratify the selection by the Board of Directors of
Perry-Smith LLP to be the independent registered 13,752,485 -- 4,633 348
public accountants with respect to the audit of the
Company's financial statements for the fiscal year
ended December 31, 2004
(1) The following were elected to serve as directors at the Annual Meeting
of Shareholders: Gil Allon, Ariel Shenhar, Alon Harris, Michael Benoff
and Yigal Berman.
(2) Reflects votes cast for, and withheld for all directors, except for
Michael Benoff who received 13,750,072 votes for and 6,394 votes
withheld.
There were 1,276,119 non-votes with respect to the matters listed
above.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The shares of common stock of the Company have been listed and
principally quoted on the Nasdaq OTC Bulletin Board under the trading symbol
"OISI" since May 28, 1998 and prior thereto on the Nasdaq Small-Cap Market. The
following table sets forth the high and low prices for the Company's common
stock as reported on the Nasdaq OTC Bulletin Board. These prices reflect
inter-dealer prices, without retail markup, markdown or commissions, and may not
necessarily represent actual transactions.
-8-
Year Ended Year Ended
December 31, 2004 December 31, 2003
----------------------- ----------- ------------
Low High Low High
Bid Ask Bid Ask
----------- ----------- ----------- ------------
First Quarter 0.75 1.35 0.20 0.33
Second Quarter 0.86 1.55 0.30 0.91
Third Quarter 0.50 1.40 0.61 1.25
Fourth Quarter 0.55 1.15 0.92 1.50
On February 18, 2005, the closing price for the Company's common stock,
as reported by the Nasdaq OTC Bulletin Board, was $1.06 per share and there were
approximately 133 shareholders of record.
Dividend Policy
The Company has not paid any cash dividends since its inception and
does not anticipate paying any cash dividends on its common stock in the
foreseeable future. The Company expects to retain its earnings, if any, to
provide funds for the expansion of its business. Future dividend policy will be
determined periodically by the Board of Directors based upon conditions then
existing, including the Company's earnings and financial condition, capital
requirements and other relevant factors.
Equity Compensation Plans
The following table sets forth certain information, as at December 31,
2004, with respect to the Company's equity compensation plans:
NUMBER OF SECURITIES
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
ISSUED UPON EXERCISE OF EXERCISE PRICE OF FUTURE ISSUANCE
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY COMPENSATION
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS PLANS
Equity compensation plans
approved by security holders. 695,500(a) $.69 91,000(b)
---------- ---- ---------
Equity compensation plans
not approved by security
holders...................... 1,623,633(c) $.44 1,009,999(d)
------------ ---- ------------
Total...................... 2,319,133 $.51 1,100,999
========= ---- =========
(a) Represents 36,500 options granted under the Company's 1992 Stock Option
Plan under which no further options may be granted and 659,000 options
granted under the Company's 2003 Stock Option Plan.
(b) Represents shares available for grant under the 2003 Stock Option Plan
to employees and directors of, consultants to, and to non-employee
directors of, the Company. Upon the expiration, cancellation or
termination of unexercised options, shares subject to options under the
plan will again be available for the grant of options under the
applicable plan.
-9-
(c) Includes 60,000 shares subject to options granted under the Company's
1997 Stock Option Plan under which no further options may be granted.
Also includes 75,000 and 1,383,333 shares subject to options granted
under the 1995 Stock Option Plan (the "1995 Plan") and the 2000 Stock
Option Plan (the "2000 Plan"), respectively. Also includes 105,300
options granted under individual stock option plans.
(d) Includes 920,000 and 89,999 shares available for future grant under the
1995 Plan and the 2000 Plan respectively, to employees and directors
of, consultants to, and to non-employee directors of the Company. Upon
the expiration, cancellation or termination of unexercised options,
shares subject to options under the 1995 Plan and the 2000 Plan will
again be available for the grant of options under the applicable plan.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
General
This report contains forward-looking statements within the meaning of
the federal securities laws. The Company intends such forward-looking statements
to be covered by the safe harbor provisions contained in Section 27A of the
Securities Act of 1933, as amended, and in Section 21E of the Exchange Act of
1934, as amended. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on its operations and future prospects include, but are not limited to,
changes in: economic conditions generally and the medical instruments market
specifically, legislative or regulatory changes affecting the Company, including
changes in healthcare regulation, the availability of working capital, the
introduction of competing products, and other risk factors described herein.
These risks and uncertainties, together with the other risks described from time
to time in reports and documents filed by the Company with the SEC should be
considered in evaluating forward-looking statements, and undue reliance should
not be placed on such statements. Indeed, it is likely that some of the
Company's assumptions will prove to be incorrect. The Company's actual results
and financial position will vary from those projected or implied in the
forward-looking statements, and the variances may be material.
To date, the Company has designed, developed, manufactured and marketed
ophthalmic digital imaging systems and informatics solutions and has derived
substantially all of its revenues from the sale of such products. The primary
target market for the Company's digital angiography systems and related products
has traditionally been retinal specialists.
In October 2001, MediVision, the Company's parent, signed an agreement
for the acquisition of a minority interest by Agfa Gevaert N.V. creating an
alliance for joint development and marketing of an integrated, digital
Ophthalmology PACS solution. The marketing efforts under this agreement are
anticipated to be implemented beginning in the US market, and are to include
efforts by the Company. The extent and focus of future research and development
efforts will depend, in large measure, on direction from MediVision, including
potential collaborative projects between MediVision and the Company.
In June 2003, the Company signed a licensing agreement with NextGen
Healthcare Information Systems, Inc., a subsidiary of Quality Systems, Inc.
Under the terms of the agreement, OIS will become a value added reseller of two
computer-based practice management and medical records products: NextGen(R)
Electronic Medical Records (EMR) and NextGen(R) Enterprise Practice Management
(EPM).
-10-
This strategic business alliance diversifies the product portfolio of
the Company, enabling it to offer a wider variety of products and comprehensive
solutions to its customer base of ophthalmology departments and practices. The
NextGen(R) EMR system creates and maintains complete medical records with
minimal effort while it streamlines workflow, controls utilization, and manages
critical data related to patient care outcomes. The NextGen(R) EPM system is a
complete physician management system that provides a common registration system,
enterprise-wide appointment scheduling, referral tracking, clinical support, a
custom report writer, and patient financial management based on a managed care
model.
In May 2003, the Company entered into a $150,000 line of credit
agreement with its bank. The line is secured by a pledged investment with the
bank equal to the amount of the line of credit. The interest charged on the line
of credit is at prime rate and is due monthly. Advances on the line of credit
mature on September 10, 2008.
In September 2003, the Company entered into a $1,200,000 debt agreement
with Laurus Master Fund, Ltd ("Laurus") in the form of a three-year convertible
note with a fixed coupon price of 6.5% per annum. The convertible note may be
converted by Laurus into the Company's Common Stock at a fixed conversion price
of $1.07. The Company also issued seven-year warrants to Laurus to purchase
375,000 shares of the Company's Common Stock at exercise prices ranging between
$1.23 and $1.61 per share.
In April 2004, the Company entered into a $1,000,000 debt agreement
with Laurus in the form of a three-year convertible note with a fixed coupon
price of 6.5% per annum. The convertible note may be converted by Laurus into
the Company's Common Stock at a fixed conversion price of $1.22. The Company
also issued five-year warrants to Laurus to purchase 313,000 shares of the
Company's Common Stock at exercise prices ranging between $1.40 and $1.83 per
share.
On December 28, 2004, the Company entered into an investment agreement
with Dutchess Private Equities Fund II, LP ("Dutchess") providing for an equity
line of credit. Pursuant to the investment agreement, Dutchess has agreed to
provide the Company with up to $9,000,000 of funding during the thirty month
period beginning on the date that the registration statement the Company agreed
to file providing for the resale of the shares of common stock issuable under
the investment agreement is declared effective by the Securities and Exchange
Commission. During this thirty month period, the Company may request a drawdown
under the investment agreement by selling shares of its common stock to
Dutchess, and Dutchess will be obligated to purchase the shares. The Company is
under no obligation to request any drawdowns under the investment agreement.
The amount that the Company can request in any drawdown notice is, at
the Company's election, the greater of (A) up to 200% of the average daily
volume of the Company's common stock for the ten trading days prior to the date
of the drawdown notice multiplied by the average of the three daily closing bid
prices for the common stock immediately preceding the date of the drawdown
notice or (B) $100,000; provided that the Company may not request more than
$1,000,000 in any single drawdown. At December 31, 2004, the Company had not
requested any drawdowns.
At December 31, 2004, the Company had a stockholders' equity of
approximately $2,397,000 and its current assets exceeded its current liabilities
by approximately $1,742,000. The convertible loan agreements with Laurus that
were entered into during 2003 and 2004 have had a favorable impact on the
Company's current ratio. There can be no assurance that the Company will be able
to achieve or sustain significant positive cash flows, revenues or profitability
in the future.
-11-
MediVision Transactions
During the period of August 2000 through July 1, 2001, the Company
executed several promissory notes in favor of MediVision Medical Imaging LTD.
("MediVision"), an Israeli corporation and majority shareholder in the Company.
The Short-Term Note had a maximum principal balance of $260,000 available, while
the Working Capital Funding Agreement and Amendment No.1 to this agreement
provided an additional funding of $2,500,000. Both Notes and the Amendment bear
interest at the rate of 9.3% per annum and are secured by all of the Company's
assets. The principal amount outstanding, together with any and all accrued
interest on the Working Capital Note and Amendment, was payable by August 31,
2003, except that MediVision could, at its option, at any time convert any
amount of principal and interest then outstanding into shares of the Company's
common stock at a conversion price of $.80 per share on the Working Capital Note
and $0.185 per share on the Amendment No.1 to the Working Capital Note.
In May 2003, the Company and MediVision entered in Amendment No. 2 to
the Working Capital Funding Agreement and the Short Term Note whereby the
repayment terms on the debt were extended on all principal and interest due
until January 1, 2005.
In June 2003, MediVision exercised its option, as stipulated in the
Working Capital Funding Agreement, Amendment No. 1, to convert $1,150,000 of
principal and interest at a conversion price of $0.185 per share into 6,216,216
common shares of stock.
In August 2002, the Company's Board of Directors, at MediVision's
request, authorized the Company to guarantee and/or provide security interests
in its assets for certain of MediVision's loans with financial institutions, on
the maximum aggregate amount of approximately $1,900,000. In August 2002,
MediVision subordinated to the financial institutions its security position in
the Company's assets, which had been granted in consideration of loans to the
Company from MediVision. In December 2002, the Company's Board of Directors
approved that the Company enter into and issue a debenture in favor of the banks
to act as security for the debt of MediVision, such debenture shall be secured
by a first lien on all of the Company's assets. Such debenture and lien were
signed in December 2002. The amount owed to the financial institutions by
MediVision and secured by the Company as of December 31, 2004 was approximately
$447,000.
In March 2004, the Company's Board of Directors approved a line of
credit to MediVision of $1,000,000 at 9.3% interest for two years. In January
2005 the Company's Board of Directors approved an additional loan advance of
$150,000 for a 30 day term. At December 31, 2004 the Company had recorded a net
amount due from MediVision of approximately $1,056,000.
On February 28, 2005, the Company and MediVision entered into a Loan
and Security Agreement and Promissory Note whereby the Company agreed to loan
MediVision up to two million dollars ($2,000,000). The loan agreement
incorporates the $1,150,000 previously approved by the Company's Board of
Directors. Under the terms of the agreement, interest is 7.25% per annum and is
payable on February 28, 2006 along with all outstanding principal due at that
date. The note is secured by 2,409,000 of the 11,130,151 shares of the Company's
common stock owned by MediVision. The number of shares is based on the average
closing price of shares of stock of the Company during the period covering the
last ten (10) business days of February, 2005, which average closing price was
$1.11, discounted by 25%. In the event that MediVision were to sell any shares
it owns in the Company during the period of the agreement, a minimum of 50% of
the proceeds from such sales would be required to be paid to the Company to
reduce the outstanding amount owed.
Pursuant to a Common Stock Purchase Agreement dated as of June 1, 2004
between MediVision and S2 Partners LP, MediVision agreed to sell 550,000 of the
Company's common stock to S2 Partners LP
-12-
at a price of $1.35 per share. On June 23, 2004, MediVision, through
Nollenberger Capital Partners Inc. acting as its agent, sold an additional
500,000 shares of the Company's common stock at a price of $1.38 per share. As a
result of the foregoing transactions, as of December 31, 2004, MediVision
currently owns approximately 74% of the Company's outstanding common stock.
New Accounting Pronouncements.
Financial Accounting Pronouncement FAS 123(R)
In December 2004 the FASB issued Statement Number 123 (revised 2004)
(FAS 23 (R)), Share-Based Payments. FAS 123 (R) requires all entities to
recognize compensation expense in an amount equal to the fair value of
share-based payments such as stock options granted to employees. The Company is
required to apply FAS 23 (R) on a modified prospective method. Under this
method, the Company is required to record compensation expense (as previous
awards continue to vest) for the unvested portion of previously granted awards
that remain outstanding at the date of adoption. In addition, the Company may
elect to adopt FAS 123 (R) by restating previously issued financial statements,
basing the expense on that previously reported in their pro forma disclosures
required by FAS 123. FAS 123 (R) is effective for the first reporting period
beginning after June 15, 2005. For companies filing under Regulation S-B, FAS
123 (R) is effective the beginning of the first interim or annual reporting
period that begins after December 15, 2005, which for the Company will be the
first quarter of the year ending December 31, 2006. The Company anticipates
adopting SFAS No. 123(R) beginning in the quarter ending March 31, 2006.
Management has not completed its evaluation of the effect that FAS 123 (R) will
have, but believes that the effect will be consistent with its previous pro
forma disclosures.
Financial Accounting Pronouncement FAS 151
In November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS
151). SFAS 151 requires that abnormal amounts of idle facility expense, freight,
handling costs and spoilage be recognized as current period charges. Further,
SFAS 151 requires the allocation of fixed production overheads to inventory
based on the normal capacity of the production facilities. Unallocated overheads
must be recognized as an expense in the period in which they are incurred. SFAS
151 is effective for inventory costs incurred beginning in the first quarter of
2006. The Company is currently evaluating the effect of SFAS 151 on its
financial statements and related disclosures.
-13-
Results of Operations
Selected Financial Data
YEARS ENDED DECEMBER 31,
----------------------------------------------
2004 2003 2002
------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 10,818,379 $ 9,944,827 $ 8,465,707
Cost of sales 4,290,049 3,955,680 3,535,316
------------ ------------ ------------
Gross profit 6,528,330 5,989,147 4,930,391
------------ ------------ ------------
Operating expenses:
Sales, marketing, general
and administrative 4,141,865 3,984,482 3,426,616
Research and development 987,769 702,020 558,999
------------ ------------ ------------
Total operating expenses 5,129,634 4,686,502 3,985,615
------------ ------------ ------------
Income from operations 1,398,696 1,302,645 944,776
Other expense, net (252,100) (269,451) (360,953)
------------ ------------ ------------
Net income before provision
for income tax benefit 1,146,596 1,033,194 583,823
Provision for income tax
benefit 558,000 405,000 (19,000)
Net income $ 1,704,596 $ 1,438,194 $ 564,823
============ ============ ============
Basic earnings per share $ .12 $ .13 $ .07
============ ============ ============
Shares used in the
calculation of basic
earnings per share 14,771,112 11,267,493 8,138,305
============ ============ ============
Diluted earnings per share $ .11 $ .12 $ .07
============ ============ ============
Shares used in the
calculation of diluted
earnings per share 15,772,214 11,877,205 8,138,305
============ ============ ============
STATEMENT OF CASH FLOWS DATA:
Net cash provided by
operating activities $ 1,116,940 $ 258,304 $ 725,846
Net cash used in investing
activities (22,625) (175,360) (72,331)
Net cash (used in) provided
by financing activities (376,039) 805,856 (342,207)
------------ ------------ ------------
Net increase in cash and cash
equivalents $ 718,276 $ 888,800 $ 311,308
============ ============ ============
-14-
COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER 31,
2003
Revenues
The Company's revenues for the year ended December 31, 2004 were
$10,818,379 representing an increase of approximately 9% from revenues of
$9,944,827 for the year ended December 31, 2003. The increased revenue levels
for 2004 include revenues from initial deliveries of the Company's newest
digital angiography system, the WinStation 3200TM and the OIS WebStationTM
common software platform released in October of 2004. Digital angiography
systems and peripherals, including upgrades, accounted for approximately 89% and
92% of the Company's total revenues during 2004 and 2003, respectively. Service
revenue for the years ended 2004 and 2003 accounted for approximately 11% and 8%
of the Company's total revenue, respectively. The increased revenue levels
during the 2004 period reflect the impact of a number of factors discussed in
further detail below.
Gross Margins
Gross margins were approximately 60% during fiscal 2004 and 2003. The
fiscal 2004 and 2003 gross margin percentage reflects the continued impact of
sales of higher margin products as well as economies of scale associated with
the fixed and semi-variable overhead cost absorption over increased revenue
levels. It is anticipated that our gross margins will decrease as our sales of
the Ophthamology Office software products become more significant, since the
gross margins associated with such sales are below the majority of the products
that we currently market.
Sales and Marketing, Expenses
Sales and marketing expenses accounted for approximately 27% of total
revenues during fiscal 2004 and 29% during fiscal 2003. Expense levels were
$2,936,100 during fiscal 2004, representing no significant change compared to
expenses of $2,915,848 in fiscal 2003.
General and Administrative Expenses
General and administrative expenses accounted for approximately 11% of
total revenues during both fiscal 2004 and 2003, respectively. Expense levels
increased to $1,205,765 during fiscal 2004, representing an increase of
approximately 13% compared to expenses of $1,068,634. Increased expenses were
primarily the result of increased investor relations expenses and legal
expenses.
Research and Development Expenses
Research and development expenses increased by approximately 41% to
$987,769 during 2004 from $702,020 during 2003. Such expenses accounted for
approximately 9% and 7% of total revenues during fiscal 2004 and fiscal 2003,
respectively. The Company has focused its recent research and development
efforts on new digital image capture products. The Company expects its research
and development expenditures to increase. Research and development is currently
conducted for the Company by MediVision and other outside consultants.
Interest and Other Expense, net
Interest and other expense were $252,100 during 2004 compared to
$269,451 during 2003. These amounts were comprised principally of interest
expense associated with the convertible notes to Laurus during fiscal 2004 and
2003, respectively and interest expense associated with financing arrangements
provided to certain of the Company's customers in connection with sales of its
products. Interest income in both periods was insignificant.
-15-
Income Taxes
At December 31, 2004 and 2003, management reviewed recent operating
results and projected future operating results. At the end of each of these
years, management determined that it was more likely than not that a portion of
the deferred tax assets attributable to net operating losses would likely be
realized. Due to the Company's limited history of profitable operations,
management has recorded a valuation allowance of $2,504,000 and $3,497,000 at
December 31, 2004 and 2003, respectively. The amount of the valuation allowance
will be adjusted in the future when management determines that it is more likely
than not the deferred assets will be realized.
The Company has at December 31, 2004, a net operating loss carryover of
approximately $4,531,200 for federal income tax purposes which expires between
2007 and 2020, and a net operating loss carryforward of approximately $1,305,700
for California state income tax purposes which expires through 2010. The State
of California suspended the application of net operating losses for the 2002 and
2003 fiscal years and extended the carry forward period two years. Federal tax
credit carryforwards of approximately $174,900 will begin to expire in 2007. Due
to changes in ownership which occurred in prior years, Section 382 of the
Internal Revenue Code provides for significant limitations on the utilization of
net operating loss carryforwards and tax credits. As a result of these
limitations, a portion of these loss and credit carryovers may expire without
being utilized.
Net Income
The Company reported net income of $1,704,596, or $0.12 per share basic
and $0.11 per share diluted, during 2004, compared to a net income of
$1,438,194, or $0.13 per share basic and $0.12 per share diluted, during 2003.
The per share figures are basic amounts in accordance with Financial Accounting
Standards No. 128 (see Note 1 of Notes to Financial Statements included in Item
7 of this Form 10-KSB).
The results of operations for 2004 reflect the positive impact of the
Company's ongoing attention and resources to core marketing, selling and
corporate operations issues. Growing sales of the Company's digital angiography
products reflect the market acceptance of these products and the ongoing product
quality improvements made to meet customers' requirements. There can be no
assurance, however, that there will be continued market acceptance of the
Company's products or that any continued market acceptance will result in
significant future unit sales or revenue contribution.
Export Sales
Revenues from sales to customers located outside of the United States
accounted for approximately 12% and 9% of the Company's net sales for 2004 and
2003, respectively. Sales to MediVision, included in these totals, accounted for
approximately 57% or $744,000 and 56% or $482,000 for 2004 and 2003,
respectively.
Seasonality
The Company's most effective marketing tool is the demonstration and
display of its products at the annual meeting of the American Academy of
Ophthalmology held during the fall of each year, with a significant amount of
the Company's sales orders generated during or shortly after this meeting.
Accordingly, the Company expends a considerable amount of time and resources
during the fourth quarter of its fiscal year preparing for this event.
-16-
COMPARISON OF YEAR ENDED DECEMBER 31, 2003 TO YEAR ENDED DECEMBER 31,
2002
Revenues
The Company's revenues for the year ended December 31, 2003 were
$9,944,827 representing an increase of approximately 17% from revenues of
$8,465,707 for the year ended December 31, 2002. The increased revenue levels
for 2003 include revenues from initial deliveries of the Company's newest
digital angiography system, the WinStation 4000. Digital angiography systems and
peripherals, including upgrades, accounted for approximately 92% and 93% of the
Company's total revenues during 2003 and 2002, respectively. Service revenue for
the years ended 2003 and 2002 accounted for approximately 8% and 7% of the
Company's total revenue, respectively. The increased revenue levels during the
2003 period reflect the impact of a number of factors discussed in further
detail below.
Gross Margins
Gross margins were approximately 60% during fiscal 2003 versus
approximately 58% for fiscal 2002. The fiscal 2003 gross margin percentage
reflects the continued impact of sales of higher margin products as well as
economies of scale associated with the fixed and semi-variable overhead cost
absorption over increased revenue levels. It is anticipated that our gross
margins will decrease as our sales of the NextGen software products become more
significant, since the gross margins associated with such sales are below the
majority of the products that we currently market.
Sales, Marketing, General and Administrative Expenses
Sales, marketing, general and administrative expenses accounted for
approximately 40% of total revenues during both fiscal 2003 and fiscal 2002.
Expense levels increased to $3,984,482 during fiscal 2003, representing an
increase of approximately 16% compared to expenses of $3,426,616 in 2002.
Primary contributing factors to the increased expenses were salaries and support
costs related to direct sales and other support personnel added during and
subsequent to the third quarter of 2002, as well as other costs in connection
with the increased sales levels in 2003.
Research and Development Expenses
Research and development expenses increased by approximately 26% to
$702,020 during 2003 from $558,999 during 2002. Such expenses accounted for
approximately 7% of total revenues during fiscal 2003 and fiscal 2002. The
Company has focused its recent research and development efforts on new digital
image capture products. The Company expects its research and development
expenditures to increase as a result of the research and development conducted
by MediVision on the Company's behalf. In addition, the Company anticipates an
increase in reported expenses that were previously reimbursed to the Company, in
connection with the "Computer Guided Laser Therapy" project, by the Israel-U.S.
Binational Industrial Research and Development Foundation, that has since been
completed.
Interest and Other Expense, net
Interest and other expense were $269,451 during 2003 compared to
$360,953 during 2002. These amounts were comprised principally of interest
expense associated with net borrowings from MediVision during fiscal 2003 and
2002, respectively and interest expense associated with financing arrangements
provided to certain of the Company's customers in connection with sales of its
products. Interest income in both periods was insignificant.
-17-
Income Taxes
At December 31, 2003 and 2002, management reviewed recent operating
results and projected future operating results. At the end of each of these
years, management determined that it was more likely than not that a portion of
the deferred tax assets attributable to net operating losses would likely be
realized. Due to the Company's limited history of profitable operations,
management has recorded a valuation allowance of $3,497,000 and $5,053,000 at
December 31, 2003 and 2002, respectively. The amount of the valuation allowance
will be adjusted in the future when management determines that it is more likely
than not the deferred assets will be realized.
The Company has at December 31, 2003, a net operating loss carryover of
approximately $5,410,500 for federal income tax purposes which expires between
2007 and 2020, and a net operating loss carryforward of approximately $2,088,800
for California state income tax purposes which expires through 2010. The State
of California has suspended the application of net operating losses for the 2002
and 2003 fiscal years and extended the carry forward period two years. Federal
tax credit carryforwards of approximately $174,900 will begin to expire in 2007.
Due to changes in ownership which occurred in prior years, Section 382 of the
Internal Revenue Code provides for significant limitations on the utilization of
net operating loss carryforwards and tax credits. As a result of these
limitations, a portion of these loss and credit carryovers will expire without
being utilized.
Net Income
The Company reported net income of $1,438,194, or $0.13 per share basic
and $0.12 per share diluted, during 2003, compared to a net income of $564,823,
or $0.07 per share basic and diluted, during 2002. The per share figures are
basic amounts in accordance with Financial Accounting Standards No. 128 (see
Note 1 of Notes to Financial Statements included in Item 7 of this Form 10-KSB).
The results of operations for 2003 reflect the positive impact of the
Company's ongoing attention and resources to core marketing, selling and
corporate operations issues. Growing sales of the Company's digital angiography
products reflect the market acceptance of these products and the ongoing product
quality improvements made to meet customers' requirements.
Export Sales
Revenues from sales to customers located outside of the United States
accounted for approximately 9% and 11% of the Company's net sales for 2003 and
2002, respectively. Sales to MediVision, included in these totals, accounted for
approximately 56% or $482,000 and 55% or $514,000 for 2003 and 2002,
respectively.
-18-
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash of $1,116,940 during
2004 as compared to generating cash of $258,304 during 2003. The cash provided
by operations during 2004 was substantially due to the Company's increased
profitability which amounts were partially offset by increased receivables and
increased deferred tax asset.
Net cash used in investing activities was $22,625 during 2004 versus
$175,360 during 2003. The Company's primary investing activities consisted of
minor capital asset acquisitions. The Company anticipates continued certain
near-term capital expenditures in connection with increasing its pool of
demonstration equipment, as well as its ongoing efforts to upgrade its existing
management information and corporate communication systems. The Company
anticipates that related expenditures, if any, will be financed from cash flow
from operations, or other financing arrangements available to Company, if any.
The Company used cash of $376,039 in financing activities during 2004
as compared to providing $805,856 during 2003. The cash used in financing
activities during 2004 was principally from repayments of borrowings under
existing arrangements with MediVision and advances to MediVision during fiscal
2004. These amounts were offset by the signing of the $1,000,000 convertible
debt instrument with Laurus. The cash generated during 2003 was principally from
the signing of the $1,200,000 convertible debt instrument offset by repayment of
principal on notes payable under existing arrangements with MediVision.
Principal payments on notes payable other than to MediVision in both years were
minimal.
In June 2003, MediVision exercised its option, as stipulated in the
Amendment No.1, to convert $1,150,000 of principal and interest at a conversion
price of $0.185 per share into 6,216,216 common shares of stock.
On December 31, 2004, the Company's cash and cash equivalents were
$1,990,310. Management anticipates that additional sources of capital beyond
those currently available to it may be required to continue funding of research
and development for new products and selling and marketing related expenses for
existing products.
The Company will continue to evaluate alternative sources of capital to
meet its cash requirements, including other asset or debt financing, issuing
equity securities and entering into other financing arrangements and is hopeful
that it will be successful in this regard. There can be no assurance, however,
that any of the contemplated financing arrangements described herein will be
available and, if available, can be obtained on terms favorable to the Company.
Trends
The Company is unaware of any known trends, events or uncertainties
that have or are reasonably likely to have a material impact on the Company's
financial condition or results from operations.
Inflation
The Company believes that inflation has not had a material or
significant impact on the Company's revenue or on its results from operations.
Off Balance Sheet Arrangements
None.
-19-
ITEM 7. FINANCIAL STATEMENTS.
The Company's financial statements for the year ended December 31, 2004
are attached hereto.
-20-
OPHTHALMIC IMAGING SYSTEMS
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003 AND
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
AND
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
OPHTHALMIC IMAGING SYSTEMS
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003 AND
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
TABLE OF CONTENTS
-----------------
PAGE
----
Report of Independent Registered Public Accounting Firm 1
Balance Sheet 2-3
Statement of Income 4
Statement of Stockholders' Equity 5
Statement of Cash Flows 6-7
Notes to Financial Statements 8-23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Ophthalmic Imaging Systems
We have audited the accompanying balance sheet of Ophthalmic Imaging
Systems as of December 31, 2004 and 2003, and the related statements of income,
stockholders' equity, and cash flows for the years then ended. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits 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 as of December 31, 2004 and 2003, and the results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Perry-Smith LLP
Sacramento, California
March 2, 2005
F-1
OPHTHALMIC IMAGING SYSTEMS
BALANCE SHEET
DECEMBER 31, 2004 AND 2003
2004 2003
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $1,990,310 $1,272,034
Accounts receivable, net of allowance for
doubtful accounts of approximately
$301,839 and $361,175 1,855,009 1,536,610
Inventories (Note 2) 515,391 416,420
Prepaid expenses and other current assets 189,393 214,653
Deferred tax asset (Note 9) 1,029,000 500,000
---------- ----------
Total current assets 5,579,103 3,939,717
---------- ----------
Restricted cash (Note 7) 150,000 150,000
Furniture and equipment, at cost, net (Note 3) 150,487 150,912
Receivable from related party (Note 6) 1,055,512
Other assets 137,929 82,821
---------- ----------
Total assets $7,073,031 $4,323,450
========== ==========
(Continued)
F-2
OPHTHALMIC IMAGING SYSTEMS
BALANCE SHEET
(Continued)
DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 472,167 $ 523,539
Accrued liabilities (Note 4) 1,558,861 1,387,563
Deferred extended warranty revenue (Note 4) 793,972 557,143
Customer deposits 226,850 201,797
Income taxes payable (Note 9) 9,224 102,650
Notes payable - short term portion (Note 5) 776,338 409,613
Notes payable to related party (Note 6) 200,979
------------ ------------
Total current liabilities 3,837,412 3,383,284
------------ ------------
Line of credit (Note 7) 150,000
Notes payable, less current portion (Note 5) 838,362 763,637
------------ ------------
Total liabilities 4,675,774 4,296,921
------------ ------------
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, no par value, 35,000,000 shares authorized;
15,033,585 and 14,403,929 shares issued and outstanding
in 2004 and 2003, respectively 14,502,320 13,836,188
Accumulated deficit (12,105,063) (13,809,659)
------------ ------------
Total stockholders' equity 2,397,257 26,529
------------ ------------
Total liabilities and stockholders' equity $ 7,073,031 $ 4,323,450
============ ============
The accompanying notes are an integral
part of these financial statements.
F-3
OPHTHALMIC IMAGING SYSTEMS
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
Revenues:
Net sales $ 10,818,379 $ 9,944,827
Cost of sales 4,290,049 3,955,680
Gross profit 6,528,330 5,989,147
------------ ------------
Operating expenses:
Sales and marketing 2,936,100 2,915,848
General and administrative 1,205,765 1,068,634
Research and development (Note 6) 987,769 702,020
------------ ------------
Total operating expenses 5,129,634 4,686,502
------------ ------------
Income from operations 1,398,696 1,302,645
Other income (expense):
Interest expense (210,106) (295,353)
Other income (expense) (54,860) 20,722
Interest income 12,866 5,180
Total other income (expense) (252,100) (269,451)
------------ ------------
Net income before provision for income
tax benefit 1,146,596 1,033,194
------------ ------------
Provision for income tax benefit (Note 9) 558,000 405,000
------------ ------------
Net income $ 1,704,596 $ 1,438,194
============ ============
Basic earnings per share $ 0.12 $ 0.13
============ ============
Shares used in the calculation of basic
earnings per share 14,771,112 11,267,493
============ ============
Diluted earnings per share $ 0.11 $ 0.12
============ ============
Shares used in the calculation of diluted
earnings per share 15,772,214 11,887,205
============ ============
The accompanying notes are an integral
part of these financial statements.
F-4
OPHTHALMIC IMAGING SYSTEMS
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
COMMON STOCK TOTAL
--------------------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
---------------- --------------- --------------- ----------------
Balance, January 1, 2003 8,138,305 $ 12,630,604 $ (15,247,853) $ (2,617,249)
Conversion of principal and interest
to common stock (Note 6) 6,216,216 1,150,000 1,150,000
Conversion of principal and interest
to common stock (Note 5) 31,074 33,250 33,250
Exercise of non-qualified stock
options (Note 8) 18,334 22,334 22,334
Net income 1,438,194 1,438,194
---------------- --------------- --------------- ----------------
Balance, December 31, 2003 14,403,929 13,836,188 (13,809,659) 26,529
Conversion of principal and interest
to common stock (Note 5) 576,322 616,665 616,665
Exercise of non-qualified stock
options (Note 8) 53,334 49,467 49,467
Net income 1,704,596 1,704,596
---------------- --------------- --------------- ----------------
Balance, December 31, 2004 15,033,585 $ 14,502,320 $ (12,105,063) $ 2,397,257
================ =============== =============== ================
The accompanying notes are an integral
part of these financial statements.
F-5
OPHTHALMIC IMAGING SYSTEMS
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
----------- -----------
Cash flows from operating activities:
Net income $ 1,704,596 $ 1,438,194
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 116,186 53,000
Non-cash payment of interest 35,869 6,791
Loss on disposition of equipment 1,499
Net changes in operating assets and liabilities:
Accounts receivable (318,399) (633,932)
Inventories (98,971) 47,551
Prepaid expenses and other current
assets 25,260 (123,906)
Deferred tax asset (529,000) (449,000)
Net increase in other assets (108,482) (109,495)
Accounts payable (51,372) (67,435)
Accrued liabilities 171,298 (83,514)
Deferred extended warranty revenue 236,829 289,255
Customer deposits 25,053 (141,855)
Income taxes payable (93,426) 32,650
----------- -----------
Net cash provided by operating activities 1,116,940 258,304
----------- -----------
Cash flows from investing activities:
Acquisition of furniture and equipment (23,515) (25,360)
Proceeds from disposition of equipment 890
Increase in restricted cash (150,000)
----------- -----------
Net cash used in investing activities (22,625) (175,360)
----------- -----------
Cash flows from financing activities:
Repayment of notes payable to related
parties, net (200,979) (562,311)
Principal payments on notes payable (19,015) (4,167)
Advances to related parties (1,055,512)
(Repayments of) proceeds from borrowings under
line of credit, net (150,000) 150,000
Proceeds from notes payable, other 1,000,000 1,200,000
Proceeds from sale of stock 49,467 22,334
----------- -----------
Net cash (used in) provided by financing
activities (376,039) 805,856
----------- -----------
Net increase in cash and cash equivalents 718,276 888,800
Cash and cash equivalents, beginning of the year 1,272,034 383,234
----------- -----------
Cash and cash equivalents, end of the year $ 1,990,310 $ 1,272,034
=========== ===========
(Continued)
F-6
OPHTHALMIC IMAGING SYSTEMS
STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
----------- -----------
Supplemental schedule of non cash financing activities:
Conversion of related party notes payable to
common stock $ 1,150,000
Repayment of notes payable with common stock $ 580,796 $ 26,458
Payment of interest with common stock $ 35,869 $ 6,792
Addition to (reduction in) aggregate debt payable
to significant shareholders in exchange for
inventory and other noncash transactions, net $ (4,150) $ 6,689
Assets acquired with borrowed funds $ 41,261
Supplemental schedule of cash flow information:
Cash paid for taxes $ 70,345 $ 10,500
Cash paid for interest $ 63,833 $ 9,545
The accompanying notes are an integral
part of these financial statements.
F-7
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
1. 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 accounting principles generally accepted in the United States of
America which require management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
Cash and Cash Equivalents
-------------------------
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.
At December 31, 2004, the Company had deposits with carrying amounts of
$1,990,185 and bank balances of $2,254,617. Federally insured balances
totaled $200,000 and uninsured balances totaled $2,054,617 at December
31, 2004.
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 comprised 10% or more of net sales, during the years ended
December 31, 2004 or 2003.
Revenues from sales to customers located outside of the United States
accounted for approximately 12% and 9% of net sales during the years
ended December 31, 2004 and 2003, 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-8
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. 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 derives revenue primarily from the sale, installation and
training services of its products. In accordance with SEC Staff
Accounting Bulletin No. 104, Revenue Recognition, revenue is recognized
when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable, collectibility is
reasonably assured, contractual obligations have been satisfied, and
title and risk have been transferred to the customer. The Company
generally recognizes revenue from installation and training services
when such services are performed. 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 in net sales on a straight-line basis over
the term of the extended warranty contract.
Shipping and Handling Costs
---------------------------
Shipping and handling costs are included with cost of sales.
Advertising Costs
-----------------
Advertising expenditures totaled approximately $82,413 and $50,864, for
the years ended December 31, 2004 and 2003, respectively.
Income Taxes
------------
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets relate
primarily to estimated warranty claims, and deferred tax liabilities
relate primarily to property and equipment. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred tax
assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date
of enactment.
General business credits are accounted for as a reduction of federal
income taxes payable under the flow-through method.
F-9
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
-----------------------------------
At December 31, 2004 and 2003, the Company's financial instruments
included cash, cash equivalents, receivables, accounts payable, accrued
liabilities and borrowings. With the exception of borrowings, the fair
value of these financial instruments approximated their carrying value
because of the short-term nature of these instruments. The fair value
of the Company's borrowings approximated their carrying value based
upon management's review of market prices for financial instruments
with similar characteristics.
Earnings Per Share
------------------
Basic earnings per share (EPS), which excludes dilution, is computed by
dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock, such as stock
options, result in the issuance of common stock which shares in the
earnings of the Company. The treasury stock method is applied to
determine the dilutive effect of stock options in computing diluted
EPS.
Stock Based Compensation
------------------------
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 (the intrinsic
value method). 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 8
for additional disclosures regarding the Company's stock option plans.
F-10
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Based Compensation (Continued)
------------------------------------
Pro forma disclosures of stock-based employee compensation expense
disclosures are as follows:
Year Ended December 31,
------------------------------
2004 2003
-------------- -----------
Net income as reported $ 1,704,596 $ 1,438,194
Deduct: total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effect (8,666) (40,445)
-------------- -----------
Pro forma net income $ 1,695,930 $ 1,397,749
============== ===========
Basic earnings per share - as reported $ 0.12 $ 0.13
============== ===========
Basic earnings per share - pro forma $ 0.11 $ 0.12
============== ===========
Diluted earnings per share - as reported $ 0.11 $ 0.12
============== ===========
Diluted earnings per share - pro forma $ 0.11 $ 0.12
============== ===========
Impact of New Financial Accounting Standards
--------------------------------------------
Stock-Based Compensation
In December 2004 the FASB issued Statement Number 123 (revised 2004)
(FAS 23 (R)), Share-Based Payments. FAS 123 (R) requires all entities
to recognize compensation expense in an amount equal to the fair value
of share-based payments such as stock options granted to employees. The
Company is required to apply FAS 23 (R) on a modified prospective
method. Under this method, the Company is required to record
compensation expense (as previous awards continue to vest) for the
unvested portion of previously granted awards that remain outstanding
at the date of adoption. In addition, the Company may elect to adopt
FAS 123 (R) by restating previously issued financial statements, basing
the expense on that previously reported in their pro forma disclosures
required by FAS 123. For companies filing under Regulation S-B, FAS 123
(R) is effective the beginning of the first interim or annual reporting
period that begins after December 15, 2005, which for the Company will
be the first quarter of the year ending December 31, 2006. The Company
anticipates adopting SFAS No 123 (R) beginning in the quarter ending
March 31, 2006. Management has not completed its evaluation of the
effect that FAS 123 (R) will have, but believes that the effect will be
consistent with its previous pro forma disclosures.
F-11
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventory Costs
---------------
In November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS
151). SFAS 151 requires that abnormal amounts of idle facility expense,
freight, handling costs and spoilage be recognized as current-period
charges. Further, SFAS 151 requires the allocation of fixed production
overheads to inventory based on the normal capacity of the production
facilities. Unallocated overheads must be recognized as an expense in
the period in which they are incurred. SFAS 151 is effective for
inventory costs incurred beginning in 2006. The Company is currently
evaluating the effect of SFAS 151 on the financial statements and
related disclosures.
Reclassifications
-----------------
Certain accounts have been reclassified to conform to the current
year's presentation.
2. INVENTORIES
Inventories consist of the following as of December 31, 2004 and 2003:
2004 2003
------------------ ------------------
Raw materials $ 315,367 $ 230,880
Work-in-process 119,634 59,145
Finished goods 80,390 126,395
------------------ ------------------
$ 515,391 $ 416,420
================== ==================
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following as of December 31,
2004 and 2003:
2004 2003
------------------ ------------------
Research and manufacturing equipment $ 148,941 $ 679,506
Office furniture and equipment 235,603 657,847
Demonstration equipment 19,368 197,104
------------------ ------------------
403,912 1,534,457
Less accumulated depreciation
and amortization (253,425) (1,383,545)
------------------ ------------------
$ 150,487 $ 150,912
================== ==================
F-12
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
4. ACCRUED LIABILITIES AND PRODUCT WARRANTY
Accrued liabilities consist of the following as of December 31, 2004
and 2003:
2004 2003
------------------ ------------------
Accrued compensation $ 565,176 $ 555,817
Accrued warranty expenses 505,851 438,450
Other accrued liabilities 487,834 393,296
------------------ ------------------
$ 1,558,861 $ 1,387,563
================== ==================
Product Warranty and Deferred Warranty Revenue
----------------------------------------------
The Company generally offers a one year warranty to its customers. The
Company's warranty requires it to repair or replace defective products
during the warranty period. At the time product revenue is recognized,
the Company records a liability for estimated costs that may be
incurred under its warranties. The costs are estimated based on
historical experience and any specific warranty issues that have been
identified. (Although historical warranty costs have been within
expectations, there can be no assurance that future warranty costs will
not exceed historical amounts.) The Company periodically assesses the
adequacy of its recorded warranty liability and adjusts the balance as
necessary.
Product warranty reserve changes consist of the following as of
December 31, 2004 and 2003:
2004 2003
------------------ ------------------
Warranty balance at beginning of the year $ 438,450 $ 370,680
Net provisions 236,901 272,770
Warranty costs incurred (169,500) (205,000)
------------------ -------------------
$ 505,851 $ 438,450
================== ==================
In addition to the Company's one-year warranty, the Company offers an
extended warranty for an additional charge to the customer. The Company
records the sale of the extended warranty as deferred revenue and
amortizes the revenue over the term of the agreement, generally one to
two years. At December 31, 2004 and 2003, deferred extended warranty
revenue was $793,972 and $557,143, respectively.
F-13
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. NOTES PAYABLE
Notes payable consist of the following at December 31, 2004 and 2003:
2004 2003
------------------ ------------------
Laurus Master Fund Ltd. #1 $ 579,662 $ 1,173,250
Laurus Master Fund Ltd. #2 1,000,000
Other 35,038
------------------ ------------------
1,614,700 1,173,250
Less: current portion 776,338 409,613
------------------ ------------------
Long-term portion $ 838,362 $ 763,637
================== ==================
Maturities of notes payable are as follows:
Year Ending
December 31,
------------
2005 $ 776,338
2006 701,252
2007 132,416
2008 4,694
------------------
$ 1,614,700
Laurus Master Fund Ltd. #1
--------------------------
On September 25, 2003, the Company entered into a convertible term note
and securities purchase agreement with Laurus Master Fund, Ltd. #1
("Laurus 1"). Pursuant to the agreements, the Company sold to Laurus 1,
a secured convertible term note in the principal amount of $1,200,000
bearing interest at the rate of six and one-half percent (6.5%) per
annum, due September 25, 2006, convertible into shares of its common
stock at a conversion price of $1.07 per share. Under certain
circumstances, both the Company and Laurus 1 may exercise their right
to convert all or a portion of the outstanding principal and interest
into shares of common stock. Loan costs of $118,718 have been
capitalized and are being amortized over the three-year life of the
note. The Company granted to Laurus 1 a subordinated second priority
security interest in its assets to secure the obligations under the
note. Additionally, the Company issued a warrant to Laurus 1 to
purchase 375,000 shares of its common stock at exercise prices ranging
between $1.23 and $1.61 per share (Note 8).
In 2003, the Company opted to pay $26,458 of principal and $6,792 of
interest in 31,074 shares of common stock. In 2004, the Company opted
to pay $580,796 of principal and $35,869 of interest in 576,322 shares
of common stock.
F-14
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. NOTES PAYABLE (Continued)
Laurus Master Fund Ltd. #2
--------------------------
On April 27, 2004, the Company entered into a convertible term note and
securities purchase agreement with Laurus Master Fund, Ltd. #2 ("Laurus
2"). Pursuant to these agreements, the Company sold to Laurus 2, a
secured convertible term note in the principal amount of $1,000,000
bearing interest at the rate of six and one-half percent (6.5%) per
annum, due April 27, 2007, convertible into shares of its common stock
at a conversion price of $1.22 per share. Under certain circumstances,
both the Company and Laurus 2 may exercise their right to convert all
or a portion of the outstanding principal and interest into shares of
common stock. Loan costs of $70,980 have been capitalized and are being
amortized over the three-year life of the note. The Company granted to
Laurus 2 a subordinated second priority security interest in its assets
to secure the obligations under the note. Additionally, the Company
issued a warrant to Laurus 2 to purchase 313,000 shares of its common
stock at exercise prices ranging between $1.40 and $1.83 per share
(Note 8).
6. RELATED PARTY TRANSACTIONS
MediVision
----------
During the period of August 2000 through July 1, 2001, the Company
executed several promissory notes in favor of MediVision Medical
Imaging LTD. ("MediVision"), an Israeli corporation and majority
shareholder in the Company. The "Short-Term Note" had a maximum
principal balance of $260,000 available, while the "Working Capital
Funding Agreement and Amendment No.1" to this agreement provided
additional funding of $2,500,000. Both the Note and the Amendment bear
interest at the rate of 9.3% per annum and are secured by all of the
Company's assets. The principal amount outstanding, together with any
and all accrued interest on the Working Capital Note and Amendment, was
payable by August 31, 2003, except that MediVision may, at its option,
at any time convert any amount of principal and interest then
outstanding into shares of the Company's common stock at a conversion
price of $.80 per share on the Working Capital Note and $0.185 per
share on the Amendment No.1 to the Working Capital Note.
In May 2003, the Company and MediVision entered in Amendment No. 2 to
the Working Capital Funding Agreement and the Short Term Note whereby
the repayment terms on the debt were extended on all principal and
interest due until January 1, 2005. As of December 31, 2004, the
Company has paid the debt owing MediVision by way of cash payments and
noncash intercompany revenue and expense transactions.
In June 2003, MediVision exercised its option, as stipulated in the
Working Capital Funding Agreement, Amendment No. 1, to convert
$1,150,000 of principal and interest at a conversion price of $0.185
per share into 6,216,216 common shares of stock. As a result of the
foregoing transactions, MediVision currently owns approximately 74% of
the Company's outstanding common stock.
F-15
6. RELATED PARTY TRANSACTIONS (Continued)
MediVision (Continued)
----------
In August 2002, the Company's Board of Directors, at MediVision's
request, authorized the Company to guarantee and/or provide security
interests in its assets for certain of MediVision's loans with
financial institutions, on the maximum aggregate amount of
approximately $1,900,000. In August 2002, MediVision subordinated to
the financial institutions its security position in the Company's
assets, which had been granted in consideration of loans to the Company
from MediVision. In December 2002, the Company's Board of Directors
approved that the Company guaranteed certain obligations of MediVision
by issuing a security interest in the Company's assets (Note 10). The
amount guaranteed by the Company, as of December 31, 2004 was
approximately $447,000.
In March 2004, the Company's Board of Directors approved a line of
credit to MediVision of $1,000,000 at 9.3% interest for two years. In
January 2005, the Company's Board of Directors approved an additional
loan advance of $150,000 for a 30 day term. In March 2005, these
agreements were incorporated into a Loan and Security Agreement and
Promissory Note entered into between the parties (see Note 11).
At December 31, 2004, the Company had recorded approximately $1,056,000
of receivable due from MediVision as compared to $200,979 in aggregate
debt and accrued interest owed to MediVision as of December 31, 2003.
The changes are the result of cash payments and the net effect of other
intercompany revenue and expense transactions.
Sales to MediVision during the fiscal years ended December 31, 2004 and
2003 totaled approximately $744,000 and $482,000, respectively. Sales
derived from product shipments to MediVision are made at transfer
pricing which is based on similar volume discounts that would be
available to other resellers or distributors of the Company's products.
During the year ended December 31, 2004 and 2003, the Company paid
$687,100 and $263,200 to MediVision for research and development
performed on behalf of the Company.
MediStrategy Ltd.
-----------------
The Company has a service agreement with MediStrategy Ltd. ("MS"), an
Israeli company owned by Noam Allon, a Director of the Company, serving
on the Board until December 2004. Under the terms of the agreement, MS
provides services to the Company primarily in the business development
field in ophthalmology, including business cooperation, mergers and
acquisitions, identifying and analyzing new lines of business and
defining new product lines or business opportunities to be developed.
All services provided by MS are performed solely by Noam Allon.
F-16
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. RELATED PARTY TRANSACTIONS (Continued)
In consideration for the services provided, the Company agreed to pay
MS a monthly sum of $3,300. In addition, MS is to be paid a yearly
performance bonus of up to $20,000 upon achievement of goals under the
terms of the agreement determined by MS, Noam Allon and the Company's
Chairman of the Board. During the year ended December 31, 2004, MS
earned fees in the amount of $39,600 and a bonus subject to approval,
which has not yet been finalized. $19,800 of the fees has been paid
with the balance being accrued as of December 31, 2004. During the year
ended December 31, 2003, MS earned fees of $39,600 and a bonus of
$10,000, all of which were accrued at December 31, 2003 and paid in
2004.
7. LINE OF CREDIT
In May 2003, the Company entered into a $150,000 line of credit
agreement with its bank. The line is secured by a pledged investment
with the bank equal to the amount of the line of credit. Advances on
the line bear interest at prime (5.25% at December 31, 2004 and 4% at
December 31, 2003) with interest due monthly. The line matures on
September 10, 2008.
8. STOCKHOLDERS' EQUITY
Stock Option Plans
------------------
The Company applies APB 25 and related Interpretations in accounting
for its stock options because, as discussed below, the alternative fair
value accounting 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.
The Company has five stock-based compensation plans and Individual
Stock Option Agreements. Options granted under these plans generally
have a term of ten years from the date of grant unless otherwise
specified in the option agreement. The plans generally expire ten years
from the inception of the plans. Options granted under these agreements
have a vesting period of three to four years. Incentive stock options
under these plans are granted at fair market value on the date of grant
and non-qualified stock options granted can not be less than 85% of the
fair market value on the date of grant. A summary of the Company's
plans as of December 31, 2004 is presented below:
Options Range of Available
Authorized Plan Options Exercise for Future
Plan Name Per Plan Expiration Outstanding Prices Grants
- ------------------------------------- ----------- ------------------ ------------- ---------- -------
1992 Option Plan 150,000 December 2002 36,500 $0.48 - $4.25
1995 Nonstatutory Plan 1,035,000 November 2005 75,000 $0.48 - $0.50 920,000
1997 Nonstatutory Plan 1,000,000 October 2002 60,000 $0.63 - $1.38
Individual Stock Option
Agreements 126,360 November 1998 105,300 $0.63
2000 Option Plan 1,500,000 September 2010 1,383,333 $0.41 89,999
2003 Option Plan 750,000 October 2013 659,000 $0.68 91,000
----------- -----------
2,319,133 1,100,999
=========== ===========
F-17
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
-----------------
A summary of the status of the Company's stock option plans and changes
during the periods is presented below:
Weighted
Average
Exercise
Options Price
------------------ ------------------
Balance, January 1, 2003 1,715,952 $ 0.46
------------------
Options granted 650,000 $ 0.41
Options canceled (576,666) $ 0.41
Options exercised (18,334) $ 0.47
------------------
Balance December 31, 2003 1,770,952 $ 0.46
------------------
Options granted 684,000 $ 0.67
Options canceled (26,666) $ 0.41
Options lapsed (55,819) $ 0.94
Options exercised (53,334) $ 0.48
------------------
Balance December 31, 2004 2,319,133 $ 0.51
==================
The weighted average fair value of options granted during the years
ended December 31, 2004 and 2003 were $.67 and $.41, respectively.
The following table summarizes information about the stock options
outstanding at December 31, 2004:
Options Outstanding Options Exercisable
-------------------------------------------- -----------------------------
Weighted
Average Weighted- Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Number Life Price Number Price
- ------------------------------------ ------------- ------------- ------------- ------------- --------------
$ .31 - $ 1.37 2,292,633 8.3 years $ 0.50 1,525,300 $ 0.43
$ 1.38 - $ 3.00 25,000 1.8 years $ 1.38 25,000 $ 1.38
$ 3.01 - $ 4.50 1,500 1.7 years $ 4.25 1,500 $ 4.25
------------- -------------
2,319,133 1,551,800
============= =============
F-18
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
------------------
Pro forma information regarding net income and net income 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 December 31, 2004 and 2003, respectively; dividend yield of zero;
volatility factors of the expected market price of the Company's common
stock ranged from 91% to 95% for the years ended December 31, 2004 and
2003, risk-free interest rate of 4.04% and 3.98%; respectively, and a
weighted-average expected life of 10 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.
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:
2004 2003
------------------ ------------------
Pro forma net income $ 1,695,930 $ 1,397,749
================== ==================
Pro forma basic and diluted net income per share $ 0.11 $ 0.12
================== ==================
Warrants
--------
The Company issued a warrant in September 2003 pursuant to the issuance
of a note payable (Note 5). The warrant permits the holder to purchase
up to 375,000 shares of common stock at a price of $1.23 per share for
the first 100,000 shares; $1.39 per share for the next 125,000 shares
and $1.61 per share for the remaining 150,000 shares. The warrant is
exercisable through September 26, 2010.
The Company issued a warrant in April 2004 pursuant to the issuance of
a note payable (Note 5). The warrant permits the holder to purchase up
to 313,000 shares of common stock at a price of $1.40 per share for the
first 83,000 shares; $1.59 per share for the next 105,000 shares and
$1.83 per share for the remaining 125,000 shares. The warrant is
exercisable through April 27, 2009.
F-19
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. INCOME TAXES
The income tax (benefit) expense for the years ended December 31, 2004
and 2003 consisted of the following:
Federal State Total
------------------ ------------------ ------------------
2004
----
Current $ (22,000) $ (7,000) $ (29,000)
Deferred 376,000 88,000 464,000
Change in valuation allowance (890,000) (103,000) (993,000)
------------------ ------------------ ------------------
Total income tax (benefit) $ (536,000) $ (22,000) $ (558,000)
================== ================== ==================
2003
----
Current $ 22,000 $ 22,000 $ 44,000
Deferred (109,000) (21,000) (130,000)
Change in valuation allowance (219,000) (100,000) (319,000)
------------------ ------------------ ------------------
Total income tax (benefit) $ (306,000) $ (99,000) $ (405,000)
================== ================== ==================
The Company's effective tax rate for the years ended December 31, 2004
and 2003 was (49)% and (39)%. The reconciliation of the statutory rate
to the effective rate is as follows:
2004 2003
------------------ ------------------
Statutory rate 34% 34%
State income taxes, net of Federal benefit 6 6
Other (11) (29)
(19) (32)
Change in valuation allowance (46) (31)
---------------- ----------------
Total (49)% (39)%
================ ================
F-20
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. INCOME TAXES (Continued)
The significant components of the Company's deferred tax assets and
liabilities are as follows:
December 31,
--------------------------------------
2004 2003
------------------ ------------------
Deferred tax assets:
Net operating loss carryforwards $ 1,481,000 $ 1,850,000
Inventory reserves 962,000 1,119,000
Payroll related accruals 143,000 171,000
Warranty accrual 217,000 188,000
Sales and accounts receivable reserves 165,000 186,000
Uniform capitalization 70,000 77,000
Deferred revenue 340,000 239,000
R&D credit carryover 175,000 175,000
------------------ ------------------
Total deferred tax assets 3,553,000 4,005,000
Valuation allowance (2,504,000) (3,497,000)
------------------ ------------------
Net deferred tax assets 1,049,000 508,000
Deferred tax liabilities:
Depreciation (20,000) (8,000)
------------------ ------------------
Net deferred tax assets $ 1,029,000 $ 500,000
================== ==================
At December 31, 2004 and 2003, management reviewed recent operating
results and projected future operating results. At the end of each of
these years, management determined that it was more likely than not
that a portion of the deferred tax assets attributable to net operating
losses would likely be realized. Due to the Company's limited history
of profitable operations, management has recorded a valuation allowance
of $2,504,000 and $3,497,000 at December 31, 2004 and 2003,
respectively. The amount of the valuation allowance will be adjusted in
the future when management determines that it is more likely than not
the deferred assets will be realized.
The Company has at December 31, 2004, a net operating loss carryover of
approximately $4,531,200 for Federal income tax purposes which expires
between 2007 and 2020, and a net operating loss carryforward of
approximately $1,305,700 for California state income tax purposes which
expires through 2010. The State of California has suspended the
application of net operating losses for the 2002 and 2003 fiscal years
and extended the carry forward period two years. Federal tax credit
carryforwards of approximately $174,900 will begin to expire in 2007.
Due to changes in ownership which occurred in prior years, Section 382
of the Internal Revenue Code provides for significant limitations on
the utilization of net operating loss carryforwards and tax credits. As
a result of these limitations, a portion of these loss and credit
carryovers may expire without being utilized.
F-21
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. COMMITMENTS AND CONTINGENCIES
Security Interest
-----------------
In December 2002, the Company granted a security interest in
substantially all assets of the Company to the United Mizrahi Bank Ltd.
and Bank Leumi (the "banks"), as security for amounts borrowed by
MediVision from the banks and advanced to the Company under the note
agreements (Note 6).
Equity Line of Credit
---------------------
On December 28, 2004, the Company entered into an investment agreement
with Dutchess Private Equities Fund II, LP (Dutchess) providing for an
equity line of credit. Pursuant to the investment agreement, Dutchess
has agreed to provide the Company with up to $9,000,000 of funding
during the thirty month period beginning on the date that a
registration statement the Company agreed to file providing for the
resale of the shares of common stock issuable under the investment
agreement is declared effective by the Securities and Exchange
Commission. During this thirty month period, the Company may request a
drawdown under the investment agreement by selling shares of its common
stock to Dutchess, and Dutchess will be obligated to purchase the
shares. The Company is under no obligation to request any drawdowns
under the investment agreement.
The amount that the Company can request in any drawdown notice is, at
the Company's election, the greater of (A) up to 200% of the average
daily volume of the Company's common stock for the ten trading days
prior to the date of the drawdown notice multiplied by the average of
the three daily closing bid prices for the common stock immediately
preceding the date of the drawdown notice or (B) $100,000; provided
that the Company may not request more than $1,000,000 in any single
drawdown.
Operating Leases
----------------
The Company leases its corporate headquarters and manufacturing
facility under a noncancellable operating lease that expires in June
2007. The lease agreement provides for minimum lease payments of
approximately $105,864 for the years ended December 31, 2005 and 2006,
respectively and $53,532 for the year ended December 31, 2007. The
Company also leases a sales office under a month-to-month lease
requiring a minimum lease payment of approximately $300 per month.
Rental expense charged to operations for all operating leases was
approximately $96,000 and $104,000, respectively during the years ended
December 31, 2004 and 2003.
F-22
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
11. SUBSEQUENT EVENT
On March 2, 2005, the Company and MediVision entered into a Loan and
Security Agreement evidenced by and payable in accordance with the note
executed by MediVision whereby the Company agreed to loan MediVision up
to two million dollars ($2,000,000). Under the terms of the agreement,
interest accrues at 7.25% per annum and is payable on February 28, 2006
along with all outstanding principal due at that date. The note is
secured by 2,409,000 shares of the Company's stock owned by MediVision.
In the event that MediVision were to sell any stock it owns in the
Company during the period of the agreement, a minimum of 50% of the
proceeds from such sales would be required to pay down the amount owed
to the Company.
F-23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None of the principal accountant's reports on the financial statements
for either of the past two years contains an adverse opinion or disclaimer of
opinion, and none was modified as to uncertainty, audit scope or accounting
principles. There were no disagreements with Perry-Smith LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure.
ITEM 8A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Report, management of the
Company, with the participation of the Company's Chief Executive Officer
(principal executive officer) and the Company's Chief Financial Officer
(principal financial officer), evaluated the effectiveness of the Company's
"disclosure controls and procedures," as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934. Based on that evaluation, these officers
concluded that, as of December 31, 2004, the Company's disclosure controls and
procedures were effective.
During the quarter ended December 31, 2004, there were no changes in
the Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
-21-
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
(a) Directors and Executive Officers
The following is a list of the names and ages of the Company's
directors and executive officers:
Name Age Position
- --------------------------------------------------------------------------------
Gil Allon 43 Chief Executive Officer and Director
Ariel Shenhar 39 Chief Financial Officer, Vice President,
Secretary, and Director
Yigal Berman 56 Director, Chairman of the Board
Alon Harris, Ph.D. 45 Director
Michael Benoff 50 Director
Gil Allon has served as a member of the Company's Board of Directors
since August 2000 and has served as the Company's Chief Executive Officer since
January 2002. Mr. Allon has acted in the capacity of the Company's Chief
Executive Officer since August 2000. Mr. Allon is also a member of the
Compensation, Option and Nomination Committees of the Company's Board of
Directors. Mr. Allon has also served as the Vice President, Chief Operating
Officer and a member of the Board of Directors of MediVision since MediVision's
inception in June 1993 until December 2004. Mr. Allon received his B.A. and
M.Sc. in Computer Science, both with distinction, from the Technion Israel
Institute of Technology in Haifa, Israel in May 1987 and December 1989,
respectively, and his M.B.A. with distinction in Business Management from the
University of Haifa in September 1999.
Ariel Shenhar has served as a member of the Company's Board of
Directors since August 2000, has served as the Company's Vice President and
Chief Financial Officer since July 2002 and has served as the Company's
Secretary since August 2002. Mr. Shenhar has also served as a member of the
Board of Directors of MediVision from August 1994 until December 2004 and as its
Vice President and Chief Financial Officer since January 1997. Mr. Shenhar
served as a member of the Board of Directors of Fidelity Gold Real Estate
Markets Ltd., an Israeli public company engaged in real estate, from 1994 to
1998, as an accountant at Nissan Caspi & Co. Certified Public Accountants in
Jerusalem, Israel in 1996, and at Witkowski &Co. Certified Public Accountants in
Tel Aviv, Israel from 1994 to 1995. Mr. Shenhar received his B.A. in Economics
and Accounting in June 1992 and his M.B.A. in Finance, with distinction, in June
1999 both from the Hebrew University in Jerusalem, Israel, and has been a
Certified Public Accountant since January 1997.
Yigal Berman has served as a member of the Company's Board of Directors
since December 2004. Mr. Berman was appointed as Chairman of the Board of
Directors in January 2005 as well as Chairman of each of the Audit,
Compensation, Option and Nomination Committees of the Company's Board of
Directors. Yigal Berman has also served as a member of the Board of Directors of
MediVision from July 1996 until December 2004. In addition, since 1991, Mr.
Berman has served as Vice President of Finance and Secretary of Intergamma
Investment Ltd. Since 1989, Mr. Berman has served as a member of the Board of
Directors of Delta Trading, the majority shareholder of MediVision. Mr. Berman
received his B.A. in Economics and his M.B.A. in Business Management from the
Tel Aviv University in Israel in April 1974 and December 1976 respectively.
-22-
Alon Harris has served as a member of the Company's Board of Directors
since November 2001. Professor Harris also served as a member of the Audit
Committee of the Company's Board of Directors until December 2004. Professor
Harris has been Director of the Glaucoma Research and Diagnostic Laboratories
(the "Laboratory") in the Department of Ophthalmology at the Indiana University
School of Medicine ("Indiana") since 1993. The Laboratory, founded by Professor
Harris, specializes in investigation of ocular blood flow and its relationship
to eye diseases such as glaucoma, age-related macular degeneration and diabetic
retinopathy. He has been the Letzter Chair of Ophthalmology at Indiana since
2000 and has been a Professor of Ophthalmology and Physiology and Biophysics at
Indiana since 1999. Professor Harris is the 1995 recipient of the Research to
Prevent Blindness International Scholar Award and holds the Letzter Endowed
Chair of Ophthalmology.
Michael Benoff has served as a member of the Company's Board of
Directors since June 2004. Mr. Benoff was also appointed to the Audit,
Compensation and Option Committees of the Company's Board of Directors during
2004. Mr. Benoff has been a private investor since 1999. From 1987 until 1999,
he served in several senior financial management positions, most recently as
Executive Vice President and Chief Financial Officer of the Money Store Inc.
Prior to this he held the position of Vice President of Investment Banking at
Matthew & Wright, Inc. Mr. Benoff graduated from Princeton University, magna cum
laude, with a Bachelor of Arts in politics. He was also a member of the Phi Beta
Kappa Society.
(b) Audit Committee Financial Expert
The Company's Board of Directors has determined that Yigal Berman, the
Chairman of the Audit Committee, qualifies as an independent financial expert
serving on its audit committee. This qualification is based upon his experience,
more fully described above in his biography.
(c) Section 16 (a) Compliance
Section 16 (a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers and holders of more than
10% of the Company's common stock to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of the Company.
The Company believes that during the year ended December 31, 2004, its
acting officers, directors and holders of more than 10% of its outstanding
common stock complied with all Section 16(a) filing requirements, except that
Noam Allon, Gil Allon, Ariel Shenhar, Jonathan Adereth, Michael Benoff and Alon
Harris were late in filing reports concerning the grant to them of options to
purchase 40,000, 90,000, 75,000, 40,000, 40,000 and 20,000 shares of the
Company's common stock, respectively, and Yigal Berman was late in filing
reports concerning his initial statement of beneficial ownership of securities
in the Company.
(d) Code of Ethics
(i) The Company has adopted a Code of Ethics that applies to its
principal executive officer and principal financial officer. The Company's Code
of Ethics is attached to this Form 10-KSB as Exhibit 14. The Company will
provide to any person upon request, without charge, a copy of the Code of
Ethics. Such request is to be submitted in writing to the Company at: Ophthalmic
Imaging Systems, Attention: Ariel Shenhar, 221 Lathrop Way, Suite I, Sacramento,
Ca. 95815
-23-
ITEM 10. EXECUTIVE COMPENSATION
(a) Summary Executive Compensation Table
SUMMARY COMPENSATION TABLE
NAME AND
PRINCIPAL FISCAL OTHER ANNUAL
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)
-------- ---- ---------- --------- ----------------
Gil Allon 2004 $137,754 $ 70,000(1) $ 42,969(2)
Chief Executive Officer 2003 132,000 53,755(3) 34,860(4)
2002 122,769 39,892(5) 36,126(6)
Ariel Shenhar 2004 $120,000 $34,325(7) $ 42,504(8)
Vice-President, Chief Financial 2003 115,500 38,000 8,737(9)
Officer 2002 48,231(10) 38,000(11) 5,528(12)
(1) Represents bonus accrued in the financial statements as of December 31,
2004 and to be paid in 2005.
(2) Represents $24,000 in housing expenses, $10,000 in tuition expenses for
children and approximately $8,969 in automobile expenses for Mr. Allon
paid by the Company
(3) $44,921 of the bonus was paid by the Company to Mr. Allon in 2003. The
balance of $8,834 was accrued in the financial statements and paid in
2004
(4) Represents $26,123 in housing expenses paid by MediVision and charged
to the Company and approximately $8,737 in automobile expenses for Mr.
Allon paid by the Company.
(5) $10,000 of this amount was paid by the Company to Mr. Allon in 2002 and
the balance was paid in 2003.
(6) Represents $25,800 in housing expenses paid by MediVision and charged
to the Company and approximately $10,326 in automobile expenses for Mr.
Allon paid by the Company.
(7) Represents bonus accrued in the financial statements as of December 31,
2004, and to be paid in 2005, of which $14,325 of the amount to be paid
by the Company was charged to MediVision.
(8) Represents $24,000 in housing expenses, $10,000 in tuition expenses for
children and approximately $8,504 in automobile expenses for Mr.
Shenhar paid by the Company
(9) Represents approximately $8,737 in automobile expenses for Mr. Shenhar
paid by the Company. (10) Represents salary from July 22, 2002 through
December 31, 2002 (11) Represents bonus accrued in the financial
statements and paid in 2003. (12) Represents approximately $5,528 in
automobile expenses for Mr. Shenhar paid by the Company.
-24-
(b) Summary Option Grants
During the year ended december 31, 2004, the following options were
granted to named executive officers:
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
% of total
Number of Options/
Securities SARs Granted
Underlying to Employees
Options/SARs in Fiscal Exercise or Base
Name Granted (#) Year Price ($/Share) Expiration Date
- ------------------------------------------------------------------------------------------------------------
Gil Allon 90,000 13% $0.68 October 24, 2014
Chief Executive Officer
Ariel Shenhar
Vice President, Chief 75,000 11% $0.68 October 24, 2014
Financial Officer
(c) Aggregated Option Exercises and Fiscal Year End Values
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
Number of Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Shares Value FY-End (#) FY-End ($)
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- -------------------------------- ------------- -------------- ----------------------- ----------------------
Gil Allon -- -- 323,334/126,666(1)(2) $224,393/63,156
Chief Executive Officer
Ariel Shenhar
Vice President, Chief -- -- 183,333/91,667(3) $127,233/42,992
Financial Officer
All options had a market value of $1.10 per share at December 31, 2004.
(1) The exercise price on all shares exercisable was $0.406 per share. The
exercise price on 36,666 and 90,000 unexercisable shares was $.406 and
$0.681, respectively.
(2) Includes 26,667 shares exercisable and 13,333 shares unexercisable by
indirect ownership through spouse.
(3) The exercise price on all shares exercisable was $0.406 per share. The
exercise price on 16,667 and 75,000 unexercisable shares was $.406 and
$0.681, respectively.
-25-
(d) Compensation of Directors
The Company has entered into an employment agreement with Mr. Allon,
dated December 1, 2001, for his services as Chief Executive Officer, for a term
of approximately one year, which agreement may be renewed for successive one
year intervals upon mutual agreement of the parties. Under the terms of the
agreement, revised in May 2004, Mr. Allon is to receive an annual salary of
$140,000 effective April 1, 2004 and a bonus to be determined annually by the
Board of Directors based on the Company meeting certain performance goals.
During 2004, the Board approved a housing subsidy payment of $2,000 per month
and payments of $10,000 per year for tuition expenses for his children. Mr.
Allon will also be eligible to participate in the Company's health and welfare
insurance plans and is provided an automobile for business use. The agreement
between the parties was renewed on December 15, 2002, but was revised to provide
for an indefinite term. The agreement also stipulates that either party may
terminate the agreement with six months advance notice.
The Company also entered into an employment agreement with Mr. Shenhar
for his services as Chief Financial Officer, for a term of approximately one
year, commencing on July 22, 2002, and expiring on June 30, 2003. Under the
terms of the agreement, revised in December 2003 to provide for an indefinite
term, Mr. Shenhar's salary was increased from $114,000 to $120,000 annually
effective October 1, 2003, and he is to receive a bonus to be determined
annually by the Board of Directors based on the Company meeting certain
performance goals. During 2004, the Board approved a housing subsidy payment of
$2,000 per month and payments of $10,000 per year for tuition expenses for his
children. Mr. Shenhar will also be eligible to participate in the Company's
health and welfare insurance plans and is provided an automobile for business
use. The agreement also stipulates that either party may terminate the agreement
with six months advance notice.
In addition, Jonathan Adereth received $36,000 for his services as
Chairman of the Board and an additional $3,500 for meetings attended in 2004.
Mr. Adereth was also granted a stock option to purchase 40,000 shares at an
exercise price of $0.68 per share in October 2004.
Pursuant to a letter agreement executed on October 24, 2001, between
Dr. Harris and the Company, and as subsequently modified by the parties, the
Company agreed to the following in connection with his service as a director:
(i) to grant to Dr. Harris options to purchase up to 20,000 shares of the
Company's Common Stock, at a per share exercise price not less that fair market
value on the date of the grant, (ii) to pay to Dr. Harris, in four equal
quarterly installments, an annual retainer in the aggregate amount of $4,000,
(iii) to pay to Dr. Harris a per meeting fee of $500 for attending
non-telephonic meetings of the Board, (iv) to pay to Dr. Harris an hourly fee of
$100 for attending telephonic meetings of the Board, and (v) to reimburse Dr.
Harris for reasonable expenses incurred in connection with his services as a
director. Dr. Harris's agreement was revised in September 2002 to provide for a
quarterly payment of $1,500 for his services as a director, eliminating the
payments to him for his individual attendance at telephonic and non-telephonic
meetings of the Board. For his services as a director during the year, Dr.
Harris earned approximately $6,000, of which approximately $3,000 remained
accrued but unpaid as of December 31, 2004. The above referenced options were
granted in January 2002 at a per share exercise price of $.10, which price
exceeded the closing price of the Company's common stock on the date of grant.
Dr. Harris was also granted a stock option to purchase 20,000 shares at an
exercise price of $0.68 per share in October 2004.
Pursuant to a letter agreement executed on June 25, 2004 between Mr.
Benoff and the Company agreed to the following in connection with his service as
a director: (i) to grant Mr. Benoff options to purchase up to 40,000 shares of
the Company's Common Stock, at a per share price not less than fair market value
on the date of the grant, (ii) to pay Mr. Benoff, in four equal quarterly
installments, an annual retainer in the aggregate amount of $6,000 for
attendance at up to 2 Board meetings per quarter,
-26-
(iii) to pay to Mr. Benoff a fee of $100 per hour, not to exceed $500 per day,
for attendance at meetings in excess of 2 Board meetings per quarter and
reimbursement for related expenses. For his services as a director during the
year, Mr. Benoff earned approximately $3,600 of which approximately $1,500
remained accrued but unpaid as of December 31, 2004. . The above referenced
options were granted by the Board in October 2004 at a per share exercise price
of $0.68.
No standard arrangement regarding compensation of the directors has
been adopted by the Board, and, except as noted above, no director has been paid
any compensation by the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of February 18, 2005, by (i) each
person who "beneficially" owns more than 5% of all outstanding shares of common
stock, (ii) each director and the executive officer identified above in Item 10,
and (iii) all directors and the executive officers as a group. Unless otherwise
indicated, the address for each beneficial owner is 221 Lathrop Way, Suite I,
Sacramento, Ca. 95815
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Owner Percent of Class
- --------------------------------------------------------------------------------
MediVision Medical Imaging Ltd. 11,130,151(1)(2) 74.0%
P.O. Box 45, Industrial Park
Yokneam Elit
20692 Israel
Gil Allon 341,667(3)(4) 2.2%
Ariel Shenhar 191,667 1.3%
Alon Harris, Ph.D 20,000(3) *
Michael Benoff 0 *
Yigal Berman 0 *
Directors and Officers as a group 553,334(3) 3.5%
(total of 5 persons)
- --------------------------------------------------------------------------------
* Represents less than 1%.
(1) As indicated in a Schedule 13D filed by MediVision on June 25, 2004.
(2) Includes 2,409,000 shares pledged as security on a $2,000,000
promissory note payable to the Company.
(3) Represents shares subject to stock options exercisable within 60 days
from February 18, 2005.
(4) Includes indirect beneficial ownership by spouse of stock options to
purchase 33,333 shares.
-27-
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Executive Officers and Directors
In January 2004, the Company entered into a service agreement,
effective January 1, 2003 with MediStrategy Ltd. ("MS"), an Israeli company
owned by Noam Allon, a director of the Company until December 2004. Under the
terms of the agreement, MS will provide services to the Company primarily in the
business development field in ophthalmology including business cooperation,
mergers and acquisitions allocating new lines of business and analyzing of such,
defining new product lines or business opportunities to be developed. All
services provided by MS shall be performed solely by Noam Allon.
In consideration for the services to be provided, the Company agrees to
pay MS a monthly sum of $3,300 paid quarterly. In addition, MS is to be paid a
yearly performance bonus of up to $20,000 upon achievement of goals under the
terms of the agreement determined by MS, Noam Allon and the Company's Chairman
of the Board. During the year ended December 31, 2004, MS earned fees in the
amount of $39,600 and a bonus, which has not been finalized. $19,800 of the fees
has been paid with the balance being accrued as of December 31, 2004. During the
year ended December 31, 2003, MS earned fees of $39,600 and a bonus of $10,000,
all of which were accrued as of 2003 and paid in 2004.
(b) Transactions with Security Holders
As discussed in greater detail in the Business Development section of
Item 1 and in Management's Discussion and Analysis or Plan of Operation section
of Item 6 of this annual report, the Company and MediVision entered into a
series of transactions which resulted in MediVision owning approximately 74% of
the Company's outstanding common stock at fiscal year end 2004.
-28-
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit Footnote
Number Description of Exhibit Reference
------ ---------------------- ---------
3.1 Articles of Incorporation of the Company, as amended. *
3.2 Amendment to Articles of Incorporation (Certificate of Determination of (4)
Preferences of Series A Junior Participating Preferred Stock of the Company).
3.3 Amendment to Articles of Incorporation (Certificate of Determination of (7)
Preferences of Series B Preferred Stock of the Company).
3.4 Amended Bylaws of the Company. *
3.5 Amendment to Amended Bylaws of the Company dated January 28, 1998. (6)
4.1 Specimen of Stock Certificate. *
4.2 Securities Purchase Agreement dated September 25, 2003 by and between the (13)
Company and Laurus.
4.3 Secured Convertible Term Note dated September 25, 2003 issued to Laurus. (14)
4.4 Common Stock Purchase Warrant dated September 25, 2003 by and between the (15)
Company and Laurus.
4.5 Registration Rights Agreement dated September 25, 2003 by and between the (16)
Company and Laurus.
4.6 Security Agreement dated September 25, 2003 by and between the Company and (17)
Laurus.
4.7 Securities Purchase Agreement dated April 27, 2004 by and between the Company (21)
and Laurus.
4.8 Secured Convertible Term Note dated April 27, 2004 issued to Laurus. (22)
4.9 Common Stock Purchase Warrant dated April 27, 2004 by and between the Company (23)
and Laurus.
4.10 Registration Rights Agreement dated April 27, 2004 by and between the Company (24)
and Laurus.
4.11 Security Agreement dated April 27, 2004 by and between the Company and Laurus. (25)
10.1 Lease Agreement, dated as of April 21, 2001, between the Company and (11)
Jackson-Jahn, Inc.
10.2 First Amendment to the Lease Agreement dated as of April 21, 2001 between the (27)
Company and Jackson-Jahn, Inc.
10.3 Second Amendment to the Lease Agreement dated as of April 21, 2001 between (27)
the Company and Jackson-Jahn, Inc.
-29-
10.4 Confidentiality Agreement dated March 27, 1992 between the Company and Steven *
R. Verdooner.
10.5 Assignment dated October 23, 1990 of U.S. Patent Application for Apparatus *
and Method for Topographical Analysis of the Retina to the Company by Steven
R. Verdooner, Patricia C. Meade and Dennis J. Makes (as recorded on Reel
5490, Frame 423 in the Assignment Branch of the U.S. Patent and Trademark
Office).
10.6 Form of International Distribution Agreement used by the Company and sample *
form of End User Software License Agreement.
10.7 Stock Option Plan. (1)+
10.8 Rental Agreement dated May 1, 1994 by and between the Company and Robert J. (2)
Rossetti.
10.9 The Company's 1995 Nonstatutory Stock Option Plan and sample form of (3)+
Nonstatutory Stock Option Agreement.
10.10 The Company's 1997 Nonstatutory Stock Option Plan and sample form of (5)+
Nonstatutory Stock Option Agreement.
10.11 Form of Indemnification Agreement between the Company and each of its (6)
directors, officers and certain key employees.
10.12 Working Capital Funding Agreement dated as of July 13, 2000 by and between (8)
MediVision and the Company.
10.13 Amendment No. 1 to Working Capital Funding Agreement dated as of July 1, 2001 (10)
by and between MediVision and the Company.
10.14 Loan and Security Agreement dated as of July 13, 2000 by and between (8)
MediVision and the Company.
10.15 Registration Rights Agreement dated as of August 2000 by and between (8)
MediVision and the Company.
10.16 Secured Convertible Working Capital Note dated August 2000 from the Company (8)
to MediVision in the principal amount of $260,000.
10.17 Secured Promissory Note dated July 21, 2000 from the Company to MediVision in (8)
the principal amount of $1,500,000.
10.18 Secured Convertible Working Capital Promissory Note dated July 1, 2001 by and (10)
between MediVision and the Company in the principal amount of $1,000,000.
10.19 Cooperation and Project Funding Agreement dated January 21, 2001, among (9)
Israel- United States Binational Industrial Research and Development
Foundation, MediVision and the Company.
10.20 2000 Stock Option Plan. (11)+
10.21 Secured Debenture Agreement by and between United Mizrahi Bank LTD and the (12)
Company dated December 9, 2002.
10.22 Commercial Security Agreement by and among Bank Leumi, MediVision and (19)
Ophthalmic Imaging Systems dated April 30, 2003 and Commercial Guaranty of
Ophthalmic Imaging Systems.
-30-
10.23 Amendment No. 2 to Working Capital Funding Agreement dated as of May 21, 2003 (18)
by and between MediVision and the Company.
10.24 2003 Stock Option Plan. (19)
Investment Agreement dated as of December 28, 2004 by and between the Company
10.25 and Dutchess Private Equities Fund II, LP. (25)
10.26 Registration Rights Agreement dated as of December 28, 2004 by and between (26)
the Company and Dutchess Private Equities Fund II LP.
10.27 Loan and Security Agreement dated as of February 28, 2005 by and between the (27)
Company and MediVision Medical Imaging Ltd.
10.28 Promissory Note dated as of February 28, 2005 by and between the Company and (27)
MediVision Medical Imaging Ltd.
14 Code of Ethics. (27)
23.1 Consent of Perry-Smith LLP, Independent Auditors (27)
31.1 Rule 13a 14a/15d 14(a) Certification. (27)
31.2 Rule 13a 14a/15d 14(a) Certification. (27)
32 Certification of principal executive officer and principal financial officer (27)
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference to the Company's Registration Statement
on Form S-18, number 33-46864-LA.
(1) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended August 31, 1993, filed on November 26, 1993.
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended August 31, 1994, filed on November 29, 1994.
(3) Incorporated by reference to the Company's Registration Statement
on Form S-8, filed on May 28, 1996, number 333-0461.
(4) Incorporated by reference to Exhibit A of Exhibit 1 of the Company's Form
8-K, filed on January 2, 1998.
(5) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended November 30, 1997,
filed on January 14, 1998.
(6) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended August 31, 1998, filed on December 15, 1998.
(7) Incorporated by reference to Exhibit 3.1 of the Company's Form 8-K, filed on
November 24, 1999.
(8) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended August 31, 2000, filed on December 13, 2000.
-31-
(9) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the transition period from September 1, 2000 to December 31, 2000, filed on
March 29, 2001.
(10) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 2001, filed on
November 14, 2001.
(11) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2001, filed on
March 26, 2002.
(12) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2002, filed on
March 27, 2003.
(13) Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K, filed on
October 1, 2003.
(14) Incorporated by reference to Exhibit 4.2 of the Company's Form 8-K, filed on
October 1, 2003.
(15) Incorporated by reference to Exhibit 4.3 of the Company's Form 8-K, filed on
October 1, 2003.
(16) Incorporated by reference to Exhibit 4.4 of the Company's Form 8-K, filed on
October 1, 2003.
(17) Incorporated by reference to Exhibit 4.5 of the Company's Form 8-K, filed on
October 1, 2003.
(18) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 2003, filed on August 14, 2003.
(19) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2003, filed on March 25, 2004
(20) Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K, filed on
April 29, 2004
(21) Incorporated by reference to Exhibit 4.2 of the Company's Form 8-K, filed on
April 29, 2004
(22) Incorporated by reference to Exhibit 4.3 of the Company's Form 8-K, filed on
April 29, 2004.
(23) Incorporated by reference to Exhibit 4.4 of the Company's Form 8-K, filed on
April 29, 2004
(24) Incorporated by reference to Exhibit 4.5 of the Company's Form 8-K, filed on
April 29, 2004
(25) Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed on
December 30, 2004
(26) Incorporated by reference to Exhibit 10.2 of the Company's Form 8-K filed on
December 30, 2004
(27) Filed herewith.
+ Management contract or compensatory plan or arrangement.
-32-
B. Reports on Form 8-K.
On October 19, 2004, the Company filed a Form 8-K disclosing that the
Company issued a press release reporting that it will launch two new products at
the first Joint Meeting of the American Academy of Ophthalmology (AAO) and the
European Society of Ophthalmology (SOE) being held from October 23 to 26, 2004
in New Orleans, Louisiana.
On November 4, 2004 the Company filed a Form 8-K disclosing that the
Company issued a press release announcing its results of operations for the
Company's third quarter and nine months ended September 30, 2004.
On November 10, 2004 the Company filed a Form 8-K disclosing that the
Company issued a press release reporting that it will provide imaging systems
for a leading European ophthalmic imaging company, of which the Company's lead
shareholder, MediVision Medical Imaging Ltd., acquired 54%.
On December 30, 2004 the Company filed a Form 8-K disclosing that on
December 28, 2004, it entered into an investment agreement with Dutchess Private
Equities Fund II, LP providing an equity line of credit to the Company. Pursuant
to the investment agreement, Dutchess agreed to provide the Company with up to
$9,000,000 of funding during the thirty month period beginning on the date that
the registration statement the Company agreed to file providing for the resale
of the shares of common stock issuable under the investment agreement is
declared effective by the Securities and Exchange Commission.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
For the fiscal years ended December 31, 2004 and December 31, 2003,
Perry-Smith LLP has billed the Company the following fees for services rendered
in connection with the audit and other services in respect to these years:
2004 2003
Audit Fees (1) $54,200 $52,318
Audit-Related Fees 2,900 0
Tax Fees (2) 14,400 13,615
All Other Fees (3) 0 320
------- -------
Total $71,500 $66,253
======= =======
(1) Services rendered for the audit of the Company's annual financial
statements included in its report on Form 10-KSB and the reviews of the
financial statements included in its reports on Form 10-QSB filed with
the SEC.
(2) Services in connection with the preparation of tax returns and the
provision of tax advice.
(3) Services related to exercising of options under the Company's Stock
Option Plans.
All of the fees described above were approved by the Company's Audit
Committee.
The Audit Committee does not currently have any pre-approval policies.
-33-
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
OPHTHALMIC IMAGING SYSTEMS
By:
-------------------------------
Gil Allon
Chief Executive Officer
By:
-------------------------------
Ariel Shenhar
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Company and in the capacities and on
the dates indicated.
Director
- ------------------------------------
Gil Allon
Director
- ------------------------------------
Ariel Shenhar
Director, Chairman of the Board
- ------------------------------------
Yigal Berman
Director
- ------------------------------------
Michael Benoff
Director
- ------------------------------------
Alon Harris
EXHIBIT 14
OPHTHALMIC IMAGING SYSTEMS' CODE OF ETHICS FOR
PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
Ophthalmic Imaging Systems ("OIS") has established the following Code
of Ethics (the "CODE") for its Chief Executive Officer and Chief Financial
Officer to ensure the continuing integrity of financial reporting and to protect
the interests of its shareholders and all those with which OIS conducts
business. This Code sets forth specific policies to guide each of the Company's
Chief Executive Officer and Chief Financial Officer in the performance of their
duties. OIS's Chief Executive Officer and Chief Financial Officer shall:
1. Act with honesty and integrity, ethically handling any actual or
potential conflicts between his personal, private interests and the
interests of OIS, avoiding improper personal benefits as a result of
his position.
2. Perform responsibilities with a view to causing periodic reports filed
with the SEC or other public communications by OIS to contain
disclosures, which are accurate, timely, complete and understandable.
3. Comply with federal, state and local laws and regulations applicable to
OIS.
4. Take appropriately prompt action to report violations of this Code to
the proper person or persons.
5. Be accountable for adherence to this Code.
6. Maintain accurate financial record keeping.
7. Refrain from taking any action that fraudulently influences, coerces,
manipulates, or misleads any independent public or certified accountant
engaged in the performance of an audit of the financial statements of
OIS for the purpose of rendering such financial statements materially
misleading.
EXHIBIT 31.1
FORM OF 302 CERTIFICATION FOR ANNUAL REPORT ON FORM 10-KSB
----------------------------------------------------------
I, Gil Allon, certify that:
1. I have reviewed this annual report on Form 10-KSB/A of Ophthalmic
Imaging Systems;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that occurred
during the small business issuer's most recent fiscal quarter (the
small business issuer's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the small business
issuer's ability to record, process, summarize and report
financial information; and (b) Any fraud, whether or not material,
that involves management or other employees who have a significant
role in the small business issuer's internal control over
financial reporting.
Date:
--------------------------
Gil Allon
Chief Executive Officer
EXHIBIT 31.2
FORM OF 302 CERTIFICATION FOR ANNUAL REPORT ON FORM 10-KSB
----------------------------------------------------------
I, Ariel Shenhar, certify that:
1. I have reviewed this annual report on Form 10-KSB/A of Ophthalmic
Imaging Systems;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that occurred
during the small business issuer's most recent fiscal quarter (the
small business issuer's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the small business
issuer's ability to record, process, summarize and report
financial information; and (b) Any fraud, whether or not material,
that involves management or other employees who have a significant
role in the small business issuer's internal control over
financial reporting.
Date:
--------------------------
Ariel Shenhar
Chief Financial Officer
EXHIBIT 32
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the financial statements of Ophthalmic
Imaging Systems ("Registrant") for the fiscal year ended December 31,
2004 (the "Report"), each of the undersigned hereby certifies, to such
officer's knowledge, that:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
Registrant.
--------------------------
Gil Allon
Chief Executive Officer
--------------------------
Ariel Shenhar
Chief Financial Officer