U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended August 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number 1-11140
OPHTHALMIC IMAGING SYSTEMS
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
CALIFORNIA 94-3035367
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
221 LATHROP WAY, SUITE I
SACRAMENTO, CALIFORNIA 95815
(Address of Principal Executive Offices) (Zip Code)
(916) 646-2020
(Issuer's Telephone Number, Including Area Code)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
Name of Each Exchange
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, No Par Value Boston Stock Exchange
NASDAQ
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
NONE
(TITLE OF CLASS)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes XX
No
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year was $6,873,651.
The aggregate market value of the Common Stock of the issuer held by non-
affiliates as of October 31, 1996, was approximately $15,351,490 by reference
to the closing price of the Common Stock as quoted by NASDAQ Small Cap Market
on such date. As of October 31, 1996, there were 3,336,264 issued and
outstanding shares of issuer's Common Stock.
Traditional Small Business Disclosure Format (check one): Yes No XX
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's definitive Proxy Statement for the Annual Meeting of
Shareholders for fiscal year 1997 to be filed with the Securities and Exchange
Commission no later than 120 days after the end of the issuer's 1996 fiscal
year are incorporated by reference into Part III of this Form 10-KSB.
<PAGE> 1
OPHTHALMIC IMAGING SYSTEMS
FORM 10-KSB
ANNUAL REPORT FOR THE FISCAL YEAR ENDED AUGUST 31, 1996
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Ophthalmic Imaging Systems (the "Company" or "OIS") was incorporated
under the laws of the State of California on July 14, 1986. The Company is
engaged in the business of designing, developing, manufacturing, and marketing
digital imaging systems, image enhancement and analysis software, and a
glaucoma detection diagnostic instrument for use by practitioners in the ocular
health field.
Since its inception, the Company's products have addressed primarily the
needs of the ophthalmic fluorescein angiography market, and more recently the
indocyanine green market. The current flagship products in the Company's
angiography line are its digital imaging systems, the WinStation
1024<trademark> and WinStation 640<trademark>. These WinStation products are
targeted primarily at retinal specialists and general ophthalmologists.
The Glaucoma-Scope<reg-trade-mark>, the first commercial sale of which
was made in 1993, is designed for use by all ocular health providers that
manage patients with glaucoma, including glaucoma specialists, general
ophthalmologists and optometrists.
The Company believes, however, that as the U.S. healthcare system moves
toward managed care the needs of the managed care providers are changing the
nature of demand for medical imaging equipment and services. New opportunities
in telemedicine are emerging that allow managed care organizations to reduce
costs while maintaining their quality of patient care. OIS is currently a
market leader in the ophthalmic imaging field and plans to expand this role by
applying its technology to telemedicine/managed care applications.
In this regard, the Company has developed its initial service-oriented
telemedicine/managed care application incorporating a Reading and Documentation
Center, through which it intends to provide documentation services of
electronically transmitted digital images acquired at remote locations. The
Company has secured an agreement to conduct a pilot program with a major
managed care provider to evaluate remote image interpretation for diabetic
retinopathy screening. At the conclusion of the pilot program, the Company
anticipates entering into negotiations with the provider for contracting the
Reading Center services. In addition, the Company has received four
commitments to purchase Reading Center Services.
The Company has experienced operating losses for each fiscal year since
its initial public offering in 1992. The Company expects to continue to incur
operating losses for the foreseeable future and there can be no assurance that
the Company will be able to achieve or sustain significant revenues or
profitability in the future. In an effort to achieve profitability, the Company
intends to strengthen its existing product lines and expand into new product
lines. In this regard, the Company's plans to expand its technology to
telemedicine/managed care applications which may result in significant expenses
over the next several years.
The Company, headquartered in Sacramento, California, enjoys a fine
reputation within the ophthalmic community for producing high quality,
reliable, easy to use equipment. Its products are compatible with standard
diagnostic procedures used in all types of eye care practices.
<PAGE> 2
THE INDUSTRY
There are approximately 18,000 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, neuro, plastics, pediatric, cataract, cornea and
refractive surgery. The Company's WinStation products are targeted primarily
at the retina specialist and general ophthalmologist. The Glaucoma-
Scope<reg-trade-mark> is designed for glaucoma specialists, general
ophthalmologists and optometrists that manage patients with glaucoma.
PRODUCTS
The Company currently offers three products to the ophthalmic market:
WinStation 1024, WinStation 640 and the Glaucoma-Scope<reg-trade-mark>.
Additionally, the Company offers a retinal documentation service via its
Reading Center.
WINSTATION SYSTEMS (640 & 1024)
The Company's WinStation systems (640 and 1024 resolution) are primarily
used by 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 in the
bloodstream. As the dye circulates through the blood vessels of the eye, the
WinStation system connected to a fundus camera takes detailed images of the
patient's retina. Quite often these images provide a "road map" for laser
treatment.
Over the past 35 years fluorescein angiography has been performed using
photographic film which requires special processing and printing. The
Company's WinStation systems allow for immediate diagnosis and treatment of the
patient. Images are automatically data based and are permanently stored on
optical laser disk or CD-ROM. OIS offers a variety of networking and printer
options to best fit the practice needs.
The Company's WinStation systems are also used by ophthalmologists to
perform indocyanine green ("ICG") angiography. ICG angiography is a new
diagnostic test procedure which is yielding new clinically significant
information that is helpful in the treatment of patients with macular
degeneration (a leading cause of blindness afflicting over 13 million people in
the U.S.). ICG angiography, used for approximately 10-20% of patient
angiography, is a dye procedure that can only be performed using a digital
imaging system.
GLAUCOMA-SCOPE<reg-trade-mark>
The Glaucoma-Scope<reg-trade-mark> is a natural outgrowth of the
Company's digital imaging products. While engaged in the research,
development, and design of products for digital imaging for fluorescein
angiography, it became evident to the Company that a more effective means for
the early detection and tracking of glaucoma was needed. Comprised principally
of an optical head for image acquisition and an image analysis workstation, the
Glaucoma-Scope<reg-trade-mark> was designed to provide an objective,
quantifiable numerical measurement by evaluating the topography of the optic
nerve head, storing the data, and printing a report which compares optic nerve
head topography over a number of patient visits.
RETINAL DOCUMENTATION SERVICES
The Company has developed a Reading and Documentation Center, through
which it intends to provide documentation services of electronically
transmitted digital images acquired at remote locations with the Company's
WinStation digital imaging system. This is the Company's first service-
oriented telemedicine application and is initially targeted at physicians that
care for diabetic patients. Diabetic retinopathy, an eye
<PAGE> 3
disease affecting the blood vessels of the retina that occurs among diabetic
patients, is the leading cause of blindness in working age Americans.
MARKETS
The WinStation market consists of current fundus camera owners and
anticipated fundus cameras purchasers of cameras suitable for interfacing with
the Company's digital imaging system products. Presently there are over 8,500
mydriatic fundus cameras in clinical use in the United States with an equal
number in the international market. New fundus camera sales fluctuate between
500 and 1,000 units per year. Of the total number of fundus cameras worldwide,
approximately 12,000 are suitable to be interfaced with OIS digital imaging
systems.
Currently there are six manufacturers of fundus cameras producing a total
of 17 models. OIS has successfully designed optical and electronic interfaces
to each of these cameras.
The primary target market for digital angiography systems is retinal
specialists who number approximately 3,000 in the U.S. For the past two years
OIS digital imaging system sales have been driven in this segment to a large
extent by indocyanine green ("ICG") angiography. ICG angiography is a new
diagnostic test procedure which is yielding new clinically significant
information that is helpful in the treatment of patients with macular
degeneration (a leading cause of blindness afflicting over 13 million people in
the U.S.). ICG angiography is a dye procedure that can only be performed using
a digital imaging system. While only used for 10-20% of patient angiography,
it has been the catalyst to digital imaging system purchases. Competition is
intense in the retinal community and those practices without ICG capability
are losing referral business from general ophthalmologists. The Company
expects the demand for digital angiography to continue as it is becoming a
standard of care.
The Company believes that the market for the Glaucoma-
Scope<reg-trade-mark> is analogous to the market for a device known as the
automated perimeter. The visual field test performed with an automated
perimeter is the primary method currently used for validating a glaucoma
diagnosis. The Company continues to assess potential market opportunities in
anticipation of results from clinical validation studies of its Glaucoma-
Scope<reg-trade-mark> product. Pending the outcome of these clinical
validation studies, the Company believes that a potential use of the Glaucoma-
Scope<reg-trade-mark> for screening purposes could fit well into a managed care
environment.
The initial target market for the retinal documentation service is
physicians that care for diabetic patients. Diabetic retinopathy, an eye
disease affecting the blood vessels of the retina that occurs among diabetic
patients, is the leading cause of blindness in working age Americans. The
Company believes that the market for this service is substantial based upon the
strong need of managed care companies to screen for diabetic retinopathy
coupled with the low compliance of diabetic patients receiving a retinal
examination.
SALES, MARKETING AND DISTRIBUTION
The Company utilizes a direct sales force in marketing its products
throughout the United States and Canada. The direct sales force consists of
territory representatives and product specialists strategically located
throughout the contiguous U.S. as well as a marketing manager located at the
Company's headquarters. These regional representatives and product specialists
provide marketing, sales, service, installation and training. Additionally,
the Company subcontracts service in several cities in the U.S. and Canada for
routine component replacement. Internationally, the Company has retained
specialized ophthalmic distributors which sell the Company's products in
various foreign countries. Each country has trained sales and technical
service staff for their respective territories.
For its marketing activities, the Company prepares brochures, data
sheets, application notes on its products, and participates in industry trade
shows and workshops. Advertising and promotion is achieved
<PAGE> 4
through advertisements in trade journals, press releases, a Company
newsletter, direct mail solicitations, journal articles, and scientific papers
and presentations.
MANUFACTURING AND PRODUCTION
The Company is primarily a systems integrator with proprietary software,
optical interfaces, and electronic fundus camera interfaces. Certain
components are subcontracted to outside vendors and assembled at OIS. The
Company inventories and assembles components in a 10,500 square foot facility
located in Sacramento, California. For production of certain components of its
products, the Company's manufacturing strategy is to use subcontractors to
minimize time and reduce capital requirements.
The Company's product line is manufactured by assembling components
purchased from established outside quality vendors as well as certain
components manufactured by OIS. Proprietary components manufactured by the
Company include interface circuit boards for 17 fundus camera models, video
optical interfaces including ICG and live viewing options. The Glaucoma-
Scope<reg-trade-mark> optical head is also manufactured by the Company.
The Company has been routinely audited by the Food and Drug
Administration and was deemed to conform to Good Manufacturing Practices
("GMP"). The Company has 510(k)'s on file for both the Glaucoma-
Scope<reg-trade-mark> and digital angiography products.
COMPONENTS, RAW MATERIALS AND SUPPLIERS
As a systems integrator, a significant number of the major hardware
components in the Company's products are procured from sole source vendors.
Whenever possible, however, the Company seeks multiple vendor sources from
which to procure its components. As with any manufacturing concern dependent
on subcontractors and component suppliers, significant delays in receiving
products or unexpected vendor price increases could adversely affect the
Company.
The Company works closely with its principal component suppliers and the
rest of its vendors to maintain dependable working relationships and to
continually integrate the most current proven pertinent technologies into the
manufacturing of its products.
WARRANTIES
The Company generally provides a 12-month limited warranty for parts,
labor and shipping charges in connection with the initial sale of its products.
The Company also provides its standard limited warranty beyond the 12-month
period in consideration for increased deposits from customers. Peripheral
products such as monitors, printers and optical laser disk drives also carry
the original manufacturer's warranty.
To insure quality control and the proper functioning of a product in the
doctor's office, the Company installs the system and trains the doctor and his
staff. The Company makes every effort to provide the customer with a properly
functioning system and a well-trained staff.
The Company also offers service plans for sale to its customers as a
supplement to the original manufacturer's warranties carried on certain of the
Company's component parts used in its products.
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. The Company is aware of two primary competitors in the U.S. which
produce and are
<PAGE> 5
delivering digital fundus imaging systems, Topcon and Tomey. Four other
companies are known to have systems in the international market each
with small market penetration.
Topcon is the Company's main competitor in the angiography market.
Topcon angiography products predominantly interface with Topcon fundus cameras
while the Company's systems interface with 17 different models or fundus
cameras from a wide variety of manufacturers.
Competition for the Glaucoma-Scope<reg-trade-mark> includes Heidelberg
Engineering ("Heidelberg") and Laser Diagnostic Technologies ("LDT").
Published clinical studies have shown the Glaucoma-Scope<reg-trade-mark> to be
more reproducible than the devices offered by Heidelberg and LDT.
In the area of retinal documentation services, the Company knows of two
existing competitors, Joslin Diabetes Center and Pioneer Healthcare. The
Company believes that each of these companies uses diabetic retinopathy
screening as part of a strategy to establish total eye care contracts with
managed care providers. The Company's business strategy of partnering with
ophthalmologists is significantly different from these other companies and
management believes that its strategy offers the Company far larger market
potential.
Although the Company will continue to work to develop new and improved
products, many companies are engaged in research and development of new
devices and alternative methods to diagnose and evaluate eye disease.
Introduction of such devices and alternative methods could hinder the Company's
ability to compete effectively and could have a material adverse effect on its
business, financial condition and results of operations. Many of the Company's
competitors and potential competitors have substantially greater financial,
manufacturing, marketing, distribution and technical resources than the
Company.
RESEARCH AND DEVELOPMENT
The Company intends to devote significant resources to the development of
telemedicine/managed care applications, the improvement of optics, new fundus
camera interfaces for ICG, software development (including the continued
enhancement of WinStation), hardware optimization, and the patient/doctor
interface. The Company's research and development expenditures in the periods
ended August 31, 1996 and 1995, were $846,034 and $691,358, respectively.
These research and development expenditures were funded from internally
generated funds, proceeds from the sale of common stock and warrants, and loans
extended from both shareholders and financial institutions.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
On June 15, 1993 the Company was issued United States Letters Patent
5,220,360 for "Apparatus and Method for Topographical Analysis of the Retina."
This patent relates to the Glaucoma-Scope<reg-trade-mark> apparatus, and
methods used by the apparatus for topographically mapping the retina and
comparing the mapping to previous mappings. The Company has filed a further
U.S. patent application seeking additional coverage for the Glaucoma-
Scope<reg-trade-mark> product, including enhancements of the original product.
In addition, the Company relies upon trade secrets, know-how, and continuing
technological innovation to develop and maintain its competitive position. The
Company anticipates aggressively defending its patents and proprietary
technology, although there can be no assurance that any patent will not be
circumvented or invalidated.
The Company has also applied for a patent in Canada relating to the
Glaucoma-Scope<reg-trade-mark> technology. The application in Canada is based
on the application which issued as U.S. Patent 5,220,360, and is entitled by
international treaty to the effective filing date of the original U.S.
application. The Company has taken the necessary steps to secure examination
of the Canadian application, and expects it to be considered by the Canadian
patent office in due course. Although the Company has obtained a U.S. patent,
and therefore believes that the technology disclosed in the pending Canadian
application is patentable, there can be no assurance that such patent rights
will be obtained.
<PAGE> 6
The U.S. Patent and Trademark Office has completed its examination of the
Company's Glaucoma-Scope<reg-trade-mark> trademark registration application,
and on April 26, 1994 the Company received United States Trademark Registration
1,833,259 for the Glaucoma-Scope<reg-trade-mark> trademark. This issued
registration provides notice to the public that the Company claims ownership of
this trademark for use on the indicated products.
Further, although the Company believes that the Glaucoma-
Scope<reg-trade-mark> and the Company's other products do not and will not
infringe patents or violate proprietary rights of others, it is possible that
its existing rights may not be valid or that infringement of existing or future
patents, trademarks or proprietary rights may occur. In the event that any of
the Company's products, including the Glaucoma-Scope<reg-trade-mark>, infringe
patents, trademarks or proprietary rights of others, the Company may be
required to modify the design of such products, change the names under which
the products or services are provided, or obtain licenses. There can be no
assurance that the Company will be able to do so in a timely manner, upon
acceptable terms and conditions, or at all. The failure to do any of the
foregoing could have a material adverse effect on the Company. There can be no
assurance that the Company's patents or trademarks, if granted, would be upheld
if challenged, or that competitors might not develop similar or superior
processes or products outside the protection of any patents issued to the
Company. In addition, there can be no assurance that the Company will have the
financial or other resources necessary to enforce or defend a patent or
trademark infringement or proprietary rights violation action. Moreover, if
the Company's products infringe patents, trademarks or proprietary rights of
others, the Company could, under certain circumstances, become liable for
damages, which also could have a material adverse effect on the Company.
The Company also relies on unpatented proprietary technology. Certain of
the image processing and optical interfaces of the Company's digital imaging
systems are largely proprietary and constitute trade secrets, but the basic
computer hardware, software, and video components are purchased from third
parties. No patent applications have been filed with respect thereto. There
is no assurance that others will not independently develop substantially
equivalent proprietary information or techniques, or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company
can meaningfully protect its rights to its unpatented trade secrets.
The Company seeks to protect its unpatented proprietary technology, in
part, through proprietary confidentiality and nondisclosure agreements with
employees, consultants and other parties. The Company's confidentiality
agreements with its employees and consultants generally contain industry
standard provisions requiring such individuals to assign to the Company without
additional consideration any inventions conceived or reduced to practice by
them while employed or retained by the Company, subject to customary
exceptions. There can be no assurance that proprietary information agreements
with employees, consultants and others will not be breached, that the Company
would have adequate remedies for any breach or that the Company's trade secrets
will not otherwise become known to or independently developed by competitors.
ROYALTY COMMITMENTS
In an effort to secure and retain the services of two key employees and
founders of the Company, Messrs. Makes and Verdooner, and to compensate them
for their role in the research, design, and development of the Glaucoma-
Scope<reg-trade-mark> and its topographical analytic capabilities, the Company
has agreed to pay each of them a perpetual royalty of $250 for each Glaucoma-
Scope<reg-trade-mark> sold by the Company. Such royalty payments are paid
quarterly pursuant to the terms contained in their respective employment
agreements.
The Company also entered into a consulting agreement with G. Peter
Halberg, M.D. on January 23, 1992, pursuant to which Dr. Halberg receives as
partial payment for services rendered under such agreement, deferred
compensation in the form of a royalty payment of $200 for each of the first 100
Glaucoma-Scope<reg-trade-mark> units sold at full price (for a maximum royalty
payment of $20,000). Such royalty payment is due within 45 days of delivery of
each unit, regardless of whether Dr. Halberg continues to serve as a consultant
to the Company.
<PAGE> 7
Other than as described above, the Company has no other agreements,
contracts, understandings or arrangements, directly or indirectly, to pay any
additional royalties on the sale of its products.
GOVERNMENT REGULATION
The marketing and sale of the Company's products are subject to certain
domestic and foreign governmental regulations and approvals. Pursuant to the
Federal Food, Drug, and Cosmetic Act ("FDCA"), the Company is required under
Section 510(k) to file, and has submitted, a Pre-Marketing Notification with
the Federal Drug Administration (the "FDA") which provides certain safety and
effectiveness information concerning the Company's diagnostic imaging systems
and the Glaucoma-Scope<reg-trade-mark>. The FDA has approved the Company's
pre-marketing notification submittals thereby granting the Company permission
to market its product, subject to the general controls and provisions of the
FDCA. The Company's products are classified as Class II devices (special
controls) which require, among other things, annual registration, listing of
devices, good manufacturing practices and labeling, and prohibition against
misbranding and adulteration.
The Company has registered its manufacturing facility with both the FDA
and the California authorities as a medical device manufacturer and operates
such facility under FDA and California requirements concerning Good
Manufacturing Practices ("GMP"). As a medical device manufacturer, the Company
is required to continuously maintain its GMP compliance status and to
demonstrate such compliance during periodic FDA or California inspections. If
the facilities do not meet applicable GMP regulatory requirements, the Company
may be required to implement changes necessary to comply with such regulations.
Although the FDA has made findings which permit the Company to proceed
with its products to the marketplace, such findings do not constitute FDA
approval of these devices. Further, since the Company is engaged in
international sales, the Company's products must satisfy certain manufacturing
requirements and may subject the Company to various filing and other regulatory
requirements imposed by foreign governments as a condition to the sale of such
products. The Company cannot predict the effect that future legislation or
regulatory developments may have on its 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 the Company's business, financial
condition and results of operations. Moreover, new products and services
developed by the Company, if any, also may be subject to the same or other
various federal and state regulation, including that of the FDCA.
INSURANCE
The Company maintains general commercial casualty and property insurance
coverage for its business operations, as well as product liability insurance.
As of August 31, 1996, the Company has not received any product liability
claims and is unaware of any threatened or pending claims. To the extent that
product liability claims are made against the Company in the future, such
claims may have a material adverse impact on the Company.
EMPLOYEES
As of August 31, 1996, the Company had 43 employees, of which 34 were
full time. The Company also engages the services of consultants from time to
time to assist the Company on specific projects in the area of research and
development, software development, regulatory affairs, and product services.
These consultants periodically engage contract engineers as independent
consultants for specific projects. The Company has no collective bargaining
agreements covering any of its employees, has never experienced any material
labor disruption, and is unaware of any current efforts or plans to organize
its employees. The Company considers its relationship with its employees to be
good.
<PAGE> 8
ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
The Company leases approximately 13,875 square feet of office,
manufacturing, and warehouse space in Sacramento, California under a lease
which terminates June 30, 1998. The Company also leases an approximately
200 square foot sales office in Simsbury, Connecticut on a month-to-month
basis. Management believes that its existing facilities are suitable and
adequate to meet its current needs.
The Company does not have, and does not foresee acquiring, any real
estate or investments in real estate, and is not engaged in any real estate
activities.
ITEM 3. LEGAL PROCEEDINGS
On September 6, 1996, an action was filed in Superior Court in the County
of Sacramento, California against the Company by a former employee alleging
that such employee was wrongfully terminated by the Company in retaliation for
filing a grievance against a co-employee for harassment and creation of a
hostile work environment. The suit seeks, among other things, lost wages,
$150,000 in compensatory damages, and punitive damages. The Company believes
that this action is without merit and intends to defend this action vigorously.
There is no other material litigation or other legal proceedings
presently pending or threatened (to the knowledge of management of the Company)
to which the Company (or any of its directors or officers in their capacity as
such) is, or may be a party, or to which property of the Company is, or may be,
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's securities
holders during the fourth quarter of its fiscal year ended August 31, 1996
covered by this Annual Report on Form 10-KSB.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock of the Company, no par value, is traded over-the-counter
on the NASDAQ Small-Cap Market under the symbol "OISI" and on the Boston Stock
Exchange under the symbol "OIS."
The table below illustrates the approximate high and low sales prices for
the Company's Common Stock for each quarter of fiscal year 1995 and 1996,
respectively, as determined by the bid and ask prices for the Common Stock.
The source of the following information was the OTC Bulletin Board and NASDAQ.
Over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-downs or commissions and may not necessarily represent actual
transactions.
<PAGE> 9
<TABLE>
<CAPTION>
FISCAL YEAR 1995 FISCAL YEAR 1996
<S> <C> <C> <C> <C> <C> <C>
High Low High Low
ASK BID DIVIDEND ASK BID DIVIDEND
QUARTER 1 2-7/16 15/16 -- 3-3/4 1-1/2 --
QUARTER 2 2-7/8 1/2 -- 4 1-9/16 --
QUARTER 3 2-3/4 1-5/8 -- 7-3/8 3 --
QUARTER 4 1-15/16 1-1/8 -- 5-3/4 3-1/8 --
</TABLE>
On October 31, 1996 the closing price for the Company's Common Stock as
reported by NASDAQ was $5.00 per share and there were approximately 178
shareholders of record.
DIVIDEND POLICY
The Company has not paid any cash dividends since its inception and does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future. The Company expects to retain its earnings, if any, to provide funds
for the expansion of its business. Pursuant to a Credit Agreement (defined
below), the Company is restricted from paying dividends prior to retirement of
the debt thereunder. Future dividend policy will be determined periodically by
the Board of Directors based upon conditions then existing, including the
Company's earnings and financial condition, capital requirements, and other
relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
THE STATEMENTS BELOW INCLUDE STATEMENTS THAT ARE "FORWARD LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 21A OF THE SECURITIES ACT OF 1933, AS AMENDED, IN
SECTION 21E OF THE SECURITIES ACT OF 1934, AS AMENDED, AND IS SUBJECT TO THE
SAFE HARBOR CREATED THEREBY. FUTURE OPERATING RESULTS MAY BE ADVERSELY
EFFECTED AS A RESULT OF A NUMBER OF FACTORS ENUMERATED IN THE COMPANY'S PUBLIC
REPORTS.
OVERVIEW
To date, the Company has designed, developed, manufactured and marketed
ophthalmic digital imaging systems and has derived substantially all of its
revenues from the sale of such products. The Company has a reputation within
the ophthalmic community for producing high quality, reliable, easy to use
equipment and believes itself to be an acknowledged industry leader in the
sales of digital ophthalmic imaging systems for instant fluorescein
angiography.
The Company believes, however, that as the U.S. healthcare system moves
toward managed care the needs of the managed care providers are changing the
nature and demand for medical imaging equipment and services. New
opportunities in telemedicine are emerging that may allow managed care
organizations to reduce costs while maintaining their quality of patient care.
OIS plans to leverage its digital imaging technology and established customer
base to develop product features and services targeting telemedicine/managed
care applications for the ocular health care industry.
Since its inception, the Company's products have addressed primarily the
needs of the ophthalmic flourescein angiography market, and more recently the
indocyanine green ("ICG") market. The Company believes that the overall
angiography market remains limited, however, and that sustaining growth in its
traditional angiography equipment business will become increasingly difficult.
In recognition of this, the Company is expanding its product capabilities to
address the emerging telemedicine market, including remote consultation. While
the Company will continue to support its entire line of digital angiography
products, it will focus its future efforts on developing product enhancements
and pursuing viable opportunities in this market, particularly as they relate
to telemedicine/managed care applications.
<PAGE> 10
The Company's objective is to become a leading provider of telemedicine
products and services in the ocular health care industry, while maintaining its
position as a market leader in its existing digital imaging products.
In this regard, the Company has developed a Reading and Documentation
Center, through which it intends to provide documentation services of
electronically transmitted digital images acquired at remote locations. The
Company has secured an agreement to conduct a pilot program with a major
managed care provider to evaluate remote image interpretation for diabetic
retinopathy screening. At the conclusion of the pilot program, the Company
anticipates entering into negotiations with the provider for contracting the
Reading Center services. There can be no assurance, however, that these
negotiations will result in a contract for the Company's Reading and
Documentation Center services.
The Company continues to assess potential market opportunities in
anticipation of results from clinical validation studies of its Glaucoma-
Scope<reg-trade-mark> product, an instrument specifically designed for the
early diagnosis of glaucoma, a commonly occurring eye disease regularly
screened for by eye care practitioners.
The Company's results of operations have historically fluctuated from
quarter to quarter and from year to year and management anticipates that such
fluctuations will continue in the future. There can be no assurance that
revenue growth or profitability can be achieved or sustained in the future.
RESULTS OF OPERATIONS
The Company's revenues decreased slightly to $6,873,651 in 1996 from
$6,959,239 in 1995. The primary factor contributing to the reduced 1996
revenue level was a reallocation of the Company's resources to address emerging
opportunities in the telemedicine/managed care market. The Company will
continue to allocate resources to address the telemedicine/managed care market,
as sustaining growth in its traditional angiography equipment business becomes
increasingly difficult. As a result, the Company may experience reduced
revenue levels from sales of its digital imaging equipment products in the
near-term. As anticipated, revenues from sales of Glaucoma-
Scope<reg-trade-mark> units were below the 1995 levels as the Company continues
to direct the majority of its resources to both support the demand for its
digital angiography products and, more recently, to pursue opportunities in the
telemedicine/managed care market. Contributions to revenues from sales of
Glaucoma-Scope<reg-trade-mark> units have been negligible and management does
not anticipate significant near-term sales improvement for the Glaucoma-
Scope<reg-trade-mark>, recognizing that longer-term sales growth remains
dependent upon market acceptance of the system and resolution of healthcare
reform and reimbursement issues.
Gross margins decreased to approximately 30% in 1996 from approximately
33% in 1995. This decrease in gross margin percentage was attributable
primarily to higher labor and manufacturing support costs. The Company
continues to evaluate its expenses in this area consistent with current and
anticipated business conditions and management does not anticipate significant,
if any, near-term margin improvement. Management believes that near-term gross
margin improvement, if any, would result principally from reduced material
costs associated with currently deliverable system configurations, economies of
scale from increased unit production and other manufacturing efficiencies.
Sales and marketing and general and administrative expenses accounted for
approximately 35% of revenues for the fiscal year ended August 31, 1996 as
compared to approximately 29% for the previous fiscal year. Expenses were
$2,375,427 in 1996 as compared to $1,986,635 in 1995, representing an increase
of approximately 20%. The primary factors contributing to this anticipated
increase were costs associated with hiring additional support personnel, the
impact of increased reserves for potential credit losses and marketing, sales
and related research and development costs associated with developing the
telemedicine/managed care applications and the start-up marketing efforts
associated therewith. The Company anticipates expenses in this area will
continue to run above historical levels.
<PAGE> 11
Research and development expenses increased by approximately 22% to
$846,034, or approximately 12% of revenues in 1996 from $691,358, or
approximately 10% of revenues in 1995. The Company anticipates that it will
incur increased expense levels in near-term as it dedicates more resources to
the research and development of telemedicine/managed care applications, while
continuing to incur expenses with respect to its current products. In this
regard, the Company intends to continue research and development efforts on
product enhancements and reducing cost configurations for its current products,
particularly as they impact telemedicine/managed care applications.
Other expense was $268,049, or approximately 4% of revenues during 1996
versus $21,200, or less than 1% of revenues during 1995. Of these amounts,
interest expense accounted for $288,667 and $31,857 in 1996 and 1995,
respectively. The primary contributing factor to this increase was the
significant increase in interest expense during 1996 versus 1995 associated
with an alternative stock appreciation right pursuant to a warrant previously
issued to the Company's bank in connection with the Credit Agreement (defined
below) and additional borrowings under an existing credit line, which was not
in place until the third quarter of fiscal 1995. In May 1996, the bank
exercised an alternative stock appreciation right available under the warrant.
In conjunction with said exercise, the Company recognized additional interest
expense of approximately $155,000 during 1996. The Company had previously
recognized as interest expense approximately $69,000 in connection with a put
right under the warrant, which right is foregone in lieu of the bank exercising
its alternative stock appreciation right. During 1996, the Company recognized
as interest expense approximately $218,000 in connection with both the put
right and the alternative stock appreciation right. The parties have agreed in
principal to revise the form of consideration and timing of payment under the
alternative stock appreciation right, and are currently negotiating the terms
of that agreement.
EXPORT SALES
Revenues from sales to customers located outside of the United States
(primarily Europe) accounted for approximately 29% and 25% of the net sales for
the years ended August 31, 1996 and 1995, respectively.
SEASONALITY
The Company's most effective marketing tool is the demonstration and
display of its products at the annual meeting of the American Academy of
Ophthalmology held during the fall of each year, with a significant amount of
the Company's sales orders generated during or shortly after this meeting.
Accordingly, the Company expends a considerable amount of time and resources
during the first quarter of its fiscal year preparing for this event. As a
consequence, the Company's revenues and profitability typically decrease during
the periods prior to and following the annual meeting.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used cash of $1,460,460 in 1996 as
compared to $782,638 in 1995. The increase in net cash used in operating
activities from 1995 to 1996 was principally due the increased loss in 1996.
Cash used in operations in 1995 was partially offset by an increase in accounts
payable and accrued liabilities.
Net cash used in investing activities increased to $215,884 during 1996
from $101,615 during 1995. The Company's primary investing activities consist
of equipment and other capital asset acquisitions. Capital expenditures
increased primarily as a result of purchases of new furniture and equipment,
including capital expenditures associated with establishing the Company's
Reading Center as well as the purchase and installation of software to upgrade
its management information systems. The Company does not currently have any
material capital commitments regarding capital expenditures. However, further
upgrades to the Company's existing management information systems may result in
increased near term expenditures. In addition, the Company
<PAGE> 12
anticipates certain capital expenditures to support efforts to expand its
technology to telemedicine/managed care applications. The Company anticipates
that related expenditures, if any, will be financed from one or more of
the following sources: (i) working capital; (ii) borrowings under an
existing credit agreement, if available; or (iii) debt, equity or other
financing arrangements, if any, available to the Company.
Net cash provided by financing activities in 1996 was $2,410,464 as
compared to $390,715 during 1995. The sources of cash from financing
activities during the 1996 period were principally the net proceeds of
approximately $1,075,000 from a private placement of approximately 1,368,421
shares of the Company's Common Stock and warrants in November 1995, the net
proceeds of approximately $1,180,000 from the exercise in May 1996 of certain
Series A Warrants issued pursuant to said private placement and, to a lesser
extent, borrowings under the Credit Agreement (defined below) which is more
fully described immediately below. See Footnote 7 of the Company's financial
statements attached hereto as exhibit following signature page for a more
detailed description of the private placement. Cash generated in 1995 was
solely from borrowings under the Credit Agreement. Cash generated from
financing activities during both 1996 and 1995 was offset slightly by principal
repayments on notes payable.
The Company is party to a revolving line of credit agreement (the "Credit
Agreement") with a bank which matured on October 5, 1996. The maximum amount
available under the Credit Agreement is $750,000, based upon eligible
outstanding accounts receivable balances. Borrowings under the Credit
Agreement bear interest at the rate of the bank's prime plus 2 1/2 % per annum
and are secured by virtually all of the Company's assets. The Credit Agreement
contains certain restrictive covenants which provide for, among other things,
certain working capital and net worth balances and ratios, and limitations on
the amount of net loss the Company may incur in a quarter. The Company was not
in compliance with the restrictive covenants for the quarter ending August 31,
1996. The Company received a waiver from the bank with respect to such non-
compliance. As of August 31, 1996 the Company had outstanding borrowings of
$550,000. On November 21, 1996, the Credit Agreement was modified. The
modifications include, among other things, an extension of the maturity date
from October 1996 to March 1997, subject to the occurrence of certain equity
transactions.
At August 31, 1996, the Company's cash and cash equivalents were
$1,051,325. As indicated above, however, the Company intends to allocate
significant resources to the development and marketing of telemedicine/managed
care products and services. During this development period, the Company
anticipates that it could experience a decrease in revenues and earnings while
incurring additional expenses in connection with such activities. Accordingly,
the Company anticipates that it could continue to experience negative cash flow
from operations in the near-term. In addition, while the Credit Agreement has
been extended to March 1997, there can be no assurance that the Company will be
able to negotiate further extensions. As also indicated above, although the
Company and the bank have agreed in principal to revise the form of
consideration and timing of payment under the alternative stock appreciation
right and the Company believes that it will be able to enter into a final
agreement with the bank with regard to such matters, there can be no assurance
that it will be able to do so, in which case the entire amount of the
obligation, which amount at August 31, 1996 was approximately $224,282 plus
interest accrued thereon, would be due. Although the Company believes that it
will be able to raise the funds necessary to satisfy its liquidity and capital
requirements during the next twelve months from alternative sources including
extending or refinancing its Credit Agreement, other debt financing, issuing
equity securities or entering into other financing arrangements, there can be
no assurance that such financing will be available and, if available, that it
will be obtained in terms favorable to the Company. Additional capital could
also be made available to the Company pursuant to the exercise of additional
warrants issued in connection with the November 1995 private placement, as well
as from other outstanding options and warrants. While the Company has received
a commitment to exercise a significant number of these warrants from certain of
the warrant holders, there can be no assurance that any such warrants will be
exercised in the near-term, if at all.
INFLATION
<PAGE> 13
The Company believes that inflation has not had a material or significant
impact on the Company's revenue or on its results from operations.
INCOME TAXES
Deferred income taxes are accounted for pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," and result from
differences in the timing of recognition of certain revenues and expenses for
financial statement and income tax reporting purposes.
General business credits are accounted for as a reduction of federal
income taxes payable under the flow-through method.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF
In March 1995, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS 121 requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. SFAS 121 is effective for fiscal years
beginning after December 15, 1995. Accordingly, the Company will adopt SFAS
121 in the first quarter of fiscal year 1997 and based on current
circumstances, does not believe the effect of adoption will have any material
impact on the Company's financial position or results of operations.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company accounts for its stock option plans in accordance with the
provisions of the Accounting Principles Board's Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." In 1995, the Financial Accounting
Standards Board released Statement to Financial Accounting Standard No. 123
("SFAS 123"), "Accounting for Stock Based Compensation." SFAS 123 provides an
alternative to APB 25 and is effective for fiscal years beginning after
December 15, 1995. The Company expects to continue to account for its stock
plans in accordance with APB 25. Accordingly, SFAS 123 is not expected to have
any material impact on the Company's financial position or results of
operations.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company, including the notes thereto and
the report of independent auditors thereon, are attached hereto as exhibits
following signature page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
<PAGE> 14
Information required by Item 9 of Form 10-KSB is incorporated herein by
reference to the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders for fiscal year 1997 which will be filed with the Securities
and Exchange Commission no later than 120 days after the close of the
Registrant's fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
Information required by Item 10 of Form 10-KSB is incorporated herein by
reference to the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders for fiscal year 1997 which will be filed with the Securities
and Exchange Commission no later than 120 days after the close of the
Registrant's fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information required by Item 11 of Form 10-KSB is incorporated herein by
reference to the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders for fiscal year 1997 which will be filed with the Securities
and Exchange Commission no later than 120 days after the close of the
Registrant's fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 12 of Form 10-KSB is incorporated herein by
reference to the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders for fiscal year 1997 which will be filed with the Securities
and Exchange Commission no later than 120 days after the close of the
Registrant's fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<CAPTION>
Exhibit Footnote
NUMBER DESCRIPTION OF EXHIBIT REFERENCE
<S> <C> <C>
3.1 Articles of Incorporation of the Registrant, as amended. *
3.2 Amended Bylaws of the Registrant. *
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of *
Incorporation, as amended, and the amended Bylaws of the
Registrant defining the rights of holders of Common Stock of the
Registrant.
4.2 Specimen of Stock Certificate. *
10.1 Lease Agreement, dated as of July 10, 1987, between the Registrant *
(as tenant) and Transamerica/Emkay Income Properties I, as amended
on July 23, 1990 and June 11, 1991.
10.1(a) Seventh Amendment to lease effective as of July 18, 1996. (7)
10.2 Employment Agreement, dated March 27, 1992, between the Registrant *
and Dennis J. Makes.
<PAGE> 15
10.2(a) Amendment dated June 30, 1993 to the Employment Agreement between (1)
the Registrant and Dennis J. Makes dated March 27, 1992.
10.3 Confidentiality Agreement, dated March 27, 1992 between the *
Registrant and Dennis J. Makes.
10.4 Confidentiality Agreement, dated March 27, 1992 between the *
Registrant and Steven R. Verdooner.
10.5 Confidentiality Agreement, dated March 27, 1992 between the *
Registrant and Richard Wullaert.
10.6 Consulting Agreement, dated January 23, 1992, between the *
Registrant and G. Peter Halberg, M.D.
10.7 Assignment dated October 23, 1990 of U.S. Patent Application for *
Apparatus and Method for Topographical Analysis of the Retina to
the Registrant 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).
10.8 Form of International Distribution Agreement used by the *
Registrant and sample form of End User Software License Agreement.
10.9 Original Equipment Manufacturer Agreement, dated April 1, 1991, *
between the Registrant and SONY Medical Electronics, a division of
SONY Corporation of America.
10.10 Original Equipment Manufacturer/Value Added Reseller Agreement, *
dated May 7, 1991, between the Registrant and Eastman Kodak
Company.
10.11 The Registrant's 1992 Nonstatutory Stock Option Plan and sample *
form of Nonstatutory Stock Option Agreement.
10.12 Common Stock and Warrant Purchase Agreement ("Stock Purchase *
Agreement"), dated as of February 8, 1992, among the Registrant,
Jonnie R. Williams, Kathleen M. O'Donnell, as Trustee of Irre-
vocable Trust No. 6, FBO F.E. O'Donnell, Jr., M.D., Steven R.
Verdooner and Dennis J. Makes.
10.12(a) Amendment No. 1 to Stock Purchase Agreement, dated March 25, 1992, *
among the Registrant, Jonnie R. Williams, individually, Jonnie R.
Williams, as Trustee of Irrevocable Trust No. 1, Rambert Summons,
and Kathleen M. O'Donnell, as Trustee of Irrevocable Trust No. 6,
FBO F.E. O'Donnell, Jr., M.D.
10.13 Cross-Indemnification Agreement, dated February 14, 1991, among *
Dennis Makes, Steven Verdooner, and Richard Wullaert.
10.14 Key Man Life Insurance Policies in the amount of $1,000,000 for *
each of Dennis J. Makes and Steven R. Verdooner, with the
Registrant as the named beneficiary.
<PAGE> 16
10.15 Warrant dated February 12, 1993 issued by the Registrant to Steven (1)
R. Verdooner to purchase 50,000 shares of Common Stock.
10.16 Stock Option Plan. (1)
10.17 Promissory Note dated January 4, 1993 from the Registrant to (1)
Western Financial Savings Bank in the amount of $25,209.83 due in
full by January 4, 1998.
10.18 Rental Agreement dated May 1, 1994 by and between the Registrant (2)
and Robert J. Rossetti.
10.19 Security and Loan Agreement (with Credit Terms and Conditions) (3)
dated April 12, 1995 by and between the Registrant and Imperial
Bank.
10.19(a) General Security Agreement dated April 12, 1995 by and between the (3)
Registrant and Imperial Bank.
10.19(b) Warrant dated November 1, 1995 issued by the Registrant to (4)
Imperial Bank to purchase 67,500 shares of Common Stock.
10.19(c) Amended Loan and Security Agreement (with Credit Terms and (4)
Conditions) dated November 1, 1995.
10.19(d) Registration Rights Agreement dated November 1, 1995 between the (4)
Registrant and Imperial Bank.
10.19(e) Amended Loan and Security Agreement (with Credit Terms and (6)
Conditions) dated April 4, 1996).
10.19(f) Amended Loan and Security Agreement (with Credit Terms and (7)
Conditions) dated July 12, 1996).
10.19(g) Amended Loan and Security Agreement (with Credit Terms and (7)
Conditions) dated November 21, 1996).
10.20 Purchase Agreements dated November 21, 1995 between the (4)
Registrant, JB Oxford & Company and certain Investors.
10.20(a) Warrant Agreement dated November 21, 1995 between the Registrant, (4)
JB Oxford & Company and certain Investors.
10.20(b) First Amendment Warrant Agreement dated November 21, 1996 between (7)
the Registrant, JB Oxford & Company and certain Holders.
10.20(c) Registration Rights Agreement dated November 21, 1995 between the (4)
Registrant, JB Oxford & Company and certain Investors.
10.21 Employment Agreement dated November 20, 1995 between the (4)
Registrant and Steven R. Verdooner.
10.22 Employment Agreement dated November 20, 1995 between the (4)
Registrant and R. Michael Clark.
<PAGE> 17
10.25 The Registrant's 1995 Nonstatutory Stock Option Plan and sample (5)
form of Nonstatutory Stock Option Agreement.
11.1 Computation of net loss per share. (7)
23.1 Consent of Ernst & Young LLP, Independent Auditors. (7)
27 Financial Data Schedule (for SEC use only). (7)
</TABLE>
_________________________________________
* Incorporated by reference to the like-numbered exhibits previously filed
with Registrant's Registration Statement on Form S-18, number 33-46864-LA.
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended August 31, 1993 filed on November 26, 1993.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended August 31, 1994 filed on November 29, 1994.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
QSB for the quarterly period ended May 31, 1995 filed on July 14, 1995.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended August 31, 1995 filed on November 29, 1995.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed on May 28, 1996, number 333-0461.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
QSB for the quarterly period ended May 31, 1996 filed on July 15, 1996.
(7) Exhibit filed herewith.
B. Reports on Form 8-K
None.
<PAGE> 18
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
OPHTHALMIC IMAGING SYSTEMS Date: November 27, 1996
By /S/ STEVEN R. VERDOONER
Steven R. Verdooner, President,
Chief Financial Officer
and Secretary
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/S/ STEVEN R. VERDOONER President, Chief Financial Officer, November 27, 1996
Steven R. Verdooner Secretary and Director
(Principal Executive Officer and
Principal Financial Officer)
/S/ STEVEN C. LAGORIO Director of Finance November 27, 1996
Steven C. Lagorio (Principal Accounting Officer)
/S/ R. MICHAEL CLARK Director November 27, 1996
R. Michael Clark
/S/ MARK S. BLUMENKRANZ, M.D. Director November 27, 1996
Mark S. Blumenkranz, M.D.
/S/ ROBERT I. SCHNUER Director November 27, 1996
Robert I. Schnuer
Lawrence A. Yannuzzi, M.D. Director November __, 1996
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Ophthalmic Imaging Systems
PAGE
Report of Ernst & Young LLP, Independent Auditors ........F-1
Balance Sheet as of August 31, 1996 .....................F-2
Statements of Operations for the Years Ended August
31, 1996 and 1995....................................F-3
Statements of Stockholders' Equity for the Years Ended
August 31, 1996 and 1995..................................F-4
Statements of Cash Flows for the Years Ended August 31,
1996 and 1995........................................F-5
Notes to Financial Statements ............................F-6
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Ophthalmic Imaging Systems
We have audited the accompanying balance sheet of Ophthalmic Imaging
Systems as of August 31, 1996, and the related statements of operations,
stockholders' equity, and cash flows for the years ended August 31, 1996
and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Ophthalmic
Imaging Systems at August 31, 1996, and the results of its operations
and its cash flows for the years ended August 31, 1996 and 1995, in
conformity with generally accepted accounting principles.
ERNST & YOUNG, LLP
Sacramento, California
October 11, 1996
except for Note 10
as to which the date is November 21, 1996
F-1
<PAGE>
Ophthalmic Imaging Systems
Balance Sheet
August 31, 1996
ASSETS
Current assets:
Cash and equivalents $ 1,051,325
Accounts receivable, net of allowance for
doubtful accounts of approximately $106,000 1,072,004
Inventories 1,580,535
Prepaid expenses and other current assets 64,948
Total current assets 3,768,812
Furniture and equipment, net 361,195
Other assets 86,635
$ 4,216,642
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings $ 550,000
Accounts payable 937,459
Accrued liabilities 597,641
Accrued warrant appreciation right 224,282
Current portion of deferred extended warranty revenue 70,961
Customer deposits 36,781
Current portion of notes payable 5,002
Total current liabilities 2,422,126
Notes payable, less current portion 3,482
Deferred extended warranty revenue, less current portion 10,236
Commitments (NOTE 6)
Stockholders' equity:
Preferred stock, no par value, 20,000,000 shares
authorized; none issued or outstanding -
Common stock, no par value, 20,000,000 shares authorized;
3,307,164 shares issued and outstanding 8,940,196
Accumulated deficit (7,159,398)
Total stockholders' equity 1,780,798
$4,216,642
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
Ophthalmic Imaging Systems
Statements of Operations
YEARS ENDED AUGUST 31
1996 1995
Revenues:
Net sales $ 6,672,667 $ 6,724,339
Other revenue 200,984 234,900
6,873,651 6,959,239
Cost of sales 4,797,324 4,616,322
Gross profit 2,076,327 2,342,917
OPERATING EXPENSES:
Sales and marketing 1,652,965 1,545,390
General and administrative 722,462 441,245
Research and development 846,034 691,358
Total operating expenses 3,221,461 2,677,993
Loss from operations (1,145,134) (335,076)
OTHER INCOME (EXPENSE):
Interest income 20,618 10,657
Interest expense (288,667) (31,857)
Net loss $ (1,413,183) $ (356,276)
Net loss per share $ (.64) $ (.41)
Shares used in the calculation of
net loss per share 2,204,506 875,112
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Ophthalmic Imaging Systems
Statements of Stockholders' Equity
Years ended August 31, 1996 and 1995
<TABLE>
<CAPTION>
Total
COMMON STOCK Accumulated Stockholders'
Shares Amount Deficit Equity
<S> <C> <C> <C> <C>
Balance at August 31,
1994 875,112 $ 6,674,639 $(5,389,939) $ 1,284,700
Net loss - - (356,276) (356,276)
Balance at August 31,
1995 875,112 6,674,639 (5,746,215) 928,424
Sale of common stock
through private
placement 1,368,421 1,074,841 - 1,074,841
Options exercised 11,000 10,230 - 10,230
Issuance of common stock
upon exercise of
warrants 1,052,631 1,180,486 - 1,180,486
Net loss - - (1,413,183) (1,413,183)
Balance at August 31,
1996 3,307,164 $ 8,940,196 $ (7,159,398) $ 1,780,798
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Ophthalmic Imaging Systems
Statements of Cash Flows
Increase (Decrease) in Cash and Equivalents
YEARS ENDED AUGUST 31
1996 1995
Operating activities:
Net loss $(1,413,183) $ (356,276)
Adjustments to reconcile net loss to
net cash used in operating activities:
Accrued warrant appreciation right 211,782 12,500
Depreciation and amortization 102,156 115,334
Provision for doubtful accounts (5,338) (42,200)
Gain on sale of assets - (4,294)
Net changes in operating assets
and liabilities:
Accounts receivable 239,943 (300,832)
Inventories (405,040) (304,835)
Prepaid expenses and other current assets (475) (4,113)
Other assets (79,797) 313
Accounts payable (164,714) 394,865
Accrued liabilities 75,716 29,866
Deferred extended warranty revenue 6,100 (26,218)
Customer deposits (27,610) (296,748)
Net cash used in operating activities (1,460,460) (782,638)
INVESTING ACTIVITIES:
Capital expenditures for furniture and
equipment (215,884) (106,297)
Proceeds from the sale of furniture and
equipment - 4,682
Net cash used in investing activities (215,884) (101,615)
FINANCING ACTIVITIES:
Proceeds from short term borrowings 150,000 400,000
Principal payments on notes payable (5,093) (9,285)
Issuance of common stock 2,265,557 -
Net cash provided by financing activities 2,410,464 390,715
Net increase (decrease) in cash and
equivalents 734,120 (493,538)
Cash and equivalents, beginning of year 317,205 810,743
Cash and equivalents, end of year $ 1,051,325 $ 317,205
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Ophthalmic Imaging Systems (the Company), was incorporated in California
in July 1986. The Company is primarily engaged in the business of
designing, developing, manufacturing, and marketing digital imaging
systems, image enhancements and analysis software, and a glaucoma
detection diagnostic instrument for use by practitioners in the ocular
healthcare field.
CONCENTRATIONS OF CREDIT RISK AND EXPORT SALES
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and trade receivables. The Company places its temporary cash
investments with high credit quality financial institutions.
Concentrations of credit risk with respect to trade receivables are
limited due to the Company's policy of requiring deposits from
customers, the number of customers and their geographic dispersion. The
Company maintains reserves for potential credit losses and such losses
have historically been within management's expectations. No single
customer during fiscal 1996 or 1995 comprised 10% or more of net sales.
Revenues from sales to customers located outside of the United States
(primarily Europe) accounted for approximately 29% and 25% of net sales
during the years ended August 31, 1996 and 1995, respectively.
INVENTORIES
Inventories, which consist primarily of purchased system parts,
subassemblies and assembled systems are stated at the lower of cost
(determined using the first-in, first-out method) or market.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and depreciated or amortized
on a straight-line basis over the estimated useful lives of the assets.
The estimated useful lives generally range from three to seven years.
F-6
<PAGE>
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION AND WARRANTIES
The Company recognizes revenue from the sale of its products when the
goods are shipped to its customers. The Company generally provides a
one-year warranty covering materials and workmanship and accruals are
provided for anticipated warranty expenses.
Customers may purchase extended warranty coverage for additional one or
two year periods. Revenues from the sale of these extended warranties
are deferred and recognized as other revenue on a straight-line basis
over the term of the extended warranty contract.
INCOME TAXES
Deferred income taxes are accounted for pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
(SFAS 109) as a result of differences in the timing of recognition of
certain revenues and expenses for financial statement and income tax
reporting purposes.
General business credits are accounted for as a reduction of federal
income taxes payable under the flow-through method.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock
options and warrants are excluded from the computation because their
effect is antidilutive.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers
highly liquid investments with original maturities of three months or
less as cash equivalents.
Cash paid for interest amounted to approximately $67,000 and $19,000
during the years ended August 31, 1996 and 1995, respectively. Cash paid
for income taxes amounted to approximately $800 during each of the years
ended August 31, 1996 and 1995.
F-7
<PAGE>
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company accounts for its stock option plans in accordance with the
provisions of the Accounting Principles Board's Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees." In 1995, the Financial
Accounting Standards Board released Statement of Financial Accounting
Standard No. 123 (SFAS 123), "Accounting for Stock Based Compensation."
SFAS 123 provides an alternative to APB 25 and is effective for fiscal
years beginning after December 15, 1995. The Company expects to
continue to account for its stock plans in accordance with APB 25.
Accordingly, SFAS 123 is not expected to have any material impact on the
Company's financial position or results of operations.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying balance sheet for cash
and cash equivalents approximate their respective fair values. The
carrying amounts of the Company's borrowings under its debt agreements
approximate their fair value. The fair value was based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
USE OF ESTIMATES
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles which require the
Company's management to make estimates and assumptions that affect the
amounts reported therein. Actual results could vary from such
estimates.
RECLASSIFICATIONS
Certain amounts in the fiscal 1995 financial statements have been
reclassified to conform with the presentation of the fiscal 1996
financial statements.
F-8
<PAGE>
2. INVENTORIES
Inventories consist of the following as of August 31, 1996:
Raw materials $ 1,058,427
Work-in-process 196,840
Finished goods 325,268
$ 1,580,535
3. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following as of August 31, 1996:
Research and manufacturing equipment $ 423,296
Office furniture and equipment 329,247
Demonstration equipment 183,938
Vehicles 58,991
995,472
Less accumulated depreciation and amortization (634,277)
$ 361,195
4. SHORT-TERM BORROWINGS
The Company entered into a revolving line of credit agreement (the
"Credit Agreement") with a bank (the "Bank") which expired on October 5,
1996. The maximum amount available under the terms of the Credit
Agreement is $750,000, and is based upon eligible outstanding accounts
receivable balances. Borrowings under the Credit Agreement bear interest
at the Bank's prime lending rate plus two and one-half percent (10.75%
as of August 31, 1996) and are secured by virtually all assets of the
Company. The Credit Agreement contains certain restrictive covenants
which provide for, among other things, certain working capital and net
worth balances and ratios, and limitations on the amount of net loss the
Company may incur in a quarter. The Company was not in compliance with
the restrictive covenants for the quarter ending August 31, 1996. The
Company received a waiver from the Bank for the covenant violations. In
addition, the Credit Agreement restricts the Company's ability to 1)
enter into any merger or acquisition, 2) pay dividends or repurchase
stock, 3) mortgage existing assets or 4) loan money or guarantee the
loans of others without the Bank's prior approval. As of August 31,
1996, borrowings in the amount of $550,000 were outstanding related to
the Credit Agreement. Subsequent to year-end the Credit Agreement was
amended (Note 10).
F-9
<PAGE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of August 31, 1996:
Accrued compensation $ 264,923
Accrued warranty expenses 105,700
Other accrued liabilities 227,018
$ 597,641
6. COMMITMENTS
LEASES
The Company leases its facility under a noncancelable operating lease,
which expires in June 1998. The lease agreement provides for minimum
lease payments of approximately $101,000 and $84,000 for the years
ended August 31, 1997 and 1998, respectively.
Rental expense charged to operations for all operating leases was
approximately $88,000 and $89,000 during the years ended August 31, 1996
and 1995, respectively.
EMPLOYMENT AGREEMENTS
During March 1992, the Company entered into employment agreements with
its president and its chief financial officer. The employment agreements
had a 36-month term, expiring in March 1995, and provided, among other
things, for annual salaries of $115,000 for each officer and the payment
of a royalty to each officer of $250 per unit for sales of the Glaucoma-
Scope. The royalty payments survive the termination of the employment
agreements and are to extend indefinitely. During the years ended
August 31, 1996 and 1995 the royalties amounted to approximately $3,000
and $8,000, respectively.
During fiscal 1993, the Company restructured its executive management
pursuant to which the Company's president resigned that position to
become the vice president in charge of International Sales. His
employment contract was amended to a 36-month term expiring June 1996
which provides, among other things, for a revised annual salary of
$80,000 and a commission equal to one percent (1%) of revenues generated
from selected sales to purchasers outside of the United States and
Canada. Also, during fiscal 1993 the Company's chief financial officer
assumed the additional role of president. His
F-10
<PAGE>
6. COMMITMENTS (CONTINUED)
EMPLOYMENT AGREEMENTS (CONTINUED)
employment agreement was subsequently amended to a 36-month term
expiring April 1997, pursuant to which amendment the officer agreed,
among other things, to reduce his annual salary to $92,000 commencing
retroactive to May 1993. During 1995, his annual salary was increased to
$120,000, pursuant to the Company having achieved certain performance
goals stipulated in his employment agreement. In addition, also pursuant
to the amendment to his employment contract, the Company's board of
directors granted the new president incentive stock options covering
33,333 shares of the Company's common stock pursuant to the Company's
second Option Plan (Note 7). In November 1995, the Company extended his
employment agreement which now expires in November 1998.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
Of the 16,692,836 shares of common stock authorized but unissued as of
August 31, 1996, the following shares are reserved for issuance:
Common stock warrants 2,024,211
Stock option plans 1,290,667
3,314,878
PRIVATE PLACEMENT
In November 1995, the Company completed a private placement of 1,368,421
shares of its common stock with detachable warrants. The net proceeds
from this offering was approximately $1,075,000. Along with each share
of common stock issued the purchasers were given an "A Warrant" and a "B
Warrant" to purchase shares of the Company's common stock. The A and B
Warrants per share exercise prices are $1.25 and $1.75, respectively.
The number of shares exercisable as well as the per share exercise
prices of the A and B Warrants are subject to adjustment upon the
occurrence of certain events. The A and B Warrants expire on February
19, 1997 as amended and November 21, 1997, respectively. In addition,
the A and B Warrants are subject to redemption by the Company at $.10
per warrant commencing May 21, 1996 and May 21, 1997 (the "Redemption
Dates"), respectively. The A and B Warrant redemption provisions are
only available if the Company's common stock price exceeds $2.25 and
$2.50, respectively for the twenty trading days immediately preceding
the corresponding Redemption Dates.
F-11
<PAGE>
7. STOCKHOLDERS' EQUITY (CONTINUED)
PRIVATE PLACEMENT (CONTINUED)
The private placement underwriter was issued a warrant to purchase
250,000 shares of the Company's common stock at $.95 per share. The
number of shares exercisable as well as the per share exercise price are
subject to adjustment upon the occurrence of certain events. This
warrant expires on November 21, 1999. In addition, the underwriter will
receive as a commission, 10% of the proceeds received by the Company
upon exercise of the A and B Warrants described above.
In May 1996, 1,052,631 A Warrants were exercised resulting in net
proceeds to the Company of approximately $1,180,000.
OTHER WARRANTS
During May 1992, the Company issued a warrant to purchase 23,333 shares
of its common stock to the underwriter of the Company's initial public
offering. The exercise price of the warrant is $21.60 per share. The
warrant is exercisable between May 1993 and May 1997.
In February 1993, the Company issued a warrant to the Bank that provided
a line-of-credit (Note 4). The warrant has been amended several times
in connection with amendments to the line-of-credit as well as the
current Credit Agreement. The warrant is currently exercisable for
50,000 shares of common stock at an exercise price of $1.73 per share
and it expires in November 2000. This warrant includes a provision
wherein the Bank can require the Company to pay in cash the difference
between the fair market value (as defined) of the underlying common
stock of the warrant and the exercise price (the "Appreciation Right").
The Bank informed the Company of its intent to exercise the Appreciation
Right on May 23, 1996. The Company has accrued the entire amount of the
Appreciation Right and it is reflected as a current liability on the
accompanying balance sheet. For purposes of the statement of operations,
the amount has been recorded as additional interest expense.
During February 1993, in consideration for providing bridge loans, each
of the two officers was issued a warrant to purchase 16,667 shares of
the Company's common stock at an exercise price of $18.00 per share.
These warrants expire in February 1998. During fiscal 1995, one of the
warrants to purchase 16,667 shares was canceled.
F-12
<PAGE>
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS
During March 1992, the Company adopted a Stock Option Plan (the "Plan")
under which the board of directors is authorized to grant options to key
directors, executives, employees and others for the purchase of up to
116,667 shares of the Company's common stock at prices not less than the
fair market value of the common stock on the date of grant. The term
over which the options are exercisable, which may not exceed five years,
is determined by the board of directors at the time of the grant.
Pursuant to the Plan, options to purchase 100,000 shares of the
Company's common stock at an exercise price of $3.00 per share were
granted (50,000 options each) to the Company's chief executive officer
and chief financial officer. The options granted were fully vested on
the grant date and expire in March 1997.
In December 1992 and January 1993, the Company's board of directors and
shareholders, respectively, approved a second Stock Option Plan (the
"Option Plan") under which all officers, employees, directors and
consultants may participate. The Plan expires December 2002. Options
granted under the Option Plan may be either incentive stock options or
non-qualified stock options and will generally have a term of ten years
from the date of grant, unless otherwise specified in the option
agreement. The exercise prices of incentive stock options granted under
the Option Plan will be at 100% of the fair market value of the
Company's common stock on the date of grant. The exercise prices of non-
qualified stock options granted under the Option Plan cannot be less
than 85% of the fair market value of the Company's common stock on the
date of grant. The maximum number of shares of the Company's common
stock which may be optioned and sold under the Option Plan is 150,000.
As of August 31, 1996, stock options to purchase 97,921 shares at
exercise prices ranging from $.94 to $1.38 were granted under the Option
Plan. During the year ended August 31, 1996, 11,000 of the granted
options have been exercised.
In August 1995, the Company's board of directors approved a Nonstatutory
Stock Option Plan (the "Nonstatutory Plan") under which all officers,
employees, directors and consultants may participate. The Nonstatutory
Plan expires November 2005. Options granted under the Nonstatutory Plan
are non-qualified stock options and will generally have a term of five
years from the date of grant, unless otherwise specified in the option
agreement. The exercise prices under the Nonstatutory Plan will be at
100% of the fair market value of the Company's common stock on the date
of grant. The maximum
F-13
<PAGE>
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
number of shares of the Company's common stock which may be optioned and
sold under the Nonstatutory Plan is 1,035,000. As of August 31, 1996,
stock options to purchase 825,000 shares at exercise prices ranging from
$1.38 to $3.00 were granted under the Nonstatutory Plan, and none of the
granted options have been exercised.
8. INCOME TAXES
There was no provision (benefit) for income taxes during the years ended
August 31, 1996 or 1995.
The significant components of the Company's deferred tax assets and
liabilities as of August 31, 1996 are as follows:
Deferred tax assets:
Net operating loss carry forwards $ 809,000
Inventory reserves 329,000
Accrued warrant appreciation right 93,000
Uniform capitalization 81,000
Payroll related accruals 64,000
Sales and accounts receivable reserves 49,000
Warranty accrual 43,000
Other 11,000
Total deferred tax assets 1,479,000
Valuation allowance (1,473,000)
Net deferred tax assets 6,000
Deferred tax liabilities:
Accelerated depreciation for tax purposes 1,000
State franchise taxes 5,000
Total deferred tax liabilities 6,000
Net deferred taxes $ -
The valuation allowance as of August 31, 1995 was approximately
$2,325,000 resulting in a net decrease in the allowance of approximately
$851,000 for the year.
F-14
<PAGE>
8. INCOME TAXES (CONTINUED)
The principal reasons for the difference between the effective tax rate
and the federal statutory income tax rate are presented in the following
table:
YEAR ENDED AUGUST 31
1996 1995
Federal benefit expected at statutory rates $ (480,000) $ (121,000)
Net operating loss with no current benefit 480,000 121,000
$ - $ -
In connection with the Company's private placement of common stock (Note
7) a change of ownership (as defined in Section 382 of the Internal
Revenue Code of 1986, as amended) occurred. As a result of this change,
the Company's federal and state net operating loss carryforwards
generated through November 21, 1995 (approximately $4,800,000 and
$2,500,000, respectively) and the Company's federal and state Research
and Development credits (approximately $126,000 and $79,000,
respectively) will be subject to a total annual limitation in the amount
of approximately $107,000.
As a consequence of the limitation, the Company has at August 31, 1996 a
net operating loss carryover of approximately $2,226,000 for federal
income tax purposes which expires between 2007 and 2010, and a net
operating loss carryforward of approximately $845,000 for state income
tax purposes which expires between 1997 and 2001.
9. 401(K) PLAN
The Company has a tax deferred investment plan (the "401(k) Plan"). All
full-time employees are eligible to participate in the 401(k) Plan. The
401(k) Plan originally required mandatory employer contributions of 10%
of the participants contributions. The 401(k) Plan was subsequently
amended to provide for discretionary employer contributions. The
Company did not make any matching contributions during the year ended
August 31, 1996 and approximately $8,500 during the year ended August
31, 1995.
F-15
<PAGE>
10. SUBSEQUENT EVENT
On November 21, 1996, the Company and the Bank amended the Credit
Agreement (Note 4). The amendment to the Credit Agreement included
extending the maturity date to March 5, 1997, and establishing
limitations on the amount of net loss the Company may incur in a
quarter. The amended Credit Agreement also requires the Company to
obtain at a minimum $500,000 in new equity by December 6, 1996, and an
additional $250,000 by January 6, 1997.
F-16
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Footnote
NUMBER DESCRIPTION OF EXHIBIT REFERENCE
<S> <C> <C>
3.1 Articles of Incorporation of the Registrant, as amended. *
3.2 Amended Bylaws of the Registrant. *
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of *
Incorporation, as amended, and the amended Bylaws of the
Registrant defining the rights of holders of Common Stock of the
Registrant.
4.2 Specimen of Stock Certificate. *
10.1 Lease Agreement, dated as of July 10, 1987, between the Registrant *
(as tenant) and Transamerica/Emkay Income Properties I, as amended
on July 23, 1990 and June 11, 1991.
10.1(a) Seventh Amendment to lease effective as of July 18, 1996. (7)
10.2 Employment Agreement, dated March 27, 1992, between the Registrant *
and Dennis J. Makes.
10.2(a) Amendment dated June 30, 1993 to the Employment Agreement between (1)
the Registrant and Dennis J. Makes dated March 27, 1992.
10.3 Confidentiality Agreement, dated March 27, 1992 between the *
Registrant and Dennis J. Makes.
10.4 Confidentiality Agreement, dated March 27, 1992 between the *
Registrant and Steven R. Verdooner.
10.5 Confidentiality Agreement, dated March 27, 1992 between the *
Registrant and Richard Wullaert.
10.6 Consulting Agreement, dated January 23, 1992, between the *
Registrant and G. Peter Halberg, M.D.
10.7 Assignment dated October 23, 1990 of U.S. Patent Application for *
Apparatus and Method for Topographical Analysis of the Retina to
the Registrant 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).
10.8 Form of International Distribution Agreement used by the *
Registrant and sample form of End User Software License Agreement.
10.9 Original Equipment Manufacturer Agreement, dated April 1, 1991, *
between the Registrant and SONY Medical Electronics, a division of
SONY Corporation of America.
<PAGE> 20
10.10 Original Equipment Manufacturer/Value Added Reseller Agreement, *
dated May 7, 1991, between the Registrant and Eastman Kodak
Company.
10.11 The Registrant's 1992 Nonstatutory Stock Option Plan and sample *
form of Nonstatutory Stock Option Agreement.
10.12 Common Stock and Warrant Purchase Agreement ("Stock Purchase *
Agreement"), dated as of February 8, 1992, among the Registrant,
Jonnie R. Williams, Kathleen M. O'Donnell, as Trustee of Irre-
vocable Trust No. 6, FBO F.E. O'Donnell, Jr., M.D., Steven R.
Verdooner and Dennis J. Makes.
10.12(a) Amendment No. 1 to Stock Purchase Agreement, dated March 25, 1992, *
among the Registrant, Jonnie R. Williams, individually, Jonnie R.
Williams, as Trustee of Irrevocable Trust No. 1, Rambert Summons,
and Kathleen M. O'Donnell, as Trustee of Irrevocable Trust No. 6,
FBO F.E. O'Donnell, Jr., M.D.
10.13 Cross-Indemnification Agreement, dated February 14, 1991, among *
Dennis Makes, Steven Verdooner, and Richard Wullaert.
10.14 Key Man Life Insurance Policies in the amount of $1,000,000 for *
each of Dennis J. Makes and Steven R. Verdooner, with the
Registrant as the named beneficiary.
10.15 Warrant dated February 12, 1993 issued by the Registrant to Steven (1)
R. Verdooner to purchase 50,000 shares of Common Stock.
10.16 Stock Option Plan. (1)
10.17 Promissory Note dated January 4, 1993 from the Registrant to (1)
Western Financial Savings Bank in the amount of $25,209.83 due in
full by January 4, 1998.
10.18 Rental Agreement dated May 1, 1994 by and between the Registrant (2)
and Robert J. Rossetti.
10.19 Security and Loan Agreement (with Credit Terms and Conditions) (3)
dated April 12, 1995 by and between the Registrant and Imperial
Bank.
10.19(a) General Security Agreement dated April 12, 1995 by and between the (3)
Registrant and Imperial Bank.
10.19(b) Warrant dated November 1, 1995 issued by the Registrant to (4)
Imperial Bank to purchase 67,500 shares of Common Stock.
10.19(c) Amended Loan and Security Agreement (with Credit Terms and (4)
Conditions) dated November 1, 1995.
10.19(d) Registration Rights Agreement dated November 1, 1995 between the (4)
Registrant and Imperial Bank.
10.19(e) Amended Loan and Security Agreement (with Credit Terms and (6)
Conditions) dated April 4, 1996).
<PAGE> 21
10.19(f) Amended Loan and Security Agreement (with Credit Terms and (7)
Conditions) dated July 12, 1996).
10.19(g) Amended Loan and Security Agreement (with Credit Terms and (7)
Conditions) dated November 21, 1996).
10.20 Purchase Agreements dated November 21, 1995 between the (4)
Registrant, JB Oxford & Company and certain Investors.
10.20(a) Warrant Agreement dated November 21, 1995 between the Registrant, (4)
JB Oxford & Company and certain Investors.
10.20(b) First Amendment Warrant Agreement dated November 21, 1996 between (7)
the Registrant, JB Oxford & Company and certain Holders.
10.20(c) Registration Rights Agreement dated November 21, 1995 between the (4)
Registrant, JB Oxford & Company and certain Investors.
10.21 Employment Agreement dated November 20, 1995 between the (4)
Registrant and Steven R. Verdooner.
10.22 Employment Agreement dated November 20, 1995 between the (4)
Registrant and R. Michael Clark.
10.25 The Registrant's 1995 Nonstatutory Stock Option Plan and sample (5)
form of Nonstatutory Stock Option Agreement.
11.1 Computation of net loss per share. (7)
23.1 Consent of Ernst & Young LLP, Independent Auditors. (7)
27 Financial Data Schedule (for SEC use only). (7)
</TABLE>
_________________________________________
* Incorporated by reference to the like-numbered exhibits previously filed
with Registrant's Registration Statement on Form S-18, number 33-46864-LA.
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended August 31, 1993 filed on November 26, 1993.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended August 31, 1994 filed on November 29, 1994.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
QSB for the quarterly period ended May 31, 1995 filed on July 14, 1995.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended August 31, 1995 filed on November 29, 1995.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed on May 28, 1996, number 333-0461.
<PAGE> 22
(6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
QSB for the quarterly period ended May 31, 1996 filed on July 15, 1996.
(7) Exhibit filed herewith.
Exhibit 10.1(a)
SEVENTH AMENDMENT TO LEASE RENEWAL
PARTIES
THIS AMENDMENT is executed at Sacramento, California this 18th day of July,
1996, by and between Transamerica/Emkay Income Properties I, a California
Limited Partnership (the "Landlord") and Ophthalmic Imaging Systems, Inc. a
California Corporation (the "Tenant") for 221 Lathrop Way, Suites I, J and A,
Sacramento, California 95815.
RECITALS
Landlord and Tenant, being parties to that certain Lease dated July 10, 1987,
hereby express their mutual desire and intent to extend the terms of the Lease
and amend by this writing those terms, covenants and conditions contained in
PREMISES, TERM, TENANT IMPROVEMENTS, RENT, and FREE RENT as hereinafter
provided.
AMENDMENTS
PREMISES
Lessee will be expanding into Suite K and will occupy all of Suite I,J,A & K at
221 Lathrop Way, Sacramento, CA 95815 from August 1, 1996 through the new term
of the Lease (June 30, 1998). Total square footage including Suite K will
increase from the previous total (as stated in Addendum 6) of 10,500 square
feet to a new revised total of 13,875 square feet. It is understood that Suite
K has approximately 3,375 square feet.
TERM
Lessee hereby agrees to extend the term of their above referenced lease, dated
July 10, 1987 for the one year period from July 1, 1997 to June 30, 1998.
TENANT IMPROVEMENTS
Lessor agrees to provide the following Tenant Improvements to Lessee at no cost
to Lessee:
221 LATHROP WAY, SUITE K
Remove existing carpet and install new carpet to match in color of Suite
J at 375 yards.
Remove existing cove base and install new base to match in color of Suite
J.
Paint entire space including restrooms one coat to match in color of
Suite J.
Move thermostat into main room.
Move plugs and add dedicated circuit.
Move duct work.
One-time air balancing of entire suite.
RENT
The monthly base rent will increase $2,193/month from $6,195/month to
$8,388/month from August 1, 1996 through June 30, 1998. The monthly estimate
for common area maintenance, tax and insurance will increase from $678/month to
$899/month as of August, 1996.
FREE RENT
Lessor agrees to issue Lessee a one-time rent credit of $2,500 upon
commencement of this Lease Renewal as full compensation for cleaning and repair
of equipment due to roof replacement completed in the Fall of 1995.
<PAGE>
INCORPORATION
Expect as modified herein, all other terms and conditions of the Lease between
the parties above described, as attached hereto, shall continue in full force
and effect.
PER THE SIXTH AMENDMENT DATED MAY 26, 1995, LANDLORD HEREBY ACKNOWLEDGES THAT
TENANT HAS PAID A SECURITY DEPOSIT IN THE AMOUNT OF $3,655.00, TO BE CARRIED
FORWARD UNDER THIS AMENDMENT.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the
day and year first above written.
LANDLORD: Transamerica/Emkay TENANT: Ophthalmic Imaging
Income Properties Systems, Incorporated
THOMAS HOLCOMB 8-1-96 STEVE VERDOONER 7-22-96
________________________________ ___________________________________
Date Steve Verdooner, President Date
<PAGE>
SEVENTH AMENDMENT TO LEASE
RENEWAL
ATTACHMENT 1
TENANT IMPROVEMENTS
Lessor agrees to provide the following Tenant Improvements to Lessee at no cost
to Lessee:
221 LATHROP WAY, SUITE K
Remove existing linoleum from rear room adjacent to warehouse and install
new carpet and new base to match in color of Suite J.
221 LATHROP WAY, SUITE I/J
Paint entire conference room to match color of Suite J.
Paint entire lunchroom to match color of Suite J.
Paint/touch-up main hallways to match color of Suite J.
Exhibit 10.19(f)
IMPERIAL BANK LETTERHEAD
July 12, 1996
OPHTHALMIC IMAGING SYSTEMS
221 Lathrop Way, Suite I
Sacramento, CA 95815
Attention: Mr. Steven R. Verdooner, President
Mr. Steven C. Lagorio, Director of Finance
Re: Imperial Bank Loan No. 700000559
Gentlemen:
With reference to the Credit Terms and Conditions with Addendum
(collectively referred to as the "Loan Agreement") between Imperial Bank
("Bank") and Ophthalmic Imaging Systems ("Borrower") dated April 12, 1995
in connection with the above-referenced loan ("Loan"), and as amended by
letters dated October 11, 1995, November 1, 1995, and April 4, 1996, the
Bank and Borrower hereby modify the Loan Agreement as follows:
Paragraph 2 of the Addendum to the Loan Agreement, entitled, "Term and
Repayment," as previously amended, is deleted in its entirety and is
hereby replaced by the following: "The line of credit will require
monthly payments of interest through and including 10-5-96, at which
time all outstanding principal, accrued but unpaid interest and other
charges thereinafter shall be due and payable in full".
Borrower shall be subject to the following covenant in addition to the
existing covenants: "Loss not to exceed $550,000 for the quarter
ending 8-30-86."
Borrower shall pay Bank a $1,100 fee for this modification, which
shall be due and payable upon execution hereof by Borrower.
Except as modified hereby, the Loan Agreement shall remain unaltered and in
full force and effect. Please sign below to show your agreement with the
foregoing and return an original to me.
With reference to the Loan Agreement, Borrower is in violation of the
covenant which requires the following: "Loss not to exceed $150,000 in the
quarter ending 5-31-96." Bank hereby waives this covenant violation.
Sincerely,
THOMAS D. JORGENSEN
Thomas D. Jorgensen
Assistant Vice President
Special Markets Group
Accepted and agreed to:
OPHTHALMIC IMAGING SYSTEM
BY: STEVEN R. VERDOONER
Title: President
Date: 15 July 1996
Exhibit 10.19(g)
IMPERIAL BANK LETTERHEAD
November 21, 1996
OPHTHALMIC IMAGING SYSTEMS
221 Lathrop Way, Suite I
Sacramento, CA 95815
Attention: Mr. Steven R. Verdooner, President
Mr. Steven C. Lagorio, Director of Finance
Re: Imperial Bank Loan No. 700000559
Gentlemen:
With reference to the Credit Terms and Conditions with Addendum
(collectively referred to as the "Loan Agreement") between Imperial Bank
("Bank") and Ophthalmic Imaging Systems ("Borrower") dated April 12, 1995
in connection with the above-referenced loan ("Loan"), and as amended by
letters dated October 11, 1995, November 1, 1995, April 4, 1996, and July
12, 1996, the Bank and Borrower hereby modify the Loan Agreement as
follows:
Paragraph of the Addendum to the Loan Agreement, entitled, "Term and
Repayment," a., previously amended. is deleted in its entirety and is
hereby replaced by the following: "The line of credit will require
monthly payments of interest through and including 3-5-97, at which
time all outstanding principal, accrued but unpaid interest and other
charges thereinafter shall be due and payable in full".
Borrower shall be subject to the following covenants in addition to
the existing covenants: "Loss not to exceed $800,000 for the quarter
ending 11-30-96. Loss not to exceed $200,000 for the quarter ending
2-28-97. By 12-6-96, Borrower shall provide Bank with evidence
satisfactory to Bank that Borrower has received a minimum of $500,000
in new equity. By 1-6-97, Borrower shall provide Bank with evidence
satisfactory to Bank that Borrower teas received a minimum of $250,000
in new equity in addition to the $500,000 in new equity described
above."
Borrower shall pay Bank a $2,000 fee for this modification, which shall be
due and payable upon execution hereof by Borrower.
Bank hereby waives the Borrower's violation of the maximum loss covenant
for the period ending 8-30-96 (as described in letter from Bank to Borrower
dated 11-8-96).
Except as modified hereby, the Loan Agreement shall remain unaltered and in
full force and effect. Please sign below to show your agreement with the
foregoing and return an original to me.
Sincerely,
THOMAS D. JORGENSEN
Thomas D. Jorgensen
Assistant Vice President
Special Markets Group
Accepted and agreed to:
OPHTHALMIC IMAGING SYSTEMS
By: S. VERDOONER
Title: President
Date: November 27, 1996
Exhibit 10.20(b)
FIRST AMENDMENT
TO
WARRANT AGREEMENT
FIRST AMENDMENT TO WARRANT AGREEMENT dated November 21, 1996 (this
"Amendment"), by and among OPHTHALMIC IMAGING SYSTEMS, a California corporation
("ISSUER"), JB OXFORD & COMPANY, a Utah corporation ("JBO") and each of each
purchasers set forth on the signature pages hereto (the "HOLDERS").
PREAMBLE
Issuer and each of the Holders or their assignees are parties to a
Purchase Agreement dated November 21, 1995, pursuant to which the Holders have
purchased 1,368,421 shares of common stock, no par value, per share (the
"SHARES") in the Issuer.
Issuer and JBO are parties to an Investment Banking Agreement, dated
September 7, 1995, pursuant to which JBO has agreed to perform certain
investment banking and consulting services to Issuer;
In order to induce (i) certain of the Holders to enter into the Purchase
Agreement and to purchase the Shares, and (ii) JBO to enter into the Investment
Banking Agreement and perform the investment banking and consulting services
described therein, Issuer executed and delivered that certain Warrant Agreement
dated November 21, 1995 (the "WARRANT AGREEMENT"), pursuant to which Issuer
agreed to issue certain Series A Warrants (as described and provided for
therein) (the "WARRANTS") to certain of the Holders, certain Series B Warrants
(as described and provided for therein) to certain of the Holder, and certain
Series C Warrants (as described and provided for therein) to JBO, each Warrant
being in the amount and type as described on Exhibit B attached thereto.
The unexercised and outstanding Warrants issued under the Warrant
Agreement are set to expire on November 21, 1996 and upon such expiration,
pursuant to the terms and conditions of the Warrant Agreement, the Holders of
the outstanding Warrants will no longer be permitted to exercise the options to
purchase at the stated exercise price that number of Shares subject to the
Warrant.
Inasmuch as the Holders are not currency in a position to exercise their
Warrants at this time, each of the Issuer, JBO, and the Holders, believe that
it is in the best interest of all parties to the Warrant Agreement to amend and
modify the Warrant Agreement in order to extend the Expiration Date (as defined
in the Warrant Agreement) of the Warrants in order to provide additional time
during which the Holders may exercise the options represented by the Warrants
and each of the parties desire to enter into the Amendment for such purposes.
The Warrant Agreement requires any amendment thereto to be consented to
be a majority of all outstanding warrants thereunder, and JBO and the Holders
represent the owners of all of the outstanding warrants, and do consent by
execution to this Amendment.
Accordingly, in consideration of the foregoing premises, and for other
good and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties agree to amend and modify the Warrant Agreement as
follows:
SECTION 1
AMENDMENT
The meaning ascribed to "EXPIRATION DATE" in the Warrant Agreement, shall
be amended and modified tn its entirety to read as follows:
"EXPIRATION DATE" shall mean (i) in the case of Series A Warrants,
February 19, 1997, (ii) in the case of the Series B Warrants, November
21, 1997 and (iii) in the case of the Series C Warrants, November 21,
1999, or, in each case, is such day is not a Business Day, the next
succeeding Business Day.
SECTION 2
ADJUSTMENT OF EXERCISE PRICE AND
NUMBER OF WARRANT SHARES PURCHASABLE
By execution of this Amendment, each party acknowledges and agrees
neither the modifications agreed to in this Amendment nor anything else
contained herein shall constitute, be treated, or be deemed to operate, as an
event of the type referred to in Section 12 of the Warrant Agreement which
would cause any of the adjustments described in said Section 12 to the Warrant
Agreement.
SECTION 3
WARRANT AGREEMENT
The Warrant Agreement, except as amended and modified in Sections 1 and 2
above, shall remain in full force and effect and the terms and conditions
therein shall govern the relationship between the parties.
SECTION 4
COUNTERPARTS
This Amendment may be executed in any number of counterparts with the
same effect as if all of the parties had signed the same document. All
counterparts shall be construed together and shall constitute one agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their proper and duly authorized officers, if
applicable, as of the date and year first written above.
OPHTHALMIC IMAGING SYSTEMS JB OXFORD & COMPANY
By:_________________________________ By:_____________________________
Name: Steven R. Verdooner Name:__________________________
Title: President Title:___________________________
HOLDER:, as tenants by the entirety HOLDER:
OAKWOOD HOLDING LIMITED
___________________________________
MARK BLUMENKRANZ, M.D. AND
By:_____________________________
Name:___________________________
___________________________________ Title:___________________________
RECIA BLUMENKRANZ
<PAGE>
HOLDER: HOLDER:
ALDERSGATE NOMINEES LIMITED HASTINGS OVERSEAS CORP.
By:__________________________________ By:_____________________________
Name:_______________________________ Name:__________________________
Title:________________________________ Title:___________________________
HOLDER: HOLDER:
HALCYON SECURITIES S.A.
___________________________________
HILEL LEWIS, M.D.
By:_____________________________
Name:___________________________
HOLDER: Title:___________________________
___________________________________ HOLDER:
STANLEY CHANG, M.D.
WOODBURY ENTERPRISES LIMITED
HOLDER: By:_____________________________
Name:___________________________
VERNON FINANCE, LTD. Title:___________________________
By:__________________________________
Name:_______________________________
Title:________________________________
<PAGE>
HOLDER: HOLDER:
EASTERLY S.A. BAYFORD HOLDINGS CORP.
By:__________________________________ By:_____________________________
Name:_______________________________ Name:__________________________
Title:________________________________ Title:___________________________
HOLDER: HOLDER:
AMBLER INVESTMENTS LTD. APPLEBY TRADING S.A.
By:__________________________________ By:_____________________________
Name:_______________________________ Name:__________________________
Title:________________________________ Title:___________________________
HOLDER: HOLDER:
RIVAGE LIMITED HERMANOS RICARDO LTD.
By:__________________________________ By:_____________________________
Name:_______________________________ Name:__________________________
Title:________________________________ Title:___________________________
HOLDER: HOLDER:
SUNMER SECURITIES, S.A. NCS HOLDING, INC.
By:__________________________________
By:_____________________________
Name:_______________________________ Name:__________________________
Title:________________________________
Title:___________________________
HOLDER: HOLDER:
NORMAN FINANCIAL SERVICES, S.A. FERNDALE OVERSEAS, LTD.
By:__________________________________
By:_____________________________
Name:_______________________________ Name:__________________________
Title:________________________________
Title:___________________________
<PAGE>
HOLDER:
KERWIN INTERNATIONAL, CORP.
By:_____________________________
Name:__________________________
Title:___________________________
EXHIBIT 11.1
OPHTHALMIC IMAGING SYSTEMS
CALCULATION OF NET LOSS PER SHARE
1996 1995
Net loss ...........................$ 1,413,183 $ 356,276
Weighted average common
shares outstanding ...................2,204,506 875,112
Common stock equivalents (1).............-- --
2,204,506 875,112
Net loss per share..................$ .64 $ .41
(1) No amounts are included, as amounts are anti-dilutive.
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-57518 and Form S-8 No. 333-0461) pertaining to the Stock
Option Plan and the 1995 Nonstatutory Stock Option Plan of Ophthalmic
Imaging Systems of our report dated October 11, 1996 (except for Note 10,
as to which the date is November 21, 1996), with respect to the financial
statements of Ophthalmic Imaging Systems included in the Annual Report
(Form 10-KSB) for the year ended August 31, 1996.
ERNST & YOUNG, LLP
Sacramento, California
November 25, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FORM 10KSB FOR OPHTHALMIC IMAGING SYSTEMS FOR THE PERIOD ENDED
AUGUST 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
<CIK> 0000885317
<NAME> OPHTHALMIC IMAGING SYSTEMS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<CASH> 1,051,325
<SECURITIES> 0
<RECEIVABLES> 1,178,004
<ALLOWANCES> (106,400)
<INVENTORY> 1,580,535
<CURRENT-ASSETS> 3,768,812
<PP&E> 995,472
<DEPRECIATION> (634,277)
<TOTAL-ASSETS> 4,216,642
<CURRENT-LIABILITIES> 2,422,126
<BONDS> 0
0
0
<COMMON> 8,940,196
<OTHER-SE> (7,159,398)
<TOTAL-LIABILITY-AND-EQUITY> 4,216,642
<SALES> 6,672,667
<TOTAL-REVENUES> 6,873,651
<CGS> 4,797,324
<TOTAL-COSTS> 4,797,324
<OTHER-EXPENSES> 3,221,461
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (288,667)
<INCOME-PRETAX> (1,413,183)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,413,183)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,413,183)
<EPS-PRIMARY> (.64)
<EPS-DILUTED> 0
</TABLE>
