AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 11, 2005
REGISTRATION FILE NO. 333-116217
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
OPHTHALMIC IMAGING SYSTEMS
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
CALIFORNIA 3841 94-3035367
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL CODE) IDENTIFICATION NUMBER)
221 LATHROP WAY, SUITE I
SACRAMENTO, CALIFORNIA 95815
(916) 646-2020
(Address and telephone number of principal executive offices)
WITH A COPY TO:
ARIEL SHENHAR, CHIEF FINANCIAL OFFICER HENRY I. ROTHMAN
OPHTHALMIC IMAGING SYSTEMS TROUTMAN SANDERS LLP
221 LATHROP WAY, SUITE I 405 LEXINGTON AVENUE
SACRAMENTO, CALIFORNIA 95815 NEW YORK, NEW YORK 10174
(916) 646-2020 (212) 704-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO
TIME AFTER THIS REGISTRATION BECOMES EFFECTIVE.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration number of the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
Pursuant to Rule 429 of the Securities Act of 1933, as amended, this
registration statement also serves as Post-Effective Amendment No. 2 to the
registrant's Registration Statement on Form SB-2, File No. 333-110334 relating
to 1,716,496 shares of the registrant's common stock, which includes 1,341,496
shares of common stock isuuable upon conversion of the principal and interest of
a secured convertible term note and 375,000 shares of common stock issuable upon
exercise of a warrant.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING UNDER SECTION 8(A), MAY DETERMINE.
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This prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
PROSPECTUS
7,473,201 SHARES
OPHTHALMIC IMAGING SYSTEMS
COMMON STOCK
This prospectus relates to the resale by the selling security holders for their
own accounts of up to an aggregate of 7,473,201 shares of our common stock, of
which (1) 1,785,201 shares are issuable upon conversion of convertible term
notes issued to Laurus Master Fund, Ltd. ("Laurus"), (2) 688,000 shares are
issuable upon exercise of warrants issued to Laurus, (3) 4,050,000 shares are
held by MediVision Medical Imaging Ltd., (4) 550,000 shares are held by S2
Partners, LP, and (5) 400,000 shares are held by Meadowbrook Opportunity Fund
LLC.
Our common stock trades on the OTC Bulletin Board(R) under the symbol "OISI."
The last reported sale price of our common stock on October 4, 2005, was $1.20
per share.
The mailing address and the telephone number of our principal executive offices
are 221 Lathrop Way, Suite I, Sacramento, California 95815, (916) 646-2020.
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Investing in our common stock involves a high degree of risk.
PLEASE SEE THE SECTION OF THIS PROSPECTUS
ENTITLED "RISK FACTORS" BEGINNING ON PAGE 3.
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We will not receive any proceeds from the sale of the shares by the selling
security holders. We may receive proceeds in connection with the exercise of a
warrant whose underlying shares may be sold in this offering.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______, 2005.
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You should rely only on the information contained in this document. We have not
authorized anyone to provide you with information that is different. This
document may only be used where it is legal to sell these securities.
TABLE OF CONTENTS
Page No.
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PROSPECTUS SUMMARY.............................................................1
RISK FACTORS...................................................................3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................10
USE OF PROCEEDS...............................................................10
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................11
DILUTION......................................................................12
DESCRIPTION OF BUSINESS.......................................................13
DESCRIPTION OF PROPERTY.......................................................19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION..........................................20
SELLING SECURITY HOLDERS......................................................29
PLAN OF DISTRIBUTION..........................................................32
DESCRIPTION OF SECURITIES.....................................................33
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT..................36
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................38
EXECUTIVE COMPENSATION........................................................38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................41
LEGAL PROCEEDINGS.............................................................41
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES..............................................42
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................................42
TRANSFER AGENT AND REGISTRAR..................................................42
INTEREST OF EXPERTS AND COUNSEL...............................................43
WHERE YOU CAN FIND MORE INFORMATION...........................................43
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PART I
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus and does
not contain all of the information necessary to your investment decision. To
understand this offering fully, you should read carefully the entire prospectus,
especially the risks of investing in our common stock discussed under "Risk
Factors."
This prospectus relates to the resale by the selling security holders
for their own accounts of up to an aggregate of 7,473,201 shares of our common
stock, of which (1) 1,785,201 shares are issuable upon conversion of convertible
term notes issued to Laurus Master Fund, Ltd. ("Laurus"), (2) 688,000 shares are
issuable upon exercise of warrants issued to Laurus, (3) 4,050,000 shares are
held by MediVision Medical Imaging Ltd., (4) 550,000 shares are held by S2
Partners, LP, and (5) 400,000 shares are held by Meadowbrook Opportunity Fund
LLC.
In connection with a private placement transaction on April 27, 2004
with Laurus Master Fund, Ltd., or Laurus, this prospectus covers the resale of
(1) 819,673 shares issuable upon conversion of a three-year secured convertible
term note issued to Laurus in the principal amount of $1,000,000, secured by a
subordinated second priority lien on our assets (the "2004 Laurus Note"), (2)
160,000 shares issuable to Laurus as interest payments under the 2004 Laurus
Note and (3) 313,000 shares issuable to Laurus under the exercise of a warrant
(the "2004 Laurus Warrant"). The 2004 Laurus Note is convertible into shares of
our common stock at a fixed conversion price of $1.22 per share. The exercise
prices of the 2004 Laurus Warrant range between $1.40 and $1.83 per share.
In June 2003, pursuant to Amendment No. 1 to the Working Capital
Funding Agreement, MediVision Medical Imaging Ltd., or MediVision, an Israeli
corporation, converted $1,150,000 of outstanding principal and accrued interest
under a promissory note held by MediVision into 6,216,216 shares of our common
stock at a conversion price of $0.185 per share. This prospectus covers the
resale of 4,050,000 of such shares of common stock held by MediVision.
Pursuant to the Common Stock Purchase Agreement, dated as of June 1,
2004 between S2 Partners, LP and MediVision, S2 Partners, LP purchased 550,000
shares of our common stock from MediVision at a price per share of $1.35. S2
Partners, LP may sell, from time to time under this prospectus up to 550,000
shares of our common stock.
In connection with a private placement transaction with Laurus on
September 25, 2003, this prospectus covers the resale of (1) 621,250 shares
issuable upon conversion of a three-year convertible term note issued to Laurus
in the principal amount of $1,200,000, secured by a subordinated second priority
lien on our assets (the "2003 Laurus Note"), (2) 184,278 shares issuable to
Laurus as interest payments under the 2003 Laurus Note and (3) 375,000 shares
issuable to Laurus upon the exercise of a warrant (the "2003 Laurus Warrant").
The 2003 Laurus Note is convertible into shares of our common stock at a fixed
conversion price of $1.07 per share. The exercise prices of the 2003 Laurus
Warrant range between $1.23 and $1.61.
Meadowbrook Opportunity Fund LLC purchased from MediVision 400,000
shares of our common stock at a price per share of $1.20 pursuant to a Common
Stock Purchase Agreement dated as of September 16, 2005 between Meadowbrook
Opportunity Fund LLC and MediVision. Meadowbrook Opportunity Fund LLC may sell,
from time to time under this prospectus, up to 400,000 shares of our common
stock.
OUR COMPANY
We are 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.
Our products are used for a variety of standard diagnostic test procedures
performed in most eye care practices. Since our inception, we have developed
products that have addressed primarily the needs of the ophthalmic angiography
markets, both fluorescein and indocyanine green. The current flagship products
in our angiography line are our 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 Digital Fundus Imager is for use in color fundus imaging
and fluorescein angiography, with the emphasis on imaging the back of the eye.
See "Description of Business" for more information.
THE OFFERING
Common stock offered by Up to an aggregate of 7,473,201 shares of
selling security holders common stock may be offered under this
prospectus, of which (1) 1,785,201 shares
are issuable upon conversion of convertible
term notes issued to Laurus, (2) 688,000
shares are issuable upon exercise of
warrants issued to Laurus, (3) 4,050,000
shares are held by MediVision Medical
Imaging Ltd., (4) 550,000 shares are held by
S2 Partners, LP, and (5) 400,000 shares are
held by Meadowbrook Opportunity Fund LLC.
Use of Proceeds All proceeds of this offering will be
received by the selling security holders for
their own accounts. We may receive proceeds
in connection with the exercise of the
warrants issued to Laurus whose underlying
shares may in turn be sold by Laurus.
Risk Factors You should read the "Risk Factors" section
beginning on page 3, as well as other
cautionary statements throughout this
prospectus, before investing in shares of
our common stock.
OTC Bulletin Board(R) symbol OISI.OB
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO
THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, IT IS LIKELY THAT OUR BUSINESS,
FINANCIAL CONDITION AND OPERATING RESULTS WOULD BE HARMED. AS A RESULT, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE PART OR ALL
OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
IF WE ARE UNABLE TO OBTAIN ADDITIONAL CAPITAL, WE WOULD BE REQUIRED TO ELIMINATE
CERTAIN ACTIVITIES THAT WOULD ADVERSELY EFFECT OUR OPERATIONS.
We may require substantial funds for various purposes, including
continuing research and development, manufacturing and marketing our existing
products. We may need to seek additional capital, possibly through public or
private sales of our securities, in order to fund our activities on a long-term
basis. Adequate funds may not be available when needed or on terms acceptable to
us. Insufficient funds may require us to delay, scale back or eliminate certain
or all of our research and development programs or to license third parties to
commercialize products or technologies that we would otherwise seek to develop
ourselves, which may materially adversely affect our continued operations.
IF WE FAIL TO DEVELOP AND SUCCESSFULLY INTRODUCE NEW AND ENHANCED PRODUCTS THAT
MEET THE NEEDS OF OUR CUSTOMERS, OUR BUSINESS MAY BE HARMED.
Our future success depends on our ability to anticipate our customers'
needs and develop products that address those needs. This will require us to
design, develop, manufacture, assemble, test market and support new products and
enhancements on a timely and cost-effective basis. We cannot assure that we will
successfully identify new product opportunities and develop and bring new
products to market in a timely and cost effective manner. Our failure to do so
could lead to a reduction in sales and our business may be harmed.
OUR MARKET IS UNPREDICTABLE AND CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGES AND
EVOLVING STANDARDS, AND, IF WE FAIL TO KEEP UP WITH SUCH CHANGES, OUR BUSINESS
AND OPERATING RESULTS WILL BE HARMED.
Our industry is characterized by extensive research and development,
rapid technological change, frequent innovations and new product introductions,
changes in customer requirements and evolving industry standards. Demand for our
products could be significantly diminished by new technologies or products that
replace them or render them obsolete, which would have a material adverse effect
on our business, financial condition and results of operations.
THE MARKETS IN WHICH WE SELL OUR PRODUCTS ARE INTENSELY COMPETITIVE AND
INCREASED COMPETITION COULD CAUSE REDUCED SALES LEVELS, REDUCED GROSS MARGINS OR
THE LOSS OF MARKET SHARE.
Competition in the healthcare industry markets in which we provide
products is intense and is based upon price, product performance, quality,
reliability and customer service. Our WinStation products compete against
products offered by Topcon and Zeiss, among others. Our DFI products compete
against products offered by Topcon, Kowa, Zeiss, Canon and Nidek, among others.
We are aware of five primary competitors for the DSLI, namely Veatch, MVC, Kowa,
Helioasis and Lombard.
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Although we 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 our ability to compete effectively
and could have a material adverse effect on our business, financial condition
and results of operations. Many of our competitors and potential competitors
have substantially greater financial, manufacturing, marketing, distribution and
technical resources than we have.
Any business combinations or mergers among our competitors, forming
larger competitors with greater resources, or the acquisition of a competitor by
a major medical or technology corporation seeking to enter this business, could
result in increased competition.
WE MAY EXPERIENCE A DECLINE IN SELLING PRICES OF OUR PRODUCTS AS COMPETITION
INCREASES, WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
As competing products become more widely available, the average selling
price of our products may decrease. Trends toward managed care, health care,
cost containment and other changes in government and private sector initiatives
in the United States and other countries in which we do business are placing
increased emphasis on the delivery of more cost-effective medical therapies
which could also adversely affect prices of our products. If we are unable to
offset the anticipated decrease in our average selling prices by increasing our
sales volumes, our net sales will decline. In addition, to maintain our gross
margins, we must continue to reduce the cost of our products. Further, as
average selling prices of our current products decline, we must develop and
introduce new products and product enhancements with higher margins. If we
cannot maintain our net sales and gross margins, our operating results could be
seriously harmed, particularly if the average selling prices of our products
decrease significantly.
IF WE DO NOT SPEND HEAVILY ON RESEARCH AND DEVELOPMENT AND WE FAIL TO ADDRESS
RAPID TECHNOLOGICAL CHANGES IN OUR MARKETS, IT COULD ADVERSELY AFFECT OUR
BUSINESS.
We have incurred substantial research and development expenditures in
the past, and plan to continue to do so in the future. Over the last three
fiscal years, our research and development expenses have been in the range of 7%
to 9% of our net revenues. We cannot assure that our expenditures for research
and development will result in the introduction of new products or, if such
products are introduced, that those products will achieve sufficient market
acceptance. Our failure to address rapid technological changes in our markets
could adversely affect our business and results of operations.
OUR PRODUCTS ARE SUBJECT TO U.S., E.U. AND INTERNATIONAL MEDICAL REGULATIONS AND
CONTROLS, WHICH IMPOSE SUBSTANTIAL FINANCIAL COSTS ON US AND WHICH CAN PREVENT
OR DELAY THE INTRODUCTION OF NEW PRODUCTS.
Our ability to sell our products is subject to various federal, state
and international rules and regulations. In the United States, we are subject to
inspection and market surveillance by the FDA, to determine compliance with
regulatory requirements. The regulatory process is costly, lengthy and
uncertain.
Pursuant to Section 510(k) of the Federal Food, Drug and Cosmetic Act
("FDCA"), we are required to file, and submit, a pre-marketing notification with
the FDA which provides certain safety and effectiveness information concerning
our diagnostic imaging systems, including our DFI and DSLI. The FDA has approved
our pre-marketing notification submittals, thereby granting us permission to
market our products, subject to the general controls and provisions of the FDCA.
The classification of our products require, among other things, annual
registration, listing of devices, good manufacturing practices, labeling and
prohibition against misbranding and adulteration. Further, because we are
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engaged in international sales, our products must satisfy certain manufacturing
requirements and may subject us to various filing and other regulatory
requirements imposed by foreign governments as a condition to the sale of such
products.
We have registered our manufacturing facility with both the FDA and
certain California authorities as a medical device manufacturer and operate such
facility under FDA and California requirements concerning Quality System
Requirements ("QSR"). As a medical device manufacturer, we are required to
continuously maintain our QSR compliance status and to demonstrate such
compliance during periodic FDA and California inspections. If the facilities do
not meet applicable QSR regulatory requirements, we may be required to implement
changes necessary to comply with such regulations.
Although the FDA has made findings which permit us to sell our
products in the marketplace, such findings do not constitute FDA approval of
these devices and we can not predict the effect that future legislation or
regulatory developments may have on our operations. 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 our business, financial condition and
results of operations. Moreover, new products and services developed by us, if
any, also may be subject to the same or other various federal and state
regulations, in addition to those of the FDA.
Following clearance or approval, marketed products are subject to
continuing regulation. We are required to adhere to the FDA's Quality System
Regulation, or QSR, and similar regulations in other countries, which include
design, testing, quality control and documentation requirements. Ongoing
compliance with QSR, labeling and other applicable regulatory requirements is
monitored through periodic inspections and market surveillance by the FDA and by
comparable agencies in other countries.
THE VALUE ADDED RESELLER (VAR) AGREEMENT SIGNED WITH NEXTGEN HEALTHCARE
INFORMATION SYSTEMS, INC. MAY NOT GENERATE ANY SIGNIFICANT FUTURE REVENUE FOR US
AND MAY REDUCE GROSS MARGINS.
The NextGen(R) software products platforms of EPM (Enterprise Practice
Management) and EMR (Electronic Medical Records) allows us to broaden our
product offerings to the ocular health care industry. Despite this new VAR
agreement, there is no guarantee that our sales efforts in this new endeavor
will be successful in the future. Long sales cycles, new sales training
requirements and potential resistance to the initial high cost of the software
may be among those factors contributing to us not being successful in reselling
these products.
If we do experience any degree of success in reselling these products,
our gross margin could be negatively impacted. Our gross margin on the reselling
of these products is lower than the majority of the products that we currently
market.
WE DEPEND ON SKILLED PERSONNEL TO OPERATE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN EXISTING OR HIRE ADDITIONAL
PERSONNEL, OUR ABILITY TO DEVELOP AND SELL OUR PRODUCTS COULD BE HARMED.
Our success depends to a significant extent upon the continued service
of our key senior management, sales and technical personnel, any of whom could
be difficult to replace. Competition for qualified employees is intense, and our
business could be adversely affected by the loss of the services of any of our
existing key personnel. We cannot assure that we will continue to be successful
in hiring and retaining properly trained personnel. Our inability to attract,
retain, motivate and train qualified new personnel could have a material adverse
effect on our business.
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WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WHICH COULD ADVERSELY
AFFECT OUR COMPETITIVE ADVANTAGE.
We rely on a combination of patent, copyright, trademark and trade
secret laws, non-disclosure and confidentiality agreements and other
restrictions on disclosure to protect our intellectual property rights. We
cannot assure that our patent applications will be approved, that any patents
that may be issued will protect our intellectual property, that any issued
patents will not be challenged by third parties or that any patents held by us
will not be found by a judicial authority to be invalid or unenforceable. Other
parties may independently develop similar or competing technology or design
around any patents that may be issued to or held by us. We cannot be certain
that the steps we have taken will prevent the misappropriation of our
intellectual property, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as in the United States. Moreover, if we
lose any key personnel, we may not be able to prevent the unauthorized
disclosure or use of our technical knowledge or other trade secrets by those
former employees.
THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE US TO INCUR SIGNIFICANT
EXPENSES WITHOUT OFFSETTING REVENUES.
Customers typically expend significant effort in evaluating, testing
and qualifying our products before making a decision to purchase them, resulting
in a lengthy initial sales cycle. While our customers are evaluating our
products we may incur substantial sales and marketing and research and
development expenses to customize our products to the customer's needs. We may
also expend significant management efforts, increase manufacturing capacity and
order long-lead-time components or materials. Even after this evaluation
process, a potential customer may not purchase our products. As a result, these
long sales cycles may cause us to incur significant expenses without ever
receiving revenue to offset those expenses.
IF WE FAIL TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS FOR OUR
PRODUCTS, WE COULD INCUR ADDITIONAL COSTS AND SIGNIFICANT DELAYS IN SHIPMENTS,
WHICH COULD RESULT IN THE LOSS OF CUSTOMERS.
We must accurately predict both the demand for our products and the
lead times required to obtain the necessary components and materials. Lead times
for components and materials that we order vary significantly and depend on
factors including the specific supplier requirements, the size of the order,
contract terms and current market demand for components. If we overestimate our
component and material requirements, we may have excess inventory, which would
increase our costs, impair our available liquidity and could have a material
adverse effect on our business, operating results and financial condition. If we
underestimate our component and material requirements, we may have inadequate
inventory, which could interrupt and delay delivery of our products to our
customers. Any of these occurrences would negatively impact our net sales,
business and operating results and could have a material adverse effect on our
business, operating results and financial condition.
OUR DEPENDENCE ON SOLE SOURCE SUPPLIERS EXPOSES US TO POSSIBLE SUPPLY
INTERRUPTIONS THAT COULD DELAY OR PREVENT THE MANUFACTURE OF OUR SYSTEMS.
Certain of the components used in our products are purchased from
single sources. While we believe that most of these components are available
from alternate sources, an interruption of these or other supplies could have a
material adverse effect on our ability to manufacture some of our systems.
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SOME OF OUR MEDICAL CUSTOMERS' WILLINGNESS TO PURCHASE OUR PRODUCTS DEPENDS ON
THEIR ABILITY TO OBTAIN REIMBURSEMENT FOR MEDICAL PROCEDURES USING OUR PRODUCTS
AND OUR REVENUES COULD SUFFER FROM CHANGES IN THIRD-PARTY COVERAGE AND
REIMBURSEMENT POLICIES.
Our medical segment customers include doctors, clinics, hospitals and
other health care providers whose willingness and ability to purchase our
products depends in part upon their ability to obtain reimbursement for medical
procedures using our products from third-party payers, including private
insurance companies, and in the U.S. from health maintenance organizations, and
federal, state and local government programs, including Medicare and Medicaid.
Third-party payers are increasingly scrutinizing health care costs submitted for
reimbursement and may deny coverage and reimbursement for the medical procedures
made possible by our products. Failure by our customers to obtain adequate
reimbursement from third-party payers for medical procedures that use our
products or changes in third-party coverage and reimbursement policies could
have a material adverse effect on our sales, results of operations and financial
condition.
WE HAVE LIMITED PRODUCT LIABILITY INSURANCE AND IF WE ARE HELD LIABLE IN A
PRODUCTS LIABILITY LAWSUIT FOR AMOUNTS IN EXCESS OF OUR INSURANCE COVERAGE, WE
COULD BE RENDERED INSOLVENT.
There can be no assurance that we will not be named as a defendant in
any litigation arising from the use of our products. Although we have our own
product liability insurance policy with a limit of $1 million, should such
litigation ensue and we are held liable for amounts in excess of such insurance
coverage, we could be rendered insolvent. In addition, there can be no assurance
that product liability insurance will continue to be available to us or that the
premiums therefore will not become prohibitively expensive.
IF OUR FACILITIES WERE TO EXPERIENCE CATASTROPHIC LOSS, OUR OPERATIONS WOULD BE
SERIOUSLY HARMED.
Our facilities could be subject to a catastrophic loss such as fire,
flood or earthquake. A substantial portion of our manufacturing activities and
many other critical business operations are located near major earthquake faults
in California, an area with a history of seismic events. Any such loss at our
facility could disrupt our operations, delay production, shipments and revenue
and result in large expenses to repair or replace the facility. Any such loss
could have a material adverse effect on our sales, results of operations and
financial condition.
Since a significant portion of our research and development is done in
Israel, we are also exposed to terrorism, which could also have a material
adverse effect on our business operations.
IF AN EVENT OF DEFAULT OCCURS UNDER THE CONVERTIBLE NOTES ISSUED TO LAURUS ON
SEPTEMBER 25, 2003 OR APRIL 27, 2004, IT COULD RESULT IN A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, OPERATING RESULTS, OR FINANCIAL CONDITION.
On September 25, 2003 we issued a $1,200,000 convertible note to
Laurus. On April 27, 2004 we issued a $1,000,000 convertible note to Laurus.
Events of default under the notes include: failure to pay interest and principal
payments when due; a breach by us of any material covenant or term or condition
of the notes or in any agreement made in connection therewith; a breach by us of
any material representation or warranty made in the notes or in any agreement
made in connection therewith; we make an assignment for the benefit of our
creditors, or a receiver or trustee is appointed for us; any form of bankruptcy
or insolvency proceeding is instituted by or against us; any money judgment
shall be entered or filed against us for more than $125,000; our failure to
timely deliver shares of common stock when due upon conversions of the note; and
our common stock is suspended for 5 consecutive days or 5 days during any 10
consecutive days from a principal market.
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If we default on the notes and the holder demands all payments due and
payable, we will be required to pay 112% of the outstanding principal amount of
each note and any interest accrued thereon. The cash required to pay such
amounts will most likely come out of our working capital. Since we rely on our
working capital for our day to day operations, such a default on the notes could
have a material adverse effect on our business, operating results, or financial
condition to such extent that we are forced to restructure, file for bankruptcy,
sell assets or cease operations, any of which could put your investment dollars
at significant risk.
IF MEDIVISION FAILS TO REPAY AMOUNTS GUARANTEED BY US UNDER THE DEBENTURE AND/OR
DEFAULTS ON THE PROMISSORY NOTE ISSUED UNDER THE LOAN AGREEMENT, IT COULD RESULT
IN A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, OPERATING RESULTS, OR FINANCIAL
CONDITION.
We are a party to the Debenture whereby we guarantee the payment of all
of the debts and liabilities of MediVision to United Mizrahi Bank. The Debenture
is secured by a first lien on all of our assets. MediVision pledged 2,345,500 of
the 11,130,151 shares of our common stock it owns to us in order to secure the
Debenture. In addition we have issued a promissory note to MediVision under the
Loan Agreement whereby we have agreed to loan MediVision up to $1,000,000. The
promissory note is secured by 1,204,500 of the 11,130,151 shares of our common
stock that are owned by MediVision. As a result of the recent amendment to the
Loan Agreement and the issuance of the Debenture (which replaced two existing
debentures), our total liability under these agreements has increased from a
total of $2,000,000 to $3,000,000 while the total collateral securing these
liabilities has increased by 1,204,500 shares to 3,550,000 shares of our common
stock. For a more detailed description of the Loan Agreement and the Debenture,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operation-- MediVision Transactions"
If MediVison fails to pay the debts and liabilities secured by us under
the Debenture we will likely be required to pay these amounts to United Mizrahi
Bank. If the shares posted as collateral to secure the Debenture are
insufficient in value to pay such amounts, the cash required to pay such amounts
will most likely come out of our working capital. Additionally, if MediVision
fails to make the payments on the promissory note under the Loan Agreement when
they become due and the amount of shares posted as collateral is insufficient to
cover such delinquent payments when they are sold, the amount of our working
capital will be reduced. Since we rely on our working capital for our day to day
operations, any such default by MediVision could have a material adverse effect
on our business, operating results, or financial condition to such extent that
we are forced to restructure, file for bankruptcy, sell assets or cease
operations, any of which could put your investment dollars at significant risk.
RISKS RELATED TO THIS OFFERING
WE MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE, WHICH COULD NEGATIVELY AFFECT
YOUR INVESTMENT, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE
OFFERING PRICE.
The offering price of our common stock may vary from the market price
of our common stock after the offering. If you purchase shares of common stock,
you may not be able to resell those shares at or above the offering price. The
market price of our common stock may fluctuate significantly in response to a
number of factors, some of which are beyond our control, including: a quarterly
variations in operating results; changes in financial estimates by securities
analysts; changes in market valuations of other similar companies; announcements
by us or our competitors of new products or of significant technical
innovations, contracts, acquisitions, strategic partnerships or joint ventures;
additions or departures of key personnel; any deviations in net sales or in
losses from levels expected by securities analysts; and future sales of common
stock.
-8-
In addition, the stock market has recently experienced extreme
volatility that has often been unrelated to the performance of particular
companies. These market fluctuations may cause our stock price to fall
regardless of our performance.
BECAUSE OUR SECURITIES TRADE ON THE OTC BULLETIN BOARD, YOUR ABILITY TO SELL
YOUR SHARES IN THE SECONDARY MARKET MAY BE LIMITED.
The shares of our common stock 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. In May 1998, the NASD
notified us that we no longer satisfied Nasdaq Small-Cap Market listing
requirements and, in accordance with the terms of the Nasdaq Listing
Qualifications Panel decision, our common stock was delisted therefrom on May
27, 1998. Further, due to our inability to comply with the Boston Stock Exchange
listing requirements, our common stock was delisted therefrom on March 3, 1998.
As a result, it may be more difficult for an investor to dispose of our
securities, or to obtain accurate quotations on their market value. Furthermore,
the prices for our securities may be lower than might otherwise be obtained.
Moreover, because our securities currently trade on the OTC Bulletin
Board, they are subject to the rules promulgated under the Securities Exchange
Act of 1934, as amended, which impose additional sales practice requirements on
broker-dealers that sell securities governed by these rules to persons other
than established customers and "accredited investors" (generally, individuals
with a net worth in excess of $1,000,000 or annual individual income exceeding
$200,000 or $300,000 jointly with their spouses). For such transactions, the
broker-dealer must determine whether persons that are not established customers
or accredited investors qualify under the rule for purchasing such securities
and must receive that person's written consent to the transaction prior to sale.
Consequently, these rules may adversely affect the ability of purchasers to sell
our securities and otherwise affect the trading market in our securities.
BECAUSE OUR SHARES ARE DEEMED "PENNY STOCKS," YOU MAY HAVE DIFFICULTY SELLING
THEM IN THE SECONDARY TRADING MARKET.
The Securities and Exchange Commission has adopted regulations which generally
define a "penny stock" to be any equity security that has a market price (as
therein defined) less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to certain exceptions. Additionally, if the equity
security is not registered or authorized on a national securities exchange that
makes certain reports available, the equity security may also constitute a
"penny stock." As our common stock falls within the definition of penny stock,
these regulations require the delivery by the broker-dealer, prior to any
transaction involving our common stock, of a risk disclosure schedule explaining
the penny stock market and the risks associated with it. The broker-dealer also
must provide the customer with bid and offer quotations for the penny stock, the
compensation of the broker-dealer and any salesperson in the transaction, and
monthly account statements indicating the market value of each penny stock held
in the customer's account. In addition, the penny stock rules require that,
prior to a transaction in a penny stock not otherwise exempt from those rules,
the broker-dealer must make a special written determination that the penny stock
is a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the trading activity in the secondary market for our common stock.
The ability of broker-dealers to sell our common stock and the ability of
shareholders to sell our common stock in the secondary market would be limited.
As a result, the market liquidity for our common stock would be severely and
adversely affected. We can provide no assurance that trading in our common stock
will not be subject to these or other regulations in the future, which would
negatively affect the market for our common stock.
-9-
WE HAVE ADDITIONAL SECURITIES AVAILABLE FOR ISSUANCE, INCLUDING PREFERRED STOCK,
WHICH IF ISSUED COULD ADVERSELY AFFECT THE RIGHTS OF THE HOLDERS OF OUR COMMON
STOCK.
Our articles of incorporation authorize the issuance of 35,000,000
shares of common stock and 20,000,000 shares of preferred stock. The common
stock and the preferred stock can be issued by, and the terms of the preferred
stock, including dividend rights, voting rights, liquidation preference and
conversion rights can generally be determined by, our board of directors without
shareholder approval. Any issuance of preferred stock could adversely affect the
rights of the holders of common stock by, among other things, establishing
preferential dividends, liquidation rights or voting powers. Accordingly,
shareholders, including those purchasing the securities offered hereby, will be
dependent upon the judgment of our management in connection with the future
issuance and sale of shares of our common stock and preferred stock, in the
event that buyers can be found therefor. Any future issuances of common stock or
preferred stock would further dilute the percentage ownership of our company
held by the public shareholders. Furthermore, the issuance of preferred stock
could be used to discourage or prevent efforts to acquire control of our company
through acquisition of shares of common stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which generally
include the plans and objectives of management for future operations, including
plans and objectives relating to our future economic performance and our current
beliefs regarding revenues we might earn if we are successful in implementing
our business strategies. The forward-looking statements and associated risks may
include, relate to or be qualified by other important factors. You can identify
forward-looking statements generally by the use of forward-looking terminology
such as "believes," "expects," "may," "intends," "plans," "should," "could,"
"seeks," "pro forma," "anticipates," "estimates," "continues," or other
variations of those terms, including their use in the negative, or by
discussions of strategies, opportunities, plans or intentions. You may find
these forward-looking statements under the captions "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Description of Business," as well as captions
elsewhere in this prospectus. A number of factors could cause results to differ
materially from those anticipated by forward-looking statements, including those
discussed under "Risk Factors" and "Description of Business."
These forward-looking statements necessarily depend upon assumptions
and estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the
forward-looking statements.
Any of the factors described above or in the "Risk Factors" section
above could cause our financial results, including our net income (loss) or
growth in net income (loss) to differ materially from prior results, which in
turn could, among other things, cause the price of our common stock to fluctuate
substantially.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock offered under this prospectus. Rather, the selling security holders
will receive those proceeds directly. We may receive proceeds in connection with
the exercise of warrants whose underlying shares may in turn be sold
-10-
by the selling security holder. Although the amount and timing of our receipt of
any such proceeds are uncertain, such proceeds if received will be used for
general corporate purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The shares of our common stock 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. In May 1998, the NASD
notified us that we no longer satisfied Nasdaq Small-Cap Market listing
requirements and, in accordance with the terms of the Nasdaq Listing
Qualifications Panel decision, our common stock was delisted therefrom on May
27, 1998. Further, due to our inability to comply with the Boston Stock Exchange
listing requirements, our common stock was delisted therefrom on March 3, 1998.
The following table sets forth the high and low prices for our 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.
YEAR ENDING YEAR ENDING YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- ----------------- -----------------
HIGH LOW HIGH LOW HIGH LOW
ASK BID ASK BID ASK BID
--- --- --- --- --- ---
First Quarter 1.35 0.95 1.35 0.75 0.33 0.20
Second Quarter 1.37 0.72 1.55 0.86 0.91 0.30
Third Quarter 1.40 1.10 1.40 0.50 1.25 0.61
Fourth Quarter* 1.26 1.20 1.15 0.55 1.50 0.92
* October 1, 2005 through October 4, 2005.
On October 4, 2005, the closing price for our common stock, as reported
by the Nasdaq OTC Bulletin Board, was $1.20 per share and there were
approximately 122 shareholders of record.
Dividends
We have not paid any cash dividends since our inception and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Future dividend policy will be determined periodically by the Board of
Directors based upon conditions then existing, including our earnings and
financial condition, capital requirements and other relevant factors.
Equity Compensation Plans
The following table sets forth certain information, as of June 30,
2005, with respect to our equity compensation plans:
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NUMBER OF SECURITIES
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
BE ISSUED UPON EXERCISE EXERCISE PRICE OF FUTURE ISSUANCE
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY COMPENSATION
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS PLANS
------------- ----------------------- ------------------- -------------------------
Equity compensation
plans approved by
security holders.............. 692,500(1) $.71 94,000(2)
Equity compensation
plans not approved by
security holders.............. 1,368,633(3) $.44 1,009,999(4)
Total....................... 2,349,133 $.52 1,070,999
- ------------
(1) Represents 36,500 options granted under the our 1992 Stock Option Plan
under which no further options may be granted and 656,000 options
granted under our 2003 Stock Option Plan.
(2) Represents shares available for grant under our 2003 Stock Option Plan
to our employees, directors, consultants and non-employee directors.
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.
(3) Includes 60,000 shares subject to options granted under our 1997 Stock
Option Plan under which no further options may be granted. Also
includes 5,000 and 1,258,333 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.
(4) Includes 965,000 and 214,999 shares available for future grant under
the 1995 Plan and the 2000 Plan respectively, to our employees,
directors, consultants and non-employee directors. 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.
DILUTION
Sales of the shares of common stock by the selling security holders in
this offering will not result in any substantial change to the net tangible book
value per share before and after the distribution of shares by the selling
security holders. There will be no change in the net tangible book value per
share attributable to cash payments made by purchasers of the shares being
offered by the selling security holders. Prospective investors in the shares
held by the selling security holders should be aware, however, that the price of
shares being offered by the selling security holders may not bear any rational
relationship to our net tangible book value per share.
-12-
DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT
We were incorporated under the laws of the State of California on July
14, 1986. We are headquartered in Sacramento, California and are 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. Our products are used for a
variety of standard diagnostic test procedures performed in most eye care
practices.
Since our inception, we have developed products that have addressed
primarily the needs of the ophthalmic angiography markets, both fluorescein and
indocyanine green. The current flagship products in our angiography line are our
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.
We believe, 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 (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. We are applying our
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.
Our objective is to become a leading provider of a diverse range of
complimentary ophthalmic products and services for the ocular health care
industry. We are currently focusing our development efforts on related products
for the ocular healthcare market, as well as features and enhancements to our
existing products. We have also entered into the EPM (Enterprise Practice
Management) and the EMR (Electronic Medical Records) markets. To that end, we
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 to act as a
value added reseller of their products to the market.
(b) BUSINESS OF ISSUER
PRODUCTS
WinStation Systems
Our 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. Our
WinStation systems allow for immediate diagnosis
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and treatment of the patient. Images are automatically transferred to a database
and permanently stored on CD-ROM or DVD-ROM. We offer a variety of networking
and printer options.
Our 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 five 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 TM
We have expanded our offerings in ophthalmic informatics to provide
comprehensive solutions for the ophthalmic industry. We 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 provider of
EMR and EPM software platforms therefore expanding our product portfolio with
Ophthalmology Office.
Digital Fundus Imager (DFI)
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.
Digital Slit Lamp Imager (DSLI)
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, we believe 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 our
digital imaging system products. We believe 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
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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 our digital imaging systems.
Currently we know of five manufacturers of fundus cameras. These
manufacturers produce a total of twenty-two models, nine current and thirteen
legacy models. We have designed optical and electronic interfaces for each of
the twenty-two models.
The primary target market for digital angiography systems are retinal
specialists who number approximately 2,000 in the United States. Our digital
imaging system sales have been driven in this segment by both fluorescein and
ICG angiography. We expect the demand for digital angiography to continue
because we believe 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.
Sales, Marketing and Distribution
We utilize a direct sales force in marketing our products throughout
the United States and Canada. At June 30, 2005, our sales and marketing
organization consisted of a national sales manager as well as seven territory
sales representatives and nine product specialists located throughout the United
States. These regional representatives and product specialists provide
marketing, sales, maintenance, installation and training services. We also
utilize our own-trained contractors to provide certain installation and training
services. Additionally, we subcontract service maintenance in several cities in
the United States and Canada for routine component replacement.
Internationally, we utilize ophthalmic distributors that sell our
products in various foreign countries. Each country has trained sales and
technical service staff for their respective territories. MediVision Medical
Imaging Ltd. ("MediVision"), an Israeli company, and majority shareholder of our
company, serves as the principal distributor of our products in Europe and
certain other international markets.
To promote sales, we prepare brochures, data sheets and application
notes on our products, participate in industry trade shows and workshops, and
advertise in trade journals, marketing press releases, via direct mail
solicitations, journal articles, and scientific papers and presentations.
Manufacturing and Production
We are primarily a systems integrator with proprietary software,
optical interfaces and electronic fundus camera interfaces. We also manufacture
our DFI optical head. Certain components are subcontracted to outside vendors
and assembled at our facility. We inventory and assemble components in a 10,200
square foot facility located in Sacramento, California. For production of
certain components of our products, our manufacturing strategy is to use
subcontractors to minimize time and reduce capital requirements.
We have been audited by the Food and Drug Administration (the "FDA")
and were deemed to conform to Good Manufacturing Practices. Our digital
angiography products, including our DFI and DSLI are registered with the FDA.
-15-
Components, Raw Materials and Suppliers
As a systems integrator, a significant number of the major hardware
components in our products are procured from sole source vendors. Whenever
possible, however, we seek multiple vendor sources from which to procure our
components. Moreover, we work closely with our principal component suppliers,
such as Dell Computer and Roper Scientific, and the rest of our vendors to
maintain dependable working relationships and to continually integrate into the
manufacturing of our 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 us.
Warranties
We generally provide a 12-month limited warranty for parts, labor and
shipping charges in connection with the initial sale of our 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 our products on-site at a doctor's office, we
generally install the system and train the doctor and the doctor's staff. We
also offer service plans for sale to our 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 our WinStation products, we are 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 own
fundus cameras. In contrast, our 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. These fundus
cameras, when combined with an imaging system comparable to the DFI, are
significantly more expensive than the DFI. We are 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.
We are 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 we 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 our ability to compete effectively
and could have a material adverse effect on our business, financial condition
and results of operations. Many of our competitors and potential competitors
have substantially greater financial, manufacturing, marketing, distribution and
technical resources than we have.
-16-
Research and Development
Our net research and development expenditures in the three and six
months ended June 30, 2005 and in the years ended December 31, 2004 and 2003
were approximately $265,000 and $508,000, and $988,000 and $702,000,
respectively. We have focused our recent research and development efforts on new
digital image capture products. We expect our research and development
expenditures to increase. Research and development is currently conducted for us
by MediVision and other outsourced consultants.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
On June 15, 1993, we were 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. Certain of the proprietary software, optical interfaces and
synchronization modules of our digital imaging systems are largely proprietary
and constitute trade secrets, but the basic computer hardware, software, digital
cameras and video components are purchased from third parties. No patent
applications have been filed with respect thereto.
We have been issued a trademark for "Ophthamology Office" which expires
in December 2010 and a pending trademark registration for "Automontage". We also
have copyright registrations on "WinStation Version 5", "WinStation Version 6"
and "WinStation 10 Version XP".
Although we believe that our products do not and will not infringe on
patents or violate proprietary rights of others, it is possible that our
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 our products, infringe patents, trademarks or
proprietary rights of others, we 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 we 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 our business.
There can be no assurance that our 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 us. In
addition, there can be no assurance that we will have the financial or other
resources necessary to enforce or defend a patent or trademark infringement or
proprietary rights violation action. Moreover, if our products infringe patents,
trademarks or proprietary rights of others, we could, under certain
circumstances, become liable for damages, which also could have a material
adverse effect on our business.
We also rely on trade secrets, know-how, continuing technological
innovation and other unpatented proprietary technology to maintain our
competitive position. We anticipate aggressively defending our 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 our trade secrets or disclose such
technology, or that we can meaningfully protect our rights to our unpatented
trade secrets and other proprietary technology.
We seek to protect our unpatented proprietary technology, in part,
through proprietary confidentiality and nondisclosure agreements with employees,
consultants and other parties. Our confidentiality agreements with our employees
and consultants generally contain industry standard provisions requiring such
individuals to assign to us without additional consideration any inventions
conceived or reduced to practice by them while employed or retained by us,
subject to customary
-17-
exceptions. There can be no assurance that proprietary information agreements
with employees, consultants and others will not be breached, that we would have
adequate remedies for any breach or that our trade secrets will not otherwise
become known to or independently developed by competitors.
GOVERNMENT REGULATION
The marketing and sale of our 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"), we are required to file,
and have submitted, a pre-marketing notification with the FDA which provides
certain safety and effectiveness information concerning our diagnostic imaging
systems, including our DFI and DSLI. The FDA has approved our pre-marketing
notification submittals, thereby granting us permission to market our products,
subject to the general controls and provisions of the FDCA. The classification
of our products require, among other things, annual registration, listing of
devices, good manufacturing practices, labeling and prohibition against
misbranding and adulteration. Further, because we are engaged in international
sales, our products must satisfy certain manufacturing requirements and may
subject us to various filing and other regulatory requirements imposed by
foreign governments as a condition to the sale of such products.
We have registered our manufacturing facility with both the FDA and
certain California authorities as a medical device manufacturer and operate such
facility under FDA and California requirements concerning Quality System
Requirements ("QSR"). As a medical device manufacturer, we are required to
continuously maintain our QSR compliance status and to demonstrate such
compliance during periodic FDA and California inspections. If the facilities do
not meet applicable QSR regulatory requirements, we may be required to implement
changes necessary to comply with such regulations.
Although the FDA has made findings which permit us to sell our products
in the marketplace, such findings do not constitute FDA approval of these
devices and we can not predict the effect that future legislation or regulatory
developments may have on our operations. 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 our business, financial condition and results of
operations. Moreover, new products and services developed by us, if any, also
may be subject to the same or other various federal and state regulations, in
addition to those of the FDA.
INSURANCE
We maintain general commercial casualty and property insurance coverage
for our business operations, as well as product liability insurance. As of June
30, 2005, we have not received any product liability claims and are unaware of
any threatened or pending claims. To the extent that product liability claims
are made against us in the future, such claims may have a material adverse
impact on our business.
EMPLOYEES
As of June 30, 2005, we had 44 full-time employees. We also engage the
services of consultants from time to time to assist us 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.
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We have no collective bargaining agreements covering any of our
employees, have never experienced any material labor disruption, and are unaware
of any current efforts or plans to organize our employees. We consider our
relationship with our employees to be good.
TRANSACTIONS WITH LAURUS MASTER FUND, LTD.
On September 25, 2003, we entered into a securities purchase agreement
with Laurus. Pursuant to this agreement, we sold to Laurus 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 our common stock at a conversion price of $1.07 per share.
Interest is payable at our option in cash or shares of common stock. We granted
to Laurus a subordinated second priority security interest in our assets to
secure the obligations under the note pursuant to a security agreement dated
September 25, 2003 between us and Laurus.
Additionally, we issued a warrant to Laurus to purchase 375,000 shares
of our common stock at exercise prices ranging between $1.23 and $1.61 per
share. Laurus may exercise the warrant through September 25, 2010.
On November 26, 2003 we registered for resale the shares of common
stock issuable upon conversion of the note and upon exercise of the warrant
pursuant to a registration rights agreement dated September 25, 2003 between the
registrant and the purchaser.
As of June 30, 2005 we had approximately $477,562 of principal
outstanding and payable to Laurus under this secured convertible term note.
On April 27, 2004, we entered into a securities purchase agreement with
Laurus. Pursuant to this agreement, we sold to Laurus 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 our common stock at a conversion price of $1.22 per share. Interest is
payable at our option in cash or shares of common stock. We granted to Laurus a
subordinated second priority security interest in our assets to secure the
obligations under the note pursuant to a security agreement dated April 27, 2004
between us and Laurus.
Additionally, we issued a warrant to Laurus to purchase 313,000 shares
of our common stock at exercise prices ranging between $1.40 and $1.83 per
share. Laurus may exercise the warrant through April 27, 2009.
On June 22, 2004 we registered for resale the shares of common stock
issuable upon conversion of the note and upon exercise of the warrant pursuant
to a registration rights agreement dated April 27, 2004 between the registrant
and the purchaser.
As of June 30, 2005 we had $878,787 of principal outstanding and
payable to Laurus under this secured convertible term note.
DESCRIPTION OF PROPERTY
We lease under a noncancelable triple net lease expiring in June 2007,
approximately 10,200 square feet of office, manufacturing and warehouse space in
Sacramento, California. We also lease an approximately 200 square foot sales
office in Simsbury, Connecticut on a month-to-month basis. We believe that our
existing facilities are suitable and adequate to meet our current needs. We pay
minimum monthly lease payments, with respect to these properties, in the
aggregate of approximately $9,000. We
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believe our existing leased facilities are adequately covered by insurance. We
have no current plans to significantly renovate, improve or develop any of our
leased facilities. We do not have, and do not foresee acquiring, any real estate
or investments in real estate, and are not engaged in any real estate
activities.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
General
To date, we have designed developed, manufactured and marketed
ophthalmic digital imaging systems and informatics solutions and have derived
substantially all of our revenues from the sale of such products. The primary
target market for our digital angiography systems and related products has
traditionally been retinal specialists.
In October 2001, MediVision, our parent company, signed an agreement
for the acquisition of a minority interest in MediVision by Agfa Gevaert N.V.
thereby 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 us. 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 us.
In June 2003, we signed a licensing agreement with NextGen Healthcare
Information Systems, Inc., a subsidiary of Quality Systems, Inc. Under the terms
of the agreement, we 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).
This strategic business alliance diversifies our product portfolio,
enabling us to offer a wider variety of products and comprehensive solutions to
our 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 September 2003, we entered into a $1,200,000 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 shares of
our common stock at a fixed conversion price of $1.07. We also issued seven-year
warrants to Laurus to purchase 375,000 shares of our common stock at exercise
prices ranging between $1.23 and $1.61 per share.
In April 2004, we 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 shares of our
common stock at a fixed conversion price of $1.22. We also issued five-year
warrants to Laurus to purchase 313,000 shares of our common stock at exercise
prices ranging between $1.40 and $1.83 per share.
As of June 30, 2005, we had a stockholders' equity of approximately
$3,230,000 and our current assets exceeded our current liabilities by
approximately $3,582,000. The convertible note transactions that we entered into
with Laurus during September 2003 and April 2004 have had a favorable impact on
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our current ratio. There can be no assurance that we will be able to achieve or
sustain significant positive cash flows, revenues or profitability in the
future.
MediVision Transactions
During the period of August 2000 through July 1, 2001, we executed
several promissory notes in favor of MediVision Medical Imaging LTD.
("MediVision"), an Israeli corporation and majority shareholder in our 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 our 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 our 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, we entered in Amendment
No. 2 to the Working Capital Funding Agreement and the Short Term Note with
MediVision whereby the repayment terms on the debt were extended on all
principal and interest due until January 1, 2005. As a result of cash payments
and product shipments to MediVision discussed below, the principal and interest
was paid during the first quarter of 2004. 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 shares of common stock.
On March 2, 2005, we entered into a Loan and Security Agreement and
Promissory Note with MediVision (the "Loan Agreement") whereby we agreed to loan
MediVision up to $2,000,000. The Loan Agreement incorporated the $1,150,000
previously approved by our 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 was secured by 2,409,000 of the
11,130,151 shares of our common stock owned by MediVision. The number of shares
was based on the average closing price of shares of our stock 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 of our stock it owns during the period of the agreement, a
minimum of 50% of the proceeds from such sales would be required to be paid to
us to reduce the outstanding amount owed. On July 28, 2005, we and MediVision
entered into an amendment to the Loan Agreement whereby MediVision repaid
$1,000,000 to us, decreasing the agreed upon loan of $2,000,000 to $1,000,000
and the amount of shares securing the loan was decreased by 1,204,500 shares. On
September 20, 2005, pursuant to a Common Stock Purchase Agreement dated as of
September 16, 2005 between MediVision and Meadowbrook Opportunity Fund LLC,
MediVision sold 400,000 shares of our common stock to Meadowbrook Opportunity
Fund LLC at a price of $1.20 per share. MediVision used $240,000 of the proceeds
from this sale to repay part of the aforementioned loan to us. As of October 4,
2005, MediVision owes us $760,000 plus accrued interest under the loan.
In August 2002, our Board of Directors, at MediVision's request,
authorized us to guarantee and/or provide security interests in our 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 our assets,
which had been granted in consideration of loans to us from MediVision. In
December 2002, our Board of Directors approved our issuance of two debentures in
favor of the banks to act as security for the debt of MediVision, which
debentures were secured by a first lien on all of our assets. Such debentures
and lien were signed in December 2002. The purpose of both debentures was to
guarantee and/or provide a security interest for certain debts and liabilities
of MediVision. On July 20, 2005, we replaced the existing debentures and
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lien in favor of the banks that were issued by us in an aggregate amount of up
to $1,900,000, with a new debenture and lien in an aggregate amount of up to
$2,000,000. One of the terminated debentures was issued in favor of United
Mizrahi Bank Ltd. and the other terminated debenture was issued in favor of Bank
Leumi Le-Israel. In lieu of the terminated debentures, we entered into a new
Secured Debenture (the "Debenture") in favor of United Mizrahi Bank Ltd., in an
amount of up to $2,000,000 (plus interest, commissions and all expenses). Under
the terms of the Debenture, we guarantee the payment of all of the debts and
liabilities of MediVision to United Mizrahi Bank. The Debenture is secured by a
first lien on all of our assets. MediVision pledged 2,345,500 of the 11,130,151
shares of our common stock it owns to us in order to secure the Debenture. The
number of shares securing the Debenture is comprised of the 1,204,500 shares
previously securing the promissory note under the Loan Agreement to cover
$1,000,000 and 1,141,000 shares of our common stock (which number was based upon
the average closing price of shares of our stock during the period covering the
last ten (10) business days of February, 2005, which was $1.17, discounted by
25%) to cover the second $1,000,000. The amount owed to the financial
institutions by MediVision and secured by us as of October 4, 2005 was
approximately $2,000,000.
As a result of the amendments to the Loan Agreement and the Debenture,
the total number of shares securing the promissory note under the Loan
Agreement, and the Debenture, is 3,550,000 out of the 11,130,151 shares of our
common stock owned by MediVision.
In March 2004, our Board of Directors approved a line of credit to
MediVision of $1,000,000 at 9.3% interest for two years. In January 2005 our
Board of Directors approved an additional loan advance of $150,000 for a 30 day
term.
At June 30, 2005 we had recorded a net amount due from MediVision of
approximately $1,955,558 on the promissory note and approximately $28,539 net,
due for products and services. On July 28, 2005, pursuant to the aforementioned
Debenture signed by us, MediVision executed the amended Loan Agreement and paid
back $1,000,000 of the loan from us; reducing the amount MediVision owes us on
the promissory note to $955,558.
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 shares
of our common stock to S2 Partners LP 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 our common stock at a price of $1.38
per share.
Pursuant to a Common Stock Purchase Agreement dated as of September 16,
2005 between MediVision and Meadowbrook Opportunity Fund LLC, MediVision sold
400,000 shares of our common stock to Meadowbrook Opportunity Fund LLC at a
price of $1.20 per share. As a result of the foregoing transactions, as of
October 4, 2005, MediVision owned approximately 70% of our outstanding common
stock.
New Financial 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. We are required
to apply FAS 23 (R) on a modified prospective method. Under this method, we are
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, we may elect to adopt FAS 123 (R) by
restating previously issued financial statements, basing the expense on that
previously
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reported in their pro forma disclosures required by FAS 123. FAS 123 (R) is
effective for the first reporting period beginning after December 15, 2005. We
anticipate 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 our 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. We are currently evaluating the effect of SFAS 151 on our financial
statements and related disclosures.
Selected Financial Data
The following selected financial data of the Company as of and for the
years ended December 31, 2004 and 2003 is derived from the consolidated
financial statements that have been audited by Perry-Smith LLP, Independent
auditors. The Company's financial statements for the six-month periods ended
June 30, 2005 and June 30, 2004 are unaudited. However, in the opinion of the
Company, all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation have been made. Interim results are not necessarily
indicative of the results of operations to be expected for a full fiscal year.
This financial data should be read in conjunction with the Company's financial
statements and the notes thereto included elsewhere in this Prospectus and with
Management's Discussion and Analysis of Results of Operations and Financial
Condition which follows.
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SIX MONTHS ENDED JUNE 30,
UNAUDITED YEARS ENDED DECEMBER 31,
------------------------- ------------------------
2005 2004 2004 2003
---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net revenues $ 5,789,604 $ 4,800,109 $ 10,818,379 $ 9,944,827
Cost of sales 2,376,013 1,871,945 4,290,049 3,955,680
------------ ------------ ------------ ------------
Gross profit 3,413,591 2,928,164 6,528,330 5,989,147
Operating expenses:
Sales and marketing 1,414,395 1,356,007 2,936,100 2,915,848
General and administrative 638,632 505,805 1,205,765 1,086,634
Research and development 507,811 477,186 987,769 702,020
------------ ------------ ------------ ------------
Total operating expenses 2,560,838 2,338,998 5,129,634 4,686,502
------------ ------------ ------------ ------------
Income from operations 852,753 589,166 1,398,696 1,302,645
Interest and other expense, net (103,618) (104,667) (252,100) (269,451)
Net income before taxes 749,135 484,499 1,146,596 1,033,194
Income tax benefit (expense) (9,024) - 558,000 405,000
------------ ------------ ------------ ------------
Net income $ 740,111 $ 484,499 $ 1,704,596 $ 1,438,194
============ ============ ============ ============
Basic net income per share $ 0.05 $ 0.03 $ 0.12 $ 0.13
Shares used in the calculation of basic
net income per share 15,056,374 14,537,924 14,771,112 11,267,493
Diluted net income per share $ 0.05 $ 0.03 $ 0.11 $ 0.12
============ ============ ============ ============
Shares used in the calculation of
diluted net income per share 16,229,367 15,583,163 15,772,214 11,877,205
============ ============ ============ ============
---------------------------------------------------------------------------
STATEMENT OF CASH FLOWS DATA:
Net cash provided by operating
activities $ 1,009,309 $ (135,396) $ 1,116,940 $ 258,304
Net cash used in investing activities (8,750) (7,675) (22,625) (175,360)
Net cash (used in) provided by
financing activities (884,785) 719,317 (376,039) 805,856
Net increase (decrease) in cash and
cash equivalents $ 115,774 $ 576,246 $ 718,276 $ 888,800
============ ============ ============ ============
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COMPARISON OF THREE MONTHS ENDED JUNE 30, 2005 TO THREE MONTHS ENDED
JUNE 30, 2004 AND COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2005 TO SIX MONTHS
ENDED JUNE 30, 2004
Revenues
Our revenues for the second quarter ended June 30, 2005 were
$2,949,579, representing a 23% increase from revenues of $2,403,039 for the
second quarter ended June 30, 2004. Revenues for the first six months of fiscal
2005 were $5,789,604, representing a 21% increase from revenues of $4,800,109
for the comparable six months of fiscal 2004. The increase in revenues is due
primarily to higher revenues generated from the Ophthalmology Office products,
and increased service revenues. Digital angiography systems and Informatics
accounted for approximately 85% and 89% of our revenue for the second quarters
and six month periods of 2005 and 2004, respectively. Service revenues accounted
for approximately 15% and 11% of our revenue for the second quarter and
six-month periods of 2005 and 2004, respectively. Revenues from sales of our
products to MediVision were approximately $137,900 and $405,565 during the three
and six-month periods ended June 30, 2005 and $96,839 and $279,914 for the
comparable three and six-month period ending June 30, 2004, respectively.
Gross Margins
Gross margins were approximately 59% during the second quarter ended
June 30, 2005 as compared to 62% for the second quarter ended June 30, 2004. For
the six-month period ended June 30, 2005, gross margins were approximately 59%
as compared to 61% for the comparable six-month period of 2004. The decrease in
margins is a result of an increase in sales of the NextGen Healthcare
Information Systems, Inc. software products, which have lower gross margins than
the majority of our other products. It is anticipated that our gross margins
will decrease as our sales of the NextGen software products become more
significant.
Sales and Marketing Expenses
Sales and marketing expenses accounted for approximately 23% of total
revenues during the second quarter of fiscal 2005 as compared to approximately
29% during the second quarter of fiscal 2004. Actual expense levels decreased to
$686,390 during the second quarter of 2005 versus $696,325 during the second
quarter of 2004. For the first six months of fiscal 2005 and fiscal 2004 such
expenses accounted for approximately 24% and 28% of total revenues for the
respective six-month periods. These decreases are primarily attributable to an
increase in revenues, a static number of sales representatives and lower
marketing expenses mainly due to postponement of certain marketing projects.
General and Administrative Expenses
General and administrative expenses were $325,636 in the second quarter
of fiscal 2005 and $258,340 in the second quarter of fiscal 2004. Such expenses
accounted for approximately 11% of revenues during the second quarter of 2005
and 2004. For the first six months of fiscal 2005 and 2004 such expenses
accounted for approximately 11% of total revenues for the respective six-month
periods. Expenses increased to $638,632 from $505,805 during the six-month
periods of fiscal 2005 and 2004 respectively. The 2005 expense increase resulted
from increased legal expenses and reserves versus a write-down in reserves in
2004.
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Research and Development Expenses
Research and development expenses were $265,404 in the second quarter
of fiscal 2005 and $229,950 in the second quarter of fiscal 2004. Such expenses
accounted for approximately 9% and 10% of revenues during the second quarter of
2005 and 2004, respectively. For the first six months of fiscal 2005, such
expenses accounted for approximately 9% of total revenues as compared to
approximately 10% during the comparable six-month period of 2004. We focused our
recent research and development efforts on new digital image capture products
and expect such research and development expenditures to grow as a result of
outsourcing our research and development activities to MediVision and other
consultants.
Interest and Other Expense, net
Interest and other expense was $51,029 during the second quarter of
fiscal 2005 versus $59,342 during the second quarter of fiscal 2004. For the
six-month periods, interest and other expense was $103,618 and $104,667 in
fiscal 2005 and fiscal 2004, respectively. These amounts were comprised
principally of interest expense, mainly associated with the convertible loans
from Laurus and with financing arrangements provided to certain of our customers
in connection with sales of our products.
Net Income
We recorded net income of $405,951, or $0.03 per share basic and
diluted earnings, for the second quarter ended June 30, 2005 as compared to net
income of $244,684 or $0.02 per share basic and diluted earnings for the second
quarter ended June 30, 2004. For the six-month periods, we recorded net income
of $740,111 or $0.05 per share basic earnings and diluted earnings, as compared
to $484,499, or $0.03 per share basic and diluted earnings during fiscal 2005
and fiscal 2004, respectively. The increase in earnings per share is mainly
attributable to an increase in income between the comparable quarters and
six-month periods.
Liquidity and Capital Resources
Our operating activities generated cash of $1,009,309 during the six
months ended June 30, 2005 as compared to cash used of $135,396 in the six
months ended June 30, 2004. The cash generated from operations during the first
six months of 2005 was principally from net income for the period, a decrease in
inventory, and an increase of current liabilities. The cash used from operations
during the first six months of 2004 was principally from increased inventory and
a reduction of current liabilities offset partially by net income for the
period.
Cash used in investing activities was $8,750 during the first six
months of 2005 as compared to $7,675 during the first six months of 2004. Our
investing activities consisted of minor purchases of equipment. We anticipate
continued near-term capital expenditures in connection with increasing our pool
of demonstration equipment, and ongoing efforts to upgrade our existing
management information and communication systems. We anticipate that related
expenditures, if any, will be financed from cash flows from operations or other
financing arrangements available to us.
We used cash in financing activities of $884,785 during the first six
months of fiscal 2005 as compared to generating cash of $719,317 during the
first six months of fiscal 2004. The cash used in financing activities during
the first six months of 2005 was principally from advances on the note
receivable from MediVision and repayments of the debt to Laurus. Cash generated
in financing activities during the first six months of 2004 was principally from
proceeds received from signing the $1,000,000
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convertible debt instrument with Laurus and the addition of a capital lease
offset by repayments of borrowings and advances under existing arrangements with
MediVision.
As of June 30, 2005 we had recorded a net amount due from MediVision of
approximately $1,955,558 on the promissory note and approximately $28,558 net
amount due for products and services.
On July 28, 2005, MediVision paid back $1,000,000 of the loan; reducing
the amount MediVision owes us on the promissory note to $955,558.
On June 30, 2005 our cash and cash equivalents were $2,106,084. In the
foreseeable future, management anticipates having adequate cash flow to fund our
daily needs.
There can be no assurances that we will be able to achieve or sustain
significant positive cash flows, revenues or profitability in the future.
We will continue to evaluate alternative sources of capital to meet our
growth requirements, including other asset or debt financing, issuing equity
securities and entering into other financing arrangements. There are no
assurances, however, that any of the contemplated financing arrangements
described herein will be available and, even if available, can be obtained on
terms favorable to us.
COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER 31, 2003
Revenues
Our 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 our newest digital angiography system, the
WinStation 3200 TM 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 our total revenues during
2004 and 2003, respectively. Service revenue for the years ended 2004 and 2003
accounted for approximately 11% and 8% of our 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
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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. We have focused our recent research and development efforts on new
digital image capture products. We expect our research and development
expenditures to increase. Research and development is currently conducted for us
by MediVision and other outsourced 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 our customers in connection with sales of our products.
Interest income in both periods was insignificant.
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 our 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.
At December 31, 2004, we had 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
We 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 this prospectus).
The results of operations for 2004 reflect the positive impact of our
ongoing attention and resources to core marketing, selling and corporate
operations issues. Growing sales of our digital angiography products reflect the
market acceptance of these products and the ongoing product quality
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improvements made to meet customers' requirements. There can be no assurance,
however, that there will be continued market acceptance of our 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 our 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
Our most effective marketing tool is the demonstration and display of
our products at the annual meeting of the American Academy of Ophthalmology held
during the fall of each year, with a significant amount of our sales orders
generated during or shortly after this meeting. Accordingly, we expend a
considerable amount of time and resources during the fourth quarter of our
fiscal year preparing for this event.
SELLING SECURITY HOLDERS
Laurus Master Fund, Ltd. ("Laurus") may sell, from time to time under
this prospectus, up to an aggregate of 2,473,201 shares of our common stock,
including, (1) in connection with a private placement transaction on April 27,
2004 with Laurus, 979,673 shares issuable upon conversion of the principal and
interest on the 2004 Laurus Note, and up to 313,000 shares issuable to Laurus
under the exercise of the 2004 Laurus Warrant and (2) in connection with a
private placement transaction on September 25, 2003 with Laurus, 805,528 shares
issuable upon conversion of the principal of and interest on the 2003 Laurus
Note and up to 375,000 shares of our common stock issuable upon the exercise of
the 2003 Laurus Warrant. The 2004 Laurus Note is convertible into shares of our
common stock at a fixed conversion price of $1.22 per share. The 2003 Laurus
Note is convertible into shares of our common stock at a fixed conversion price
of $1.07 per share. The exercise prices of the 2004 Laurus Warrant range between
$1.40 and $1.83 per share and the exercise prices of the 2003 Laurus Warrant
range between $1.24 and $1.61.
MediVision Medical Imaging Ltd. may sell, from time to time under this
prospectus, pursuant to Amendment No. 1 to the Working Capital Funding
Agreement, up to 4,050,000 shares of our common stock acquired by MediVision in
June 2003 pursuant to the conversion of $1,150,000 of outstanding principal and
accrued interest under a promissory note held by MediVision into 6,216,216
shares of our common stock at a conversion price of $0.185 per share. This
prospectus covers the resale of 4,050,000 of such shares of common stock held by
MediVision.
Pursuant to the Common Stock Purchase Agreement, dated as of June 1,
2004 between S2 Partners, LP and MediVision, S2 Partners, LP purchased 550,000
shares of our common stock from MediVision at a price per share of $1.35. S2
Partners, LP may sell, from time to time under this prospectus up to 550,000
shares of our common stock.
Meadowbrook Opportunity Fund LLC purchased from MediVision 400,000
shares of our common stock at a price per share of $1.20 pursuant to a Common
Stock Purchase Agreement dated as of September 16, 2005 between Meadowbrook
Opportunity Fund LLC and MediVision. Meadowbrook Opportunity Fund LLC may sell,
from time to time under this prospectus, up to 400,000 shares of our common
stock.
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The following table sets forth, to our knowledge, certain information
about the selling security holders as of September 30, 2005. Beneficial
ownership is determined in accordance with Rule 13d-3 promulgated by the
Securities and Exchange Commission, and generally includes voting or investment
power with respect to securities. In computing the number of shares beneficially
owned by the holder and the percentage ownership of the holder, shares of common
stock issuable upon conversion of the note and upon exercise of the warrant held
by the holder that are currently convertible or are exercisable or convertible
or exercisable within 60 days after the date of the table are deemed
outstanding.
To our knowledge, Laurus has sole voting and investment power with
respect to all of the shares of common stock beneficially owned by it, except
that Laurus Capital Management, LLC, a Delaware limited liability company, may
be deemed a control person of the shares owned by Laurus. David Grin and Eugene
Grin are the principals of Laurus Capital Management, LLC. The address for
Messrs. David Grin and Eugene Grin is 825 Third Avenue, 14th Floor, New York,
New York 10022. Laurus has not held nor had any material relationship with us
within the past three years.
To our knowledge, the members of the Board of Directors of MediVision
hold the voting and investment power with respect to our shares of common stock
beneficially owned by MediVision. The members of MediVision's Board of Directors
are Jonathan Adereth, Noam Allon, Doron Maor, Marc De Clerck, Professor Michael
Belkin and Orna Bar-David. MediVision, our majority shareholder, beneficially
owns 10,730,851 shares of our common stock, which comprises approximately 70% of
our total issued and outstanding shares of common stock. Gil Allon, a member of
our Board of Directors since August 2000 and our Chief Executive Officer since
January 2002, has served as the Vice President and Chief Operating Officer of
MediVision since MediVision's inception in June 1993 and was a member of the
Board of Directors of MediVision from June 1993 through December 31, 2004. Gil
Allon also owns 542,256 shares of common stock of MediVision, which is equal to
approximately 8% of MediVision's issued and outstanding shares. Ariel Shenhar, a
member of our Board of Directors since August 2000 and our Chief Financial
Officer since July 2002, served as a member of the Board of Directors of
MediVision from August 1994 through December 31, 2004 and the Vice President and
Chief Financial Officer of MediVision from January 1997 through May 2005. Ariel
Shenhar also owns 49,568 shares of common stock of MediVision, which is equal to
approximately 1% of MediVision's issued and outstanding shares. Jonathan
Adereth, our Chairman of the Board of Directors from August 2000 through
December 31, 2004, has served as a member of the Board of Directors of
MediVision since July 1999. Noam Allon, a member of our Board of Directors from
August 2000 through December 31, 2004, has served as the President, Chief
Executive Officer and a member of the Board of Directors of MediVision from
MediVision's inception in June 1993. Noam Allon also owns 542,256 shares of
common stock of MediVision, which is equal to approximately 8% of MediVision's
issued and outstanding shares. MediVision serves as the principal distributor of
our products in Europe and certain other international markets and we also
outsource our research and development activities to MediVision. See Note 6 to
the Notes to our financial statements for the six months ended June 30, 2005 for
more information with respect to our relationship with MediVision.
To our knowledge, Walrus Partners, LLC, the general partner of S2
Partners, LP, has sole voting and investment power with respect to all of the
shares of common stock beneficially owned by it. R. Russell Last and Walter C.
Ramsley are the principals of Walrus Partners, LLC. The address for Messrs. R.
Russell Last and Walter C. Ramsley is c/o Walrus Partners, LLC, 8014 Olson
Memorial Highway, #232, Golden Valley, Minnesota 55427. S2 Partners, LP has not
held nor had any material relationship with us within the past three years.
To our knowledge, Meadowbrook Capital Opportunity Fund LLC has sole
voting and investment power with respect to all of the shares of common stock
beneficially owned by it except that Meadowbrook Capital Management LLC may be
deemed a control person of the shares owned by
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Meadowbrook Capital Opportunity Fund LLC. Michael Ragins and Evan Greenberg are
the principals of Meadowbrook Capital Management LLC. The address for Messrs.
Michael Ragins and Evan Greenberg is c/o Meadowbrook Capital Management LLC, 520
Lake Cook Road, Suite 690, Deerfield, Illinois 60015. Meadowbrook Capital
Opportunity Fund LLC has not held nor had any material relationship with us
within the past three years.
As of October 4, 2005, a total of 15,337,570 shares of our common stock
were outstanding. The following table sets forth information as of that date
regarding the beneficial ownership of our common stock both before and
immediately after the offering. Actual ownership of the shares is subject to
conversion of the convertible notes and exercise of the warrants.
The terms of the convertible notes and warrants issued to Laurus whose
underlying shares of common stock are included for resale under this prospectus
prohibit conversion of the notes or exercise of the warrants to the extent that
conversion of either or both of the notes and exercise of either or both of the
warrants would result in the holder, together with its affiliates, beneficially
owning in excess of 4.99% of our outstanding shares of common stock. A holder
may waive the 4.99% limitation upon 75 days' prior written notice to us. Also,
this limitation does not preclude the holder from converting or exercising the
notes or warrants and selling shares underlying the notes or warrants in stages
over time where each stage does not cause the holder and its affiliates to
beneficially own shares in excess of the limitation amount.
The shares of common stock being offered under this prospectus may be
offered for sale from time to time during the period the registration statement
of which this prospectus is a part remains effective, by or for the account of
the selling security holders described below.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING SHARES BEING AFTER THE OFFERING (1)
NAME OF BENEFICIAL OWNER NUMBER % OF CLASS OFFERED NUMBER % OF CLASS
------------------------ ------ ---------- ------- ------ ----------
Laurus Master Fund, Ltd. 2,473,201(2)(3) 13.9%(3) 2,473,201(2) 0 0
MediVision Medical Imaging Ltd. 10,730,851 70.0% 4,050,000 6,680,851 37.5%
S2 Partners, LP 550,000 3.6% 550,000 0 0
Meadowbrook Opportunity Fund LLP 400,000 2.6% 400,000 0 0
- ----------
* Less than one percent.
(1) Assumes all shares being offered by the selling security holders are
sold.
(2) Includes 979,673 shares issuable upon conversion of the principal of
and interest on the 2004 Laurus Note, 805,528 shares issuable upon
conversion of the principal of and interest on the 2003 Laurus Note, up
to 313,000 shares of our common stock issuable upon the exercise of the
2004 Laurus Warrant and up to 375,000 shares of our common stock
issuable upon the exercise of the 2003 Laurus Warrant.
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(3) Assumes conversion of all of the outstanding principal and interest of
the note and exercise of all of the warrants. As further discussed
above, the notes and warrants each contain 4.99% provisions which
restrict Laurus from beneficially owning in excess of 4.99% of our
outstanding shares of common stock.
PLAN OF DISTRIBUTION
The selling security holders and any of their donees, pledgees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of our common stock being offered under this prospectus on
any stock exchange, market or trading facility on which the shares are traded or
in private transactions. These sales, which may include block transactions, may
be at fixed or negotiated prices. The selling security holders may use any one
or more of the following methods when selling shares: ordinary brokerage
transactions and transactions in which the broker-dealer solicits purchasers;
block trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to facilitate
the transaction; purchases by a broker-dealer as principal and resales by the
broker-dealer for its own account; an exchange distribution in accordance with
the rules of the applicable exchange; privately negotiated transactions;
broker-dealers may agree with the selling security holders to sell a specified
number of shares at a stipulated price per share; a combination of any of these
methods of sale; or any other method permitted by applicable law.
The sale price to the public may be: the market price prevailing at the
time of sale; a price related to the prevailing market price; at negotiated
prices; or a price the selling security holders determines from time to time.
Laurus has agreed, pursuant to securities purchase agreements between
us and Laurus, that Laurus or any of its affiliates and investment partners will
not and will not cause any person or entity, directly or indirectly, to engage
in "short sales" of our common stock for as long as the convertible note is
outstanding. "Short sales" are contracts for the sale of shares of stock that
the seller does not own, or certificates which are not within the seller's
control, so as to be available for delivery at the time when, under applicable
rules, delivery must be made.
The shares may also be sold under Rule 144 under the Securities Act, if
available, rather than under this prospectus. The selling security holders have
the sole and absolute discretion not to accept any purchase offer or make any
sale of shares if they deem the purchase price to be unsatisfactory at any
particular time.
The selling security holders may pledge their shares to their brokers
under the margin provisions of customer agreements. If the selling security
holders default on a margin loan, the broker may, from time to time, offer and
sell the pledged shares. Broker-dealers engaged by the selling security holders
may arrange for other broker-dealers to participate in sales. Broker-dealers may
receive commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated. The selling security holders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with these sales. In that event, any
commissions received by these broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
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The selling security holders, alternatively, may sell all or any part
of the shares offered in this prospectus through an underwriter. To our
knowledge, no selling security holder has entered into any agreement with a
prospective underwriter, and we cannot assure you as to whether any such
agreement will be entered into. If the selling security holders inform us that
that they entered into such an agreement or agreements, the relevant details
will be set forth in a supplement or revisions to this prospectus.
The selling security holders and any other persons participating in the
sale or distribution of the shares offered under this prospectus will be subject
to applicable provisions of the Exchange Act and the rules and regulations under
that act, including Regulation M. These provisions may restrict activities of,
and limit the timing of purchases and sales of any of the shares by, the selling
security holder or any other such person. Furthermore, under Regulation M,
persons engaged in a distribution of securities are prohibited from
simultaneously engaging in market making and other activities with respect to
those securities for a specified period of time prior to the commencement of
such distributions, subject to specified exceptions or exemptions. All of these
limitations may affect the marketability of the shares.
Ophthalmic Imaging Systems is required to pay all fees and expenses
incident to the registration of the shares and has agreed to indemnify the
selling security holders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act of 1933.
Darma Plus, Inc. d/b/a Draper & Associates acted as placement agent in
connection with the transactions with Laurus and received cash fees totaling
$34,000.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 35,000,000 shares of common
stock, no par value per share, and 20,000,000 shares of preferred stock, no par
value per share. As of October 4, 2005, we had 15,337,570 shares of common stock
outstanding and no shares of preferred stock outstanding. The following is a
summary description of our capital stock.
COMMON STOCK
The holders of outstanding shares of our common stock are entitled to
receive dividends out of assets legally available at times and in amounts as the
board of directors may from time to time determine, subordinate to any
preferences that may be granted to the holders of preferred stock. Holders of
common stock are entitled to one vote per share on all matters on which the
holders of common stock are entitled to vote.
The common stock is not entitled to preemptive rights and may not be
redeemed or converted. Upon our liquidation, dissolution or winding up, the
assets legally available for distribution to our stockholders are divided among
the holders of the common stock in proportion to the number of shares of common
stock held by each of them, after payment of all of our debts and liabilities
and fulfillment of the rights of any outstanding class or series of preferred
stock that has priority to distributed assets. The rights of holders of common
stock are subordinate to those of holders of any series of preferred stock.
All of the issued and outstanding shares of common stock are duly
authorized, validly issued, fully paid, and non-assessable. To the extent that
additional shares of our common stock are issued, the relative interests of
existing stockholders may be diluted.
PREFERRED STOCK
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Preferred stock may be issued from time to time in one or more series,
and our board of directors, without action by the holders of common stock, may
fix or alter the voting rights, redemption provisions, dividend rights, dividend
rates, claims to our assets superior to those of holders of our common stock,
conversion rights and any other rights, preferences, privileges and restrictions
of any wholly unissued series of preferred stock. The board of directors,
without shareholder approval, can issue shares of preferred stock with rights
that could adversely affect the rights of the holders of common stock. The
issuance of shares of preferred stock could adversely affect the voting power of
the holders of common stock and could have the effect of making it more
difficult for a third party to acquire, or could discourage or delay a third
party from acquiring, a majority of our outstanding common stock.
Preferred stock can be used as an anti-takeover measure. The board of
directors has exclusive discretion to issue preferred shares with rights that
may trump those of its common stock. The board of directors could use an
issuance of preferred stock with dilutive or voting preferences to delay, defer
or prevent common stock shareholders from initiating a change in control of our
company or reduce the rights of common shareholders to the net assets upon
dissolution. Preferred stock issuances may also discourage takeover attempts
that may offer premiums to holders of our common stock.
SECURED CONVERTIBLE TERM NOTE ISSUED ON SEPTEMBER 25, 2003
On September 25, 2003, we issued to Laurus the 2003 Laurus Note. The
secured convertible term note in the principal amount of $1,000,000 matures on
September 25, 2006 and bears interest at the rate of six and one-half percent
(6.5%) per annum. Interest is payable monthly at our option in cash or shares of
our common stock. If a registration statement covering the shares of common
stock issuable upon conversion of the note is effective and the volume weighted
average of the closing price of our common stock for the five trading days
immediately preceding the end of the calendar month is at least $1.34, the
interest rate shall be reduced by 25 basis points for each incremental increase.
The 2003 Laurus Note is convertible into shares of our common stock at
a fixed conversion price of $1.07 per share. We granted to Laurus a subordinated
second priority security interest in our assets to secure the obligations under
the note pursuant to a security agreement dated September 25, 2003 between us
and Laurus. We are required to make monthly amortization payments to Laurus
commencing on December 25, 2003 in the amount of $36,363.64 plus any accrued but
unpaid interest. Such amortization payments shall be payable monthly at our
option in cash or shares of common stock.
In the event that the closing price of our common stock is greater then
115% of the conversion price for a period of at least five consecutive trading
days, we may, at our sole option, require the conversion at the fixed conversion
price of all or a portion of the outstanding principal amount of the note,
together with accrued interest on the amount being prepaid, as of the date we
provide written notice of the call. The call date shall be at least 11 trading
days following the date of the call notice provided that a registration
statement covering the shares of common stock issuable upon conversion of the
note is effective. Our right to issue a call notice is subject to the limitation
that the number of shares of common stock issued in connection with any call
notice shall not exceed 25% of the aggregate dollar trading volume of our common
stock for the eleven trading days immediately preceding the call date. If the
price of our common stock falls below 115% of the fixed conversion price during
the 11 trading day period immediately preceding the call date, then Laurus will
then be required to convert only such amount of the note as shall equal 25% of
the aggregate dollar trading volume for each day that our common stock has
exceeded 115% of the fixed conversion price.
If such prepayment was made on or before September 25, 2004, we would
have had the option of prepaying the note in full by paying to Laurus a sum of
money equal to 112% of the principal amount of the note plus all accrued and
unpaid interest thereon. If such prepayment had been made after September
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25, 2004 and on or before September 25, 2005, we would have had the option of
prepaying the note in full by paying to Laurus a sum of money equal to 107% of
the principal amount of the note plus all accrued and unpaid interest thereon.
If such prepayment is made after September 25, 2005 and on or before September
25, 2006, we will have the option of prepaying the note in full by paying to
Laurus a sum of money equal to 103% of the principal amount of the note plus all
accrued and unpaid interest thereon.
The terms of the convertible note prohibit conversion of the note to
the extent that conversion of the note would result in the holder, together with
its affiliates, beneficially owning in excess of 4.99% of our outstanding shares
of common stock. A holder may waive the 4.99% limitation upon 75 days' prior
written notice to us.
As of June 30, 2005 we had approximately $477,563 of principal
outstanding and payable to Laurus under this secured convertible term note.
SECURED CONVERTIBLE TERM NOTE ISSUED ON APRIL 27, 2004
On April 27, 2004, we issued to Laurus the 2004 Laurus Note. The
secured convertible term note in the principal amount of $1,200,000 matures on
April 27, 2007 and bears interest at the rate of six and one-half percent (6.5%)
per annum. Interest is payable monthly at our option in cash or shares of our
common stock. If a registration statement covering the shares of common stock
issuable upon conversion of the note is effective and the volume weighted
average of the closing price of our common stock for the five trading days
immediately preceding the end of the calendar month is at least $1.53, the
interest rate shall be reduced by 25 basis points for each incremental increase.
The 2004 Laurus Note is convertible into shares of our common stock at
a fixed conversion price of $1.22 per share. We granted to Laurus a subordinated
second priority security interest in our assets to secure the obligations under
the note pursuant to a security agreement dated April 27, 2004 between us and
Laurus. We are required to make monthly amortization payments to Laurus
commencing on August 1, 2004 in the amount of $30,303.03 plus any accrued but
unpaid interest. Such amortization payments shall be payable monthly at our
option in cash or shares of common stock.
In the event that the closing price of our common stock is greater then
115% of the conversion price for a period of at least five consecutive trading
days, we may, at our sole option, require the conversion at the fixed conversion
price of all or a portion of the outstanding principal amount of the note,
together with accrued interest on the amount being prepaid, as of the date we
provide written notice of the call. The call date shall be at least 11 trading
days following the date of the call notice provided that a registration
statement covering the shares of common stock issuable upon conversion of the
note is effective. Our right to issue a call notice is subject to the limitation
that the number of shares of common stock issued in connection with any call
notice shall not exceed 25% of the aggregate dollar trading volume of our common
stock for the 11 trading days immediately preceding the call date. If the price
of our common stock falls below 115% of the fixed conversion price during the
eleven trading day period immediately preceding the call date, then Laurus will
then be required to convert only such amount of the note as shall equal 25% of
the aggregate dollar trading volume for each day that our common stock has
exceeded 115% of the fixed conversion price.
If such prepayment had been made on or before April 27, 2005, we would
have had the option of prepaying the note in full by paying to Laurus a sum of
money equal to 112% of the principal amount of the note plus all accrued and
unpaid interest thereon. If such prepayment is made after April 27, 2005 and on
or before April 27, 2006, we would have had the option of prepaying the note in
full by paying to Laurus a sum of money equal to 107% of the principal amount of
the note plus all accrued and unpaid
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interest thereon. If such prepayment is made after April 27, 2006 and on or
before April 27, 2007, we will have the option of prepaying the note in full by
paying to Laurus a sum of money equal to 103% of the principal amount of the
note plus all accrued and unpaid interest thereon.
The terms of the convertible note prohibit conversion of the note to
the extent that conversion of the note would result in the holder, together with
its affiliates, beneficially owning in excess of 4.99% of our outstanding shares
of common stock. A holder may waive the 4.99% limitation upon 75 days' prior
written notice to us.
As of June 30, 2005 we had $878,789 of principal outstanding and
payable to Laurus under this secured convertible term note.
WARRANT ISSUED ON SEPTEMBER 25, 2003
On September 25, 2003, we issued to Laurus the 2003 Laurus Warrant.
Laurus may exercise the 2003 Laurus Warrant through September 25, 2010. The
exercise price under the 2003 Laurus Warrant is as follows: a price of $1.23 per
share for the first 100,000 shares acquired upon exercise of the warrant; a
price of $1.39 per share for the next 125,000 shares acquired upon exercise of
the warrant; and a price of $1.61 per share for any additional shares acquired
upon exercise of the warrant. The terms of the 2003 Laurus Warrant prohibit
exercise of the warrant to the extent that exercise of the warrant would result
in the holder, together with its affiliates, beneficially owning in excess of
4.99% of our outstanding shares of common stock. A holder may waive the 4.99%
limitation upon 75 days' prior written notice to us.
WARRANT ISSUED ON APRIL 27, 2004
On April 27, 2004, we issued to Laurus the 2004 Laurus Warrant. Laurus
may exercise the 2004 Laurus Warrant through April 27, 2009. The exercise price
under the 2004 Laurus Warrant is as follows: a price of $1.40 per share for the
first 83,000 shares acquired upon exercise of the warrant; a price of $1.59 per
share for the next 105,000 shares acquired upon exercise of the warrant; and a
price of $1.83 per share for any additional shares acquired upon exercise of the
warrant. The terms of the 2004 Laurus Warrant prohibit exercise of the warrant
to the extent that exercise of the warrant would result in the holder, together
with its affiliates, beneficially owning in excess of 4.99% of our outstanding
shares of common stock. A holder may waive the 4.99% limitation upon 75 days'
prior written notice to us.
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 our 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
Michael Benoff 51 Director
Merle Symes 54 Director
Gil Allon has served as a member of our Board of Directors since August
2000 and has served as our Chief Executive Officer since January 2002. Mr. Allon
has acted in the capacity of our Chief
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Executive Officer since August 2000. Mr. Allon is also a member of the
Compensation, Option and Nomination Committees of our 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 through 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 our Board of Directors since
August 2000, has served as our Vice President and Chief Financial Officer since
July 2002 and has served as our Secretary since August 2002. Mr. Shenhar has
also served as a member of the Board of Directors of MediVision from August 1994
through December 31, 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 our Board of Directors since
January 2005. 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 our Board of Directors. Yigal Berman has also served as
a member of the Board of Directors of MediVision from July 1996 through December
31, 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.
Michael Benoff has served as a member of the Board of Directors since
July 2004. Mr. Benoff has been a private investor retired from active business
since 1999. Mr. Benoff was also appointed to the Audit, Compensation and Option
Committees of our Board of Directors during 2004. .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 a 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.
Merle Symes has served as a member of our Board of Directors since July
2005. Mr. Symes was appointed to the Board of Directors in July 2005 as an
independent director. Mr. Symes is the President and Founder of The Provenance
Group, LLC, a firm specializing in corporate strategy and innovation,
entrepreneurial ventures, M&A, and technology transfer, which he founded in
2002. Prior thereto, from 1997 to 2002 he was Vice President External Technology
and Director of Corporate Development in the Surgical Division at Bausch & Lomb,
Inc. Mr. Symes received his B.S. in Chemical Engineering in 1973 from South
Dakota School of Mines and Technology and his M.B.A., in Finance, in 1979 from
the Wharton School of the University of Pennsylvania.
-37-
\
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of October 4, 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, and (iii) all
directors and the executive officer 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 Ownership Percent of Class
---------------- -------------------- ----------------
MediVision Medical Imaging Ltd. 10,730,851 (1) 70.0%
P.O. Box 45, Industrial Park
Yokneam Elit
20692 Israel
Gil Allon 390,000(2) (3) 2.5%
Ariel Shenhar 225,000 (2) 1.5%
Michael Benoff 13,333 (2) *
Yigal Berman 0 *
Merle Symes 0 (2) *
Directors and Officers as a group 628,333 (2) 3.9%
(total of 5 persons)
- --------------------------------------------------------------------------------
* Represents less than 1%.
(1) Includes 3,550,000 shares pledged as security on a $1,000,000
promissory note payable to us and to secure the lien granted to United
Mizrahi Bank.
(2) Represents shares subject to stock options exercisable within 60 days
from October 4, 2005.
(3) Includes indirect beneficial ownership by spouse of stock options to
purchase 40,000 shares.
EXECUTIVE COMPENSATION
(A) SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL FISCAL OTHER ANNUAL
POSITION YEAR SALARY ($) 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.
-38-
(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 us.
(3) $44,921 of the bonus was paid by us 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 us and approximately $8,737 in automobile expenses for Mr. Allon
paid by us.
(5) $10,000 of this amount was paid by us 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 us and approximately $10,326 in automobile expenses for Mr. Allon
paid by us.
(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
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 us.
(9) Represents approximately $8,737 in automobile expenses for Mr. Shenhar
paid by us.
(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 $5,528 in automobile expenses for Mr. Shenhar
paid by us.
(B) SUMMARY OPTION GRANTS
During the year ended December 31, 2004, the following options were
granted to named executive officers:
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
% OF TOTAL OPTIONS/
NUMBER OF SECURITIES SARS GRANTED TO EXERCISE OR
UNDERLYING OPTIONS/SARS EMPLOYEES IN BASE PRICE
NAME GRANTED (#) (1) FISCAL YEAR ($/SHARE) EXPIRATION DATE
---- --------------- ----------- --------- ---------------
Gil Allon 90,000 13% $.68 October 24, 2014
Chief Executive Officer
Ariel Shenhar 75,000 11% $.68 October 24, 2014
Vice President,
Chief Financial Officer
(1) The options granted on October 24, 2004 vest semiannually over a three year
period from the grant date.
(C) AGGREGATED OPTION EXERCISES AND FISCAL YEAR END VALUES
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FY-END OPTIONS/SARS AT FY-END
SHARES ACQUIRED VALUE (#)EXERCISABLE/ ($) EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---- --------------- ------------ ------------- -------------
Gil Allon
Chief Executive Officer -- -- 323,334/126,666(1)(2) $224,393/63,156
Ariel Shenhar
Vice President, Chief -- -- 183,333/ 91,667(3) $127,233/42,992
Financial Officer
-39-
- ---------------
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.
(D) COMPENSATION OF DIRECTORS
We have 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 April 2005, Mr. Allon is to receive an annual salary of
$146,000 effective April 1, 2005 and a bonus to be determined annually by our
Board of Directors based on us meeting certain performance goals. In addition,
in April 2005 the Compensation Committee approved expatriate subsidy payments of
$34,000 per year. Mr. Allon will also be eligible to participate in our 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.
We 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. The agreement was
revised in December 2003 to provide for an indefinite term. Under the terms of
the agreement, revised in April 2005, Mr. Shenhar is to receive an annual salary
of $126,000 effective April 1, 2005, and a bonus to be determined annually by
our Board of Directors based on us meeting certain performance goals. In
addition, in April 2005 the Compensation Committee approved expatriate subsidy
payments of $34,000 per year. Mr. Shenhar will also be eligible to participate
in our 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 June 25, 2004 between Mr.
Benoff and us, we 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 our
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 two
Board meetings per quarter, (iii) to pay Mr. Benoff a fee of $100 per hour, not
to exceed $500 per day, for attendance at meetings in excess of two 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.
Pursuant to a letter agreement executed on July 20, 2005 between Mr.
Symes and us, we agreed to the following in connection with his service as a
director: (i) to grant Mr. Symes options to purchase up
-40-
to 40,000 shares of our common stock, at a per share price not less than fair
market value on the date of the grant, (ii) to pay Mr. Symes, in four equal
quarterly installments, an annual retainer in the aggregate amount of $6,000 for
attendance at up to two Board meetings per quarter, (iii) to pay Mr. Symes a fee
of $100 per hour, not to exceed $500 per day, for attendance at meetings in
excess of two Board meetings per quarter and reimbursement for related expenses.
The above referenced options were granted by the Board in August 2005 at a per
share exercise price of $1.20.
No standard arrangement regarding compensation of the directors has
been adopted by the Board, and, except as noted above, we have not paid any
compensation to any director.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
In January 2004, we entered into a service agreement, effective January
1, 2003 with MediStrategy Ltd. ("MS"), an Israeli company owned by Noam Allon, a
member of our Board of Directors until December 2004. Under the terms of the
agreement, MS provides services to us 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
under the agreement shall be performed solely by Noam Allon.
In consideration for the services to be provided, we agreed 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 our Chairman of the Board. During
the year ended December 31, 2004, MS has earned fees in the amount of $39,600.
$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. As of
September 1, 2005, the monthly sum changed from $3,300 to $4,000, and the yearly
performance bonus changed from $20,000 to $10,000.
(B) TRANSACTIONS WITH SECURITY HOLDERS
As discussed in greater detail in the Management's Discussion and
Analysis or Plan of Operation section under the heading "MediVision
Transactions" of this prospectus, we have entered into a series of transactions
with MediVision, which resulted in MediVision owning approximately 74% of our
outstanding shares of common stock at fiscal year end 2004. As of October 4,
2005, MediVision owns approximately 70% of our outstanding shares of common
stock.
Sales to MediVision during the six months ended June 30, 2005 and the
fiscal years ended December 31, 2004 and 2003 totaled approximately $406,000,
$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 are available to other resellers or distributors of our products.
LEGAL PROCEEDINGS
On March 9, 2004, we filed a civil action in the United States District
Court for the Eastern District of California against several of our 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
-41-
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.
On August 20, 2004, the United States District Court for the Eastern
District of California granted in part our 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 April 2006.
Other than the action referred to above and immaterial claims in the
ordinary course, to our knowledge, there are no material legal proceedings
presently pending or threatened to which we (or any of our directors or officers
in their capacity as such) are, or may be, a party or to which our property is,
or may be, subject.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our bylaws provide that we will indemnify our officers and directors
for costs and expenses incurred in connection with the defense of actions,
suits, or proceedings against them on account of their being or having been our
directors or officers in accordance with Section 317 of the California
Corporations Code. Our bylaws also permit us to maintain insurance on behalf of
our officers, directors, employees and agents against any liability asserted
against and incurred by that person whether or not we have the power to
indemnify such person against liability for any of those acts.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Computershare
Trust Company, Inc., 350 Indiana Street, Suite 800, Golden, Colorado 80401. Its
telephone number is (303) 262-0600.
-42-
INTEREST OF EXPERTS AND COUNSEL
Our financial statements as of the years ended December 31, 2004 and
2003 included in this prospectus and in the registration statement of which this
prospectus is a part have been audited by Perry-Smith LLP, independent
registered public accountants, to the extent and for the periods set forth in
their report and are incorporated in this prospectus in reliance upon the report
given upon the authority of Perry-Smith LLP as experts in auditing and
accounting.
The validity of the shares of common stock offered under this
prospectus will be passed upon by Troutman Sanders LLP, The Chrysler Building,
405 Lexington Avenue, New York, New York 10174.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form SB-2 under the Securities Act, and the rules and
regulations promulgated under the Securities Act, with respect to the common
stock offered under this prospectus. This prospectus, which constitutes a part
of the registration statement, does not contain all of the information contained
in the registration statement and the exhibits and schedules to the registration
statement. While material elements of the contracts and documents referenced in
this prospectus are contained in this prospectus, statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the full
text of the contract or other document which is filed as an exhibit to the
registration statement.
For further information with respect to us and the common stock offered
under this prospectus, reference is made to the registration statement and its
exhibits and schedules. The registration statement, including its exhibits and
schedules, may be inspected without charge at the Public Reference Room
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such documents may be obtained from the
Securities and Exchange Commission upon the payment of the charges prescribed by
the Securities and Exchange Commission. The public may obtain information on the
operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains an Internet web site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Securities and Exchange
Commission. The Securities and Exchange Commission's web site address is
http://www.sec.gov. Our web site address is www.oisi.com.
-43-
OPHTHALMIC IMAGING SYSTEMS
INDEX TO FINANCIAL STATEMENTS
Page
----
OPHTHALMIC IMAGING SYSTEMS
Balance Sheets at June 30, 2005 (unaudited) and December 31, 2004 F-1
Statements of Operations (unaudited) for the six months ended
June 30, 2005 and for the six months June 30, 2004 F-2
Statement of Cash Flows (unaudited) for the six months ended
June 30, 2005 and for the six months June 30, 2004 F-3
Notes to Unaudited Financial Statements F-4
Report of Independent Registered Public Accounting Firm F-10
Balance Sheet at December 31, 2004 F-11
Statement of Income for the years ended December 31, 2004
and December 31, 2003 F-13
Statement of Stockholders' Equity for the years ended
December 31, 2004 and December 31, 2003 F-14
Statement of Cash Flows for the years ended December 31, 2004
and December 31, 2003 F-15
Notes to Financial Statements F-17
OPHTHALMIC IMAGING SYSTEMS
CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
AS OF JUNE 30, 2005
AND FOR THE THREE AND SIX MONTH PERIODS ENDED
JUNE 30, 2005 AND JUNE 30, 2004
Ophthalmic Imaging Systems
Condensed Balance Sheet
June 30, 2005
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 2,106,084
Accounts receivable, net 1,833,007
Receivable from related party 28,539
Note Receivable from related party 1,955,558
Inventories, net 354,731
Prepaid expenses and other current assets 288,075
Deferred tax asset 1,029,000
------------
Total current assets 7,594,994
Furniture and equipment, net of accumulated depreciation and
amortization of $288,065 124,597
Restricted cash 150,000
Other assets 143,494
------------
Total assets $ 8,013,085
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 340,028
Accrued liabilities 1,788,321
Deferred extended warranty revenue 826,396
Customer deposits 268,483
Income taxes payable 16,982
Notes payable- current portion 772,443
------------
Total current liabilities 4,012,653
------------
Noncurrent Liabilities:
Line of credit 150,000
Notes payable, less current portion 620,114
------------
Total noncurrent liabilities 770,114
------------
Stockholders' equity:
Common stock, no par value, 35,000,000 shares authorized;
15,118,585 issued and outstanding 14,595,270
Accumulated deficit (11,364,952)
------------
Total stockholders' equity 3,230,318
------------
Total liabilities and stockholders' equity $ 8,013,085
============
The accompanying notes are an integral part of these unaudited condensed
financial statements.
F-1
Ophthalmic Imaging Systems
Condensed Statements of Operations
(Unaudited)
Three months ended June 30, Six months ended June 30,
2005 2004 2005 2004
---- ---- ---- ----
Net revenues $ 2,949,579 $ 2,403,040 $ 5,789,604 $ 4,800,109
Cost of sales 1,210,145 914,399 2,376,013 1,871,945
------------ ------------ ------------ ------------
Gross profit 1,739,434 1,488,641 3,413,591 2,928,164
Operating expenses:
Sales and marketing 686,390 696,325 1,414,395 1,356,007
General and administrative 325,636 258,340 638,632 505,805
Research and development 265,404 229,950 507,811 477,186
------------ ------------ ------------ ------------
Total operating expenses 1,277,430 1,184,615 2,560,838 2,338,998
------------ ------------ ------------ ------------
Income from operations 462,004 304,026 852,753 589,166
Interest and other expense, net (51,029) (59,342) (103,618) (104,667)
------------ ------------ ------------ ------------
Net income before income taxes 410,975 244,684 749,135 484,499
Income taxes (5,024) (9,024)
------------ ------------ ------------ ------------
Net income $ 405,951 $ 244,684 $ 740,111 $ 484,499
============ ============ ============ ============
Shares used in the calculation of basic net
income per share 15,071,607 14,639,300 15,056,374 14,537,924
Basic net income per share $ 0.03 $ 0.02 $ 0.05 $ 0.03
============ ============ ============ ============
Shares used in the calculation of diluted net
income per share 16,136,823 15,700,475 16,229,367 15,583,163
Diluted net income per share $ 0.03 $ 0.02 $ 0.05 $ 0.03
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited condensed financial statements.
F-2
Ophthalmic Imaging Systems
Condensed Statements of Cash Flows
(Unaudited)
Six months ended June 30,
2005 2004
---- ----
OPERATING ACTIVITIES:
Net income $ 740,111 $ 484,499
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 34,640 50,918
Non-cash payment of interest 5,546 21,802
Loss on disposition of equipment 457
Net decrease (increase) in current assets other
than cash and cash equivalents 78,415 (322,950)
Net (increase) decrease in other assets (28,539) (136,734)
Net increase (decrease) in current liabilities other
than short-term borrowings 179,136 (233,388)
----------- -----------
Net cash provided by (used in) operating activities 1,009,309 (135,396)
INVESTING ACTIVITIES:
Acquisition of furniture and equipment (8,750) (8,565)
Proceeds from disposition of equipment - 890
----------- -----------
Net cash used in investing activities (8,750) (7,675)
FINANCING ACTIVITIES:
Principal payments on notes payable (147,239) (14,528)
Proceeds from notes payable, other 150,000 1,000,000
Proceeds from sale of stock 12,500 49,468
Advances to related parties (900,046) (114,644)
Repayments of borrowings under notes
payable to related party, net - (200,979)
----------- -----------
Net cash (used in) provided by financing activities (884,785) 719,317
----------- -----------
Net increase in cash and equivalents 115,774 576,246
Cash and cash equivalents at beginning of period 1,990,310 1,272,034
----------- -----------
Cash and cash equivalents at beginning of period $ 2,106,084 $ 1,848,280
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Repayment of notes payable with common stock $ 58,654 $ 315,135
Payment of interest with common stock $ 5,546 $ 21,802
Addition to capital lease obligation for equipment purchases $ 41,258
Addition to aggregate debt payable to significant shareholders in
exchange for inventory and other noncash transactions, net $ 92,366
===========
Addition to net receivable from significant shareholders in
exchange for inventory and other noncash transactions, net $ 22,398
===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash Paid for interest $ 47,119
Cash paid for taxes $ 24,024 $ 70,050
The accompanying notes are an integral part of these unaudited condensed financial statements.
F-3
Ophthalmic Imaging Systems
Notes to Condensed Financial Statements
Three and Six Month Periods ended June 30, 2005 and 2004
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed balance sheet as of June
30, 2005, condensed statements of operations for the three and
six month periods ended June 30, 2005 and 2004 and the condensed
statements of cash flows for the six month periods ended June
30, 2005 and 2004 have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item
310(b) of Regulation S-B. Accordingly, they do not include all
of the information and footnote disclosures required by
generally accepted accounting principles for complete financial
statements. These condensed financial statements should be read
in conjunction with the audited financial statements and notes
thereto included in Ophthalmic Imaging Systems' (the
"Company's") Annual Report for the year ended December 31, 2004
on Form 10-KSB. In the opinion of management, the accompanying
condensed financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position and
results of operations for the periods presented. The results of
operations for the period ended June 30, 2005 are not
necessarily indicative of the operating results for the full
year.
Note 2. Net Income 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.
F-4
Unaudited Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Numerator for basic and diluted
net income per share $ 405,951 $ 244,684 $ 740,111 $ 484,499
Denominator for basic net income per share:
Weighted average shares 15,071,607 14,639,300 15,056,374 14,537,924
Effect of dilutive securities:
Employee/director stock options 1,065,216 1,061,175 1,172,993 1,045,239
Warrants and other -- -- -- --
Dilutive potential common shares 1,065,216 1,061,175 1,172,993 1,045,239
Denominator for diluted net
income per share 16,136,823 15,700,475 16,229,367 15,583,163
Basic net income per share $ 0.03 $ 0.02 $ 0.05 $ 0.03
Diluted net income per share $ 0.03 $ 0.02 $ 0.05 $ 0.03
As of June 30, 2005 and June 30, 2004 there were 735,500 and
714,500 options and warrants, respectively, whose exercise price
exceeded the average market price of the stock and have been
excluded from this computation.
Note 3. Related Parties 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 provide 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 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 such
that all principal and interest shall become due on 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
F-5
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. On July 20 2005, the Company's Board of
Directors approved that the Company replace the existing
debentures to the financial institutions with a consolidated
debenture to only one financial institution in the amount of
$2,000,000.
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 thirty day term. 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 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 sells 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.
On July 20, 2005, the Company's Board of Directors amended this
loan agreement as follows: Medivision repay $1,000,000 to the
Company, decreasing the agreed upon loan of $2,000,000 to
$1,000,000. The amount of shares securing the loan will increase
by 1,141,000. The number of shares is based on the average
closing price of shares of the Company during the period
covering the last ten (10) business days before the Board's
decision, which average closing price was $1.17, discounted by
25%. Pursuant to these additional shares securing the loan the
total number of shares securing the loan is 3,550,000 out of the
11,130,151 shares of the Company's common stock owned by
MediVision.
At June 30, 2005 the Company had recorded a net amount due from
MediVision of approximately $1,955,558 on the promissory note
and approximately $28,539 net, due for products and services.
On July 28, 2005, pursuant to the aforementioned debenture
signed by the Company, MediVision signed the loan agreement with
the above-mentioned financial institute and paid back $1,000,000
of the loan; from the Company; reducing the amount MediVision
owes the Company on the promissory note to $955,558.
F-6
Sales to MediVision during the six months ended ,June 30, 2005
and 2004 totaled approximately $405,565 and $280,000,
respectively. Sales derived from product shipments to MediVision
are made at transfer pricing which is based on similar volume
discounts that are available to other resellers or distributors
of the Company's products.
During the six-month periods ended June 30, 2005 and 2004, the
Company paid approximately $370,000 and $330,000 respectively,
to MediVision for research and development performed by
MediVision on behalf of the Company.
As of June 30, 2005, MediVision currently owns approximately 74%
of the Company's outstanding common stock.
Note 4. Stock Based Compensation
At June 30, 2005, the Company had five stock-based compensation
plans (the "Plans"). The Company accounts for the Plans under
the recognition and measurement principles of APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based compensation cost is reflected
in net income, as all options granted under the Plans had an
exercise price equal to or above the market value of the
underlying common stock on the date of grant.
For purposes of pro forma disclosures, the estimated fair value
of stock-based compensation plans and other options are
amortized to expense primarily over the vesting period. The
following tables illustrate the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, "Accounting
for Stock-Based Compensation," to stock-based compensation.
Unaudited Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Net Income, As Reported $ 405,951 $ 244,684 $ 740,111 $ 484,499
Deduct Total Stock-Based Employee
Compensation Expenses Determined Under the
Fair Value Based Method For all Awards,
Net of Related Tax Effects (5,030) (1,078) (10,060) (2,165)
Pro Forma Net Income $ 400,921 $ 243,606 $ 730,051 $ 482,334
Basic Earnings Per Share
As Reported $ 0.03 $ 0.02 $ 0.05 $ 0.03
Pro Forma $ 0.03 $ 0.02 $ 0.05 $ 0.03
Diluted Earnings Per Share:
As Reported $ 0.03 $ 0.02 $ 0.05 $ 0.03
Pro Forma $ 0.03 $ 0.02 $ 0.05 $ 0.03
The fair value of the options granted during the periods
indicated was estimated on the date of grant using an
option-pricing model.
No options were granted for the three-month period ended June
30, 2005.
F-7
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.
Note 5. Warranty Obligations
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 amount of warranty
liability accrued reflects the Company's best estimate of the
expected future cost of honoring its obligations under the
warranty plans. The Company periodically assesses the adequacy
of its recorded warranty liability and adjusts the balance as
necessary.
The following provides a reconciliation of changes in the
Company's warranty reserve.
Unaudited Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Warranty balance at beginning of period $ 396,981 $ 406,365 $ 505,851 $ 438,449
Net provision (reduction) for current
period 54,000 (24,684) 70,250 (30,455)
Warranty Costs incurred (40,968) (35,438) (166,088) (61,750)
Warranty balance at end of period $ 410,013 $ 346,243 $ 410,013 $ 346,244
F-8
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
F-9
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-10
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-11
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-12
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-13
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-14
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-15
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 $ (4,150) $ 6,689
shareholders in exchange for inventory and other noncash
transactions, net
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-16
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-17
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-18
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.
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 (8,666) (40,445)
determined under fair value based method for all ----------- -----------
awards, net of related tax effect
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
============ ===========
F-19
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
========= =========
F-20
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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
=========== =============
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-21
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-22
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-23
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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-24
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 126,360 November 1998 105,300 $0.63
Agreements
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-25
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 Exercise Contractual 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-26
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-27
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)
Utilization of net operating losses (32) (19)
Change in valuation allowance (46) (31)
Total (49)% (39)%
F-28
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-29
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-30
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-31
================================================================================
OPHTHALMIC IMAGING SYSTEMS
7,473,201
SHARES
COMMON STOCK
PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT WE
HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS IS NOT AN OFFER TO SELL COMMON
STOCK AND IS NOT SOLICITING AN OFFER TO BUY COMMON STOCK IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
__________, 2005
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our bylaws, filed as Exhibit 3.2, provide that we will indemnify our
officers and directors for costs and expenses incurred in connection with the
defense of actions, suits, or proceedings against them on account of their being
or having been our directors or officers in accordance with Section 317 of the
California Corporations Code. Our bylaws also permit us to maintain insurance on
behalf of our officers, directors, employees and agents against any liability
asserted against and incurred by that person whether or not we have the power to
indemnify such person against liability for any of those acts.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Ophthalmic Imaging Systems pursuant to the foregoing provisions, or otherwise,
Ophthalmic Imaging Systems has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection
with the offering described in this Registration Statement:
----------------------------------------------------------------------
ITEM AMOUNT ($)
----------------------------------------------------------------------
SEC Registration Fee 813.23
----------------------------------------------------------------------
EDGAR Filing Expenses 250.00
----------------------------------------------------------------------
Transfer Agent Fees 500.00
----------------------------------------------------------------------
Legal Fees 15,000.00
----------------------------------------------------------------------
Accounting Fees 2,500.00
----------------------------------------------------------------------
Miscellaneous 250.00
----------------------------------------------------------------------
TOTAL $ 19,313.23
----------------------------------------------------------------------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On December 28, 2004, we entered into an investment agreement with
Dutchess Private Equities Fund II, LP providing for an equity line of credit.
Pursuant to the investment agreement, Dutchess has agreed to provide us with up
to $9,000,000 of funding during the thirty month period beginning on the date
that the registration statement we have 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, we may request a drawdown under the investment agreement by
selling shares of our common stock to Dutchess, and Dutchess will be obligated
to purchase the shares. The minimum and maximum amounts the registrant can draw
down at any one time is determined using a formula contained in the investment
agreement. We are under no obligation to request any drawdowns under the
investment agreement. The offering was made in accordance with the exemptions
from registration provided for under Section 4(2) of the Securities Act of 1933
and Rule 506 of Regulation D promulgated thereunder. We are obligated to
register for resale the shares of common stock issuable pursuant to the
investment agreement pursuant to a registration rights agreement dated as of
August 26, 2005 between us and Dutchess.
II-1
We have entered into an Amended and Restated Investment Agreement dated
August 26, 2005 with Dutchess that is substantially on the same terms as the
Investment Agreement dated December 28, 2004 with the exception of two
immaterial modifications.
On April 27, 2004, we entered into a private placement transaction with
Laurus Master Fund, Ltd. which was exempt from registration under Section 4(2)
of the Securities Act of 1933 and Regulation D and Rule 506 promulgated
thereunder. Pursuant to the securities purchase agreement between Laurus and us,
we issued to Laurus 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 our common stock at a
conversion price of $1.22 per share. Interest is payable at our option in cash
or shares of common stock. Additionally, we issued a warrant to Laurus to
purchase 313,000 shares of our common stock at exercise prices ranging between
$1.40 and $1.83 per share. Laurus may exercise the warrant through April 27,
2009. We are obligated to register for resale the shares of common stock
issuable upon conversion of the note and upon exercise of the warrant pursuant
to a registration rights agreement dated April 27, 2004 between the registrant
and the purchaser, of which this registration statement relates.
On September 25, 2003, we entered into a private placement transaction
with Laurus Master Fund, Ltd. which was exempt from registration under Section
4(2) of the Securities Act of 1933 and Regulation D and Rule 506 promulgated
thereunder. Pursuant to the securities purchase agreement between Laurus and us,
we issued to Laurus 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 our common stock at a
conversion price of $1.07 per share. Interest is payable at our option in cash
or shares of common stock. Additionally, we issued a warrant to Laurus to
purchase 375,000 shares of our common stock at exercise prices ranging between
$1.23 and $1.61 per share. Laurus may exercise the warrant through September 25,
2010. We are obligated to register for resale the shares of common stock
issuable upon conversion of the note and upon exercise of the warrant pursuant
to a registration rights agreement dated September 25, 2003 between the
registrant and the purchaser, of which this registration statement relates.
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.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit Description of Exhibit Footnote
Number Reference
2.1 Agreement dated as of October 21, 1999 by and among Ophthalmic Imaging (5)
Systems, Premier, Walt Williams, Daniel S. Durrie and Randall C. Fowler.
2.2 Securities Purchase Agreement dated as of July 13, 2000, by and among (6)
Ophthalmic Imaging Systems, Premier and MediVision.
3.1 Articles of Incorporation of Ophthalmic Imaging Systems, as amended. *
3.2 Amended Bylaws of Ophthalmic Imaging Systems. *
3.3 Amendment to Amended Bylaws of Ophthalmic Imaging Systems dated January 28, (4)
1998.
4.1 Specimen of Stock Certificate *
II-2
5.1 Opinions of Jenkens & Gilchrist Parker Chapin LLP (19)++
10.1 Lease Agreement dated as of April 21, 2001 between Ophthalmic Imaging Systems (9)
and Jackson-Jahn, Inc.
10.2 Confidentiality Agreement dated March 27, 1992 between Ophthalmic Imaging *
Systems and Steven R. Verdooner.
10.3 Assignment dated October 23, 1990 of U.S. Patent Application for Apparatus *
and Method for Topographical Analysis of the Retina to Ophthalmic Imaging
Systems 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).
10.4 1992 Nonstatutory Stock Option Plan of Ophthalmic Imaging Systems and sample *+
form of Nonstatutory Stock Option Agreement.
10.5 Stock Option Plan (1)+
10.6 1995 Nonstatutory Stock Option Plan of Ophthalmic Imaging Systems and sample (2)+
form of Nonstatutory Stock Option Agreement.
10.7 1997 Nonstatutory Stock Option Plan of Ophthalmic Imaging Systems and sample (3)+
form of Nonstatutory Stock Option Agreement.
10.8 Form of Indemnification Agreement between Ophthalmic Imaging Systems and each (4)
of its directors, officers and certain key employees.
10.9 Working Capital Funding Agreement dated as of July 13, 2000 by and between (6)
MediVision and Ophthalmic Imaging Systems.
10.10 Amendment No. 1 to Working Capital Funding Agreement dated as of July 1, 2001 (8)
by and between MediVision and Ophthalmic Imaging Systems.
10.11 Loan and Security Agreement dated as of July 13, 2000 by and between (9)
MediVision and Ophthalmic Imaging Systems.
10.12 Registration Rights Agreement dated as of August 2000 by and between (6)
MediVision and Ophthalmic Imaging Systems.
10.13 Secured Convertible Working Capital Note dated August 2000 from Ophthalmic (6)
Imaging Systems to MediVision in the principal amount of $260,000.
10.14 Secured Promissory Note dated July 21, 2000 from Ophthalmic Imaging Systems (6)
to MediVision in the principal amount of $1,500,000.
10.15 Secured Convertible Working Capital Promissory Note dated July 1, 2001 by and (8)
between MediVision and Ophthalmic Imaging Systems in the principal amount of
$1,000,000
10.16 Amendment No. 2 to Working Capital Funding Agreement dated as of May 21, 2003 (10)
by and between MediVision and Ophthalmic Imaging Systems.
10.17 Cooperation and Project Funding Agreement dated January 21, 2001, among (7)
Israel- United States Binational Industrial Research and Development
Foundation, MediVision and Ophthalmic Imaging Systems.
II-3
10.18 2000 Stock Option Plan. (9)+
10.19 Secured Debenture Agreement by and between United Mizrahi Bank LTD and (11)
Ophthalmic Imaging Systems dated December 9, 2002.
10.20 Commercial Security Agreement by and among Bank Leumi, MediVision and (13)
Ophthalmic Imaging Systems dated April 30, 2003 and Commercial Guaranty of
Ophthalmic Imaging Systems.
10.21 Securities Purchase Agreement dated September 25, 2003 by and between (12)
Ophthalmic Imaging Systems and Laurus Master Fund, Ltd.
10.22 Secured Convertible Term Note dated September 25, 2003 issued to Laurus (12)
Master Fund, Ltd.
10.23 Common Stock Purchase Warrant dated September 25, 2003 issued to Laurus (12)
Master Fund, Ltd.
10.24 Registration Rights Agreement dated September 25, 2003 by and between (12)
Ophthalmic Imaging Systems and Laurus Master Fund, Ltd.
10.25 Security Agreement dated September 25, 2003 by and between Ophthalmic Imaging (12)
Systems and Laurus Master Fund, Ltd.
10.26 2003 Stock Option Plan (13)+
10.27 Securities Purchase Agreement dated April 27, 2004 by and between Ophthalmic (14)
Imaging Systems and Laurus Master Fund, Ltd.
10.28 Secured Convertible Term Note dated April 27, 2004 issued to Laurus Master (14)
Fund, Ltd.
10.29 Common Stock Purchase Warrant dated April 27, 2004 issued to Laurus Master (14)
Fund, Ltd.
10.30 Registration Rights Agreement dated April 27, 2004 by and between Ophthalmic (14)
Imaging Systems and Laurus Master Fund, Ltd.
10.31 Security Agreement dated April 27, 2004 by and between Ophthalmic Imaging (14)
Systems and Laurus Master Fund, Ltd.
10.32 First Amendment to the Lease Agreement dated as of April 21, 2001 between the (16)
Company and Jackson-Jahn, Inc.
10.33 Second Amendment to the Lease Agreement dated as of April 21, 2001 between (16)
the Company and Jackson-Jahn, Inc.
10.34 Loan and Security Agreement dated as of February 28, 2005 by and between the (16)
Company and MediVision Medical Imaging Ltd.
10.35 Promissory Note dated as of February 28, 2005 by and between the Company and (16)
MediVision Medical Imaging Ltd.
10.36 Letter Agreement, dated December 6, 2004 between the Company and Dragonfly (17)
Capital Partners, LLC
10.37 Debenture dated July 20, 2005 between the Company and United Mizrahi Bank Ltd. (18)
II-4
10.38 Amended and Restated Investment Agreement dated as of August 26, 2005 by and (20)
between Ophthalmic Imaging Systems and Dutchess Private Equities Fund II, LP.
10.39 Amended and Restated Registration Rights Agreement dated as of August 26, (20)
2005 by and between Ophthalmic Imaging Systems and Dutchess
Private Equities Fund II, LP.
10.40 Common Stock Purchase Agreement dated as of September 16, 2005 by and between (21)
MediVision Medical Imaging Ltd. and Meadowbrook Opportunity Fund LLC.
23.1 Consent of Perry-Smith LLP, Independent Registered Public Accounting Firm. (22)
23.2 Consent of Jenkens & Gilchrist Parker Chapin LLP (included in Exhibit 5.1) (19)
* Incorporated by reference to our Registration Statement on Form S-18, number *
33-46864-LA.
(1) Incorporated by reference to our Annual Report on Form 10-KSB for
the fiscal year ended August 31, 1993, filed on November 26,
1993.
(2) Incorporated by reference to our Registration Statement on Form
S-8, filed on May 28, 1996, number 333-0461. (3) Incorporated by
reference to our Quarterly Report on Form 10-QSB for the
quarterly period ended November 30, 1997, filed on January 14,
1998.
(4) Incorporated by reference to our Annual Report on Form 10-KSB for
the fiscal year ended August 31, 1998, filed on December 15,
1998.
(5) Incorporated by reference to Exhibit 4.3 of our Form 8-K, filed
on November 24, 1999. (6) Incorporated by reference to our Annual
Report on Form 10-KSB for the fiscal year ended August 31, 2000,
filed on December 13, 2000.
(7) Incorporated by reference to our Annual Report on Form 10-KSB for
the transition period from September 1, 2000 to December 31,
2000, filed on March 29, 2001.
(8) Incorporated by reference to our Quarterly Report on Form 10-QSB
for the quarter ended September 30, 2001, filed on November 14,
2001.
(9) Incorporated by reference to our Annual Report on Form 10-KSB for
the fiscal year ended December 30, 2001, filed on March 26, 2002.
(10) Incorporated by reference to our Quarterly Report on Form 10-QSB
for the fiscal quarter ended June 30, 2003, filed on August 14,
2003.
(11) Incorporated by reference to our Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2002, filed on March 27, 2003.
(12) Incorporated by reference to our Current Report on Form 8-K filed
on October 1, 2003.
II-5
(13) Incorporated by reference to our Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2003, filed on March 25, 2004
(14) Incorporated by reference to our Current Report on Form 8-K filed
on April 29, 2004.
(15) Incorporated by reference to our Current Report on Form 8-K filed
on December 30, 2004.
(16) Incorporated by reference to our Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2004, filed on March 18, 2004
(17) Incorporated by reference to our registration statement on Form
SB-2 filed on April 6, 2005.
(18) Incorporated by reference to our Current Report on Form 8-K filed
on July 25, 2005
(19) Incorporated by reference to our Pre-Effective Amendment No. 1 to
Form SB-2, filed on June 21, 2004 and by reference to our
Pre-Effective Amendment No. 1 to Form SB-2, filed on November 19,
2003.++
(20) Incorporated by reference to our registration statement on Form
SB-2 filed on September 2, 2005.
(21) Incorporated by reference to our Amendment No. 5 to Schedule 13D,
filed on September 22, 2005.
(22) Filed herewith.
+ Management contract or compensatory plan or arrangement.
++ We are relying upon Rule 429 to file a combined single prospectus
for two previously separate offerings on different registration
statements (File No. 333-116217 and File No. 333-110334);
therefore, Exhibit (19) incorporates by reference an opinion of
Jenkens & Gilchrist Parker Chapin LLP from each earlier
registration statement.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
Registration Statement; and
(iii) include any additional or changed material information on the
plan of distribution.
II-6
(2) That, for determining liability under the Securities Act, each such
post-effective amendment shall be treated as a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) To file a post-effective amendment to remove from registration any of the
securities being registered that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-7
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of
Sacramento, state of California, on October 11, 2005.
OPHTHALMIC IMAGING SYSTEMS
By: /s/ Gil Allon
------------------------------------
Gil Allon
Chief Executive Officer
By: /s/ Ariel Shenhar
------------------------------------
Ariel Shenhar
Chief Financial Officer,
Vice President and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors of Ophthalmic
Imaging Systems, a California corporation that is filing a registration
statement on Form SB-2 with the Securities and Exchange Commission under the
provisions of the Securities Act of 1933, as amended, hereby constitute and
appoint Gil Allon and Ariel Shenhar, and each of them, their true and lawful
attorneys-in-fact and agents; with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign such amendment to registration statement and any or all
amendments to the registration statement, including a prospectus or an amended
prospectus therein, and all other documents in connection therewith to be filed
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all interests and purposes as they might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Gil Allon
- ----------------------------
Gil Allon Director October 11, 2005
/s/ Ariel Shenhar
- ----------------------------
Ariel Shenhar Director October 11, 2005
/s/ Yigal Berman
- ----------------------------
Yigal Berman Director October 11, 2005
- ----------------------------
Michael Benoff Director ________, 2005
- ----------------------------
Merle Symes Director ________, 2005