FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1997
Commission File Number: 1-11140
OPHTHALMIC IMAGING SYSTEMS
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3035367
(State of Incorporation) (IRS Employer Identification No.)
221 LATHROP WAY, SUITE I, SACRAMENTO, CA 95815
(Address of principal executive offices)
(916) 646-2020
(Issuer's telephone number)
Check whether the issuer (1) has 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
As of June 30, 1997, 3,732,999 shares of common stock, at no par value,
were outstanding.
<PAGE>1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>2
Ophthalmic Imaging Systems
Condensed Balance Sheet
May 31, 1997
(Unaudited)
Assets
Current assets:
Cash and equivalents $ 170,145
Accounts receivable, net 1,971,638
Inventories, net 1,340,847
Prepaid expenses and other current assets 131,753
------------
Total current assets 3,614,383
Furniture and equipment, net of accumulated
depreciation and amortization of $737,725 410,273
Other assets 68,087
------------
$ 4,092,743
============
Liabilities and Stockholders' Equity
Current liabilities:
Borrowings under line of credit $ 500,000
Accounts payable 597,481
Accrued liabilities 891,723
Accrued warrant appreciation right 245,857
Deferred extended warranty revenue 101,067
Customer deposits 21,386
Current portion of notes payable 3,733
------------
Total current liabilities 2,361,247
Notes payable, less current portion --
Commitments
Stockholders' equity:
Preferred stock, no par value, 20,000,000 shares
authorized; none issued or outstanding --
Common stock, no par value, 20,000,000 shares
authorized; 3,732,999 issued and outstanding 9,581,542
Accumulated deficit (7,850,046)
-----------
Total stockholders' equity 1,731,496
-----------
$ 4,092,743
===========
See accompanying notes.
<PAGE>3
Ophthalmic Imaging Systems
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended May 31, Nine months ended May 31,
<S> <C> <C> <C> <C>
1997 1996 1997 1996
Net revenues $ 1,975,085 $ 1,808,632 $ 5,144,738 $ 5,888,311
Cost of sales 1,195,359 1,190,646 3,179,099 3,913,858
----------------------------------- ------------------------------
Gross Profit 779,726 617,986 1,965,639 1,974,453
Operating expenses:
Sales and marketing 371,878 403,742 1,194,726 1,257,492
General and administrative 132,176 179,490 664,852 542,351
Research and development 256,808 217,899 754,234 585,747
------------------------------------ ------------------------------
Total operating expenses 760,862 801,131 2,613,812 2,385,590
------------------------------------ ------------------------------
Income (loss) from operations 18,864 (183,145) (648,173) (411,137)
Other expense, net (15,196) (166,321) (42,475) (234,762)
------------------------------------ -----------------------------
Net income (loss) $ 3,668 $ (349,466) $ (690,648) $ (645,899)
==================================== =============================
Shares used in the calculation
of net income (loss) per share 4,692,333 2,243,533 3,729,433 1,836,953
==================================== =============================
Net income (loss) per share $ 0.00 $ (0.16) $ (0.19) (0.35)
==================================== =============================
See accompanying notes.
<PAGE>4
Ophthalmic Imaging Systems
Condensed Statements of Cash Flows
Increase (Decrease) in Cash and Equivalents
(Unaudited)
Nine months ended May 31,
1997 1996
Operating activities:
Net loss $ (690,648) $ (645,899)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 103,964 74,327
Net increase in current assets
other than cash and equivalents (726,751) (613,160)
Net (decrease) increase in current
liabilities other than short-term
borrowings (19,846) 397,686
------------------------------
Net cash used in operating activities (1,333,281) (787,046)
Investing activities:
Purchases of furniture and equipment (152,526) (102,257)
Net decrease (increase) in other assets 18,032 (2,152)
------------------------------
Net cash used in investing activities (134,494) (104,409)
Financing activities:
Principal payments on notes payable (4,751) (5,295)
Net (repayments of) proceeds from line-of-credit
borrowings (50,000) 150,000
Net proceeds from sale of common stock 641,346 2,269,261
------------------------------
Net cash (used) provided by financing activities 586,595 2,413,966
------------------------------
Net increase (decrease) in cash and equivalents (881,180) 1,522,511
Cash and equivalents at beginning of period 1,051,325 317,205
------------------------------
Cash and equivalents at end of period $ 170,145 $ 1,839,716
==============================
See accompanying notes.
<PAGE>5
Ophthalmic Imaging Systems
Notes to Condensed Financial Statements
Three and Nine Month Periods ended May 31, 1997 and 1996
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed balance sheet as of May 31, 1997,
condensed statements of operations for the three and nine month periods
ended May 31, 1997 and 1996 and the condensed statements of cash flows
for the nine month periods ended May 31, 1997 and 1996 have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item
310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnote disclosures required by generally accepted
accounting principles for complete financial statements. It is suggested
that these condensed financial statements be read in conjunction with the
audited financial statements and notes thereto included in the registrant's
(the Company's) Annual Report for the Fiscal Year Ended August 31, 199
on Form 10-KSB. In the opinion of management, the accompanying condensed
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position and results of operations for the periods presented. The
results of operations for the period ended May 31, 1997 are not
necessarily indicative of the operating results for the full year.
Certain amounts in the fiscal 1996 financial statements have been
reclassified to conform with the presentation in the fiscal 1997 financial
statements.
Note 2. Net Income (Loss) Per Share
Net income per share is computed using the weighted average number of
common and common equivalent shares of common stock outstanding, which
common equivalent shares include the dilutive effect from stock options and
warrants. Net loss per share is computed using the weighted average number
of shares of common stock outstanding. Common equivalent shares from stock
options and warrants are excluded from the computation of net loss per share
because their effect is antidilutive.
<PAGE>6
Note 3. Line of Credit
In April 1995, the Company entered into a revolving line of credit
agreement (the "Credit Agreement") with a bank (the "Bank"). 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 and are secured by
virtually all assets of the Company (11% as of May 31, 1997).
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.
In connection with the Credit Agreement, the Company also modified a
warrant previously issued to the Bank. The modifications included
increasing the number of common shares for which the warrant is exercisable
to 25,000, changing the per share exercise price to $2.39 and extending the
expiration date to April 2000.
In November 1995, the Company and the Bank amended the Credit Agreement.
The amendments included extending the maturity date to April 1996, and
increasing the amount of the loss the Company may incur in a quarter. As a
condition to amending the Credit Agreement, the Company modified the
warrant issued to the Bank. The modifications included increasing the number
of common shares under the warrant for which the warrant is exercisable to
67,500, reducing the per share exercise price to $1.73 and extending the
expiration date to November 2000. The number of shares for which the warrant
is exercisable was reduced to 50,000 due to the occurrence of certain
events set forth in the Credit Agreement.
In April 1996, the Company and the Bank again amended the Credit Agreement.
The amendments included extending the maturity date to July 1996 and
limiting the amount of the net loss the Company may incur in a quarter.
<PAGE>7
Note 3. Line of Credit (continued)
In May 1996, the Bank exercised an alternative stock appreciation right
available under the warrant. In conjunction with said exercise, the
Company accrued a liability of approximately $220,000 as of May 31,
1996, said amount being the entire amount of the obligation under the
warrant. The Company recognized additional interest expense of approximately
$151,000 during the quarter ended May 31, 1996 in connection with said
exercise. The Company had previously accrued 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. The parties have agreed in principal to revise the form of
consideration and timing of payment under the alternative stock
appreciation right, but have not as yet agreed to the definitive terms
thereof.
In November 1996, the Company and the Bank again amended the Credit
Agreement. Then amendments included, among other things, extending the
maturity date to March 1997, subject to the occurrence of certain
equity transactions, and limiting the amount of the net loss the Company
may incur in the first and second quarter of fiscal 1997.
As of May 31, 1997, borrowings in the amount of $500,000 were outstanding
against the Credit Agreement. The Company was not in compliance with certain
of the restrictive covenants for the quarter ending November 30, 1996 and
the Company has requested from the Bank a waiver with respect to such non-
compliance. The potential impact of not receiving a waiver from the Bank is
that the Bank could demand payment of the balance owing against the Credit
Agreement, which amount was $500,000 as of the date of this report.
Note 4. Private Placement
On November 21, 1995, the Company completed a private placement of
1,368,421 shares of its common stock with detachable warrants. With respect
to each share of Common Stock purchased pursuant to the private placement,
each purchaser received 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 Warrants
which were not previously exercised expired on March 5, 1997, as amended,
and the B Warrants will expire on November 21, 1997.
<PAGE>8
Note 4. Private Placement (continued)
In addition, the B Warrants are subject to redemption by the Company at
$.10 per warrant commencing May 21, 1997 (the "Redemption Date") if the
Company's common stock price exceeds $2.50 for the twenty trading days
immediately preceding the corresponding Redemption Date.
The placement agent 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 in November
1999. In addition, the placement agent will receive as a commission, 10% of
the proceeds received by the Company upon the exercise of the A and B Warrants
described above.
In May 1996, 1,052,631 of the A Warrants were exercised. The net proceeds
from this exercise were approximately $1,184,000.
During the quarter ended February 28, 1997, the Company received net proceeds
of approximately $495,000 for the exercise of certain of the A and B
Warrants, the certificates for which shares have not been issued but which
shares have been shown as outstanding as of May 31, 1997 in the accompanying
Balance Sheet.
Note 5. Subsequent Events
The Credit Agreement discussed in Note 3 above expired in March 1997. In
June 1997, the Bank extended the maturity date of the Credit Agreement to
July 1997 and the Company is currently negotiating with the Bank to
further extend said Credit Agreement. The potential impact of not
negotiating an extension with the Bank is that the Bank could demand
payment of the balance owing against the Credit Agreement, which amount was
$500,000 as of the date of this report.
In conjunction with said extension in June 1997, the Bank also granted to
the Company waivers of the Company's non-compliance with certain of the
restrictive covenants for the quarter ending November 30, 1996 as well as
the non-occurrence of certain required equity transactions pursuant to the
November 1996.
<PAGE>9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 continues to believe 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. The Company 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. The Company will continue to support its
entire line of digital angiography products, focusing its future efforts
on developing product enhancements and pursuing viable opportunities in
this market, particularly as they relate to telemedicine/managed care
applications.
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, in fiscal 1996 the Company developed a Reading and
Documentation Center, through which it intends to provide documentation
services of electronically transmitted digital images acquired at remote
locations.
<PAGE>10
During fiscal 1996, the Company also secured an agreement to conduct a
pilot program with a major managed care provider to evaluate remote image
interpretation for diabetic retinopathy screening. This pilot program is
currently targeted for completion at the end of calendar 1997. At the
conclusion of the pilot program, if successful, the Company anticipates
entering into negotiations with the provider, and others, for contracting
the Reading Center services. The Company currently has several initial
commitments to purchase its Reading and Documentation Center services.
There can be no assurance, however, that the pilot program will prove a
success or that these negotiations or commitments will result in
contracts for these services.
During the 1996 fall meeting of the American Academy of Ophthalmology,
the Company introduced a lower-priced digital imaging system
incorporating telemedicine features and targeting the general
ophthalmology market. The majority of orders received in conjunction
with this introduction were delivered during the second and third
quarters of fiscal 1997.
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 due to a number of factors and are not necessarily
indicative of the results to be expected for any future period or
expected for the fiscal year ending August 31, 1997. There can be no
assurance that revenue growth or profitability can be achieved or
sustained in the future.
The following discussion should be read in conjunction with the unaudited
interim financial statements and the notes thereto which are set forth
elsewhere in this Report on Form 10-QSB. In the opinion of management,
the unaudited interim period financial statements include all
adjustments, all of which are of a normal recurring nature, that are
necessary for a fair presentation of the results of the periods.
<PAGE>11
RESULTS OF OPERATIONS
The Company generated net income of $3,668, or essentially breakeven per
share for the third quarter of fiscal 1997 as compared to a net loss of
$349,466, or $.16 per share, for the third quarter of fiscal 1996. For
the first nine months of fiscal 1997, the Company incurred a net loss of
$690,648, or $.19 per share, as compared to a net loss of $645,899, or
$.35 for the comparable period of fiscal 1996.
The Company's revenues for the third quarter of fiscal 1997 were
$1,975,085, representing an increase of approximately 9% from revenues of
$1,808,632 for the third quarter of fiscal 1996. Revenues for the first
nine months of fiscal 1997 were $5,144,738 versus $5,888,311 for the
comparable period of 1996. The 1997 third quarter revenues include
revenues from the Company's initial deliveries of lower-priced higher-
margin digital imaging systems incorporating telemedicine features, which
systems were introduced at the 1996 fall meeting of the American Academy
of Ophthalmology. A primary factor contributing to the reduced 1997
nine-month revenue level was the reallocation of the Company's resources
to address emerging opportunities in the telemedicine/managed care
market. In addition, the 1996 nine-month revenue levels were largely
attributable to strong sales of the Company's digital angiography systems
incorporating ICG and Windows<trademark> features introduced over the
previous two years. The Company will continue to allocate resources to
address the telemedicine/managed care market. Based on its backlog of
current orders, the Company does not anticipate maintaining revenue or
profitability levels attained during the 1997 third quarter and, in
comparison to previous years, the Company may experience reduced revenue
levels from sales of its digital imaging equipment products in the near-
term.
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.
<PAGE>12
Gross margins were approximately 39% during the third quarter ended May
31, 1997 versus approximately 34% for the comparable quarter of 1996.
For the nine-month period ended May 31, 1997, gross margins were
approximately 38% as compared to approximately 34% during the comparable
period of 1996. The increase in gross margin percentage for the nine-
month period is attributable primarily to reduced direct material costs
associated with delivered systems, principally the sales of the lower-
priced higher-margin digital imaging systems delivered during the 1997
second and third quarters. The increased gross margin percentage during
the 1997 third quarter also reflects the impact of reduced fixed
manufacturing and support costs during 1997 compared to the comparable
quarter of 1996. The Company continues to evaluate its expenses in this
area consistent with current and anticipated business conditions and
management anticipates that near-term margin improvement, if any, would
result principally from reduced material costs associated with current
deliverable system configurations, outsourcing certain manufacturing and
assembly operations and related fixed cost reduction measures implemented
during the recently completed third quarter of 1997, including personnel
cutbacks, economies of scale from increased unit production, and other
manufacturing efficiencies.
Sales and marketing and general and administrative expenses accounted for
approximately 26% of total revenues during the third quarter of fiscal
1997 compared to approximately 32% for the third quarter of fiscal 1996.
For the first nine months of fiscal 1997 and 1996, such expenses
accounted for approximately 36% and 31%, respectively. Expense levels
decreased to $504,054 during the third quarter of 1997 versus $583,232
during the third quarter of 1996, primarily due to the impact of a non-
recurring downward revision of amounts owed under certain of the
Company's accounts payable during the 1997 third quarter. For the first
nine months of 1997, expense levels increased to $1,859,578 from
$1,799,843 during the comparable period of 1996. The primary factors
contributing to this increase were costs associated with hiring
additional support personnel, and related costs associated with the
telemedicine/managed care start-up marketing efforts. While the Company
has implemented during the third fiscal quarter of 1997 certain fixed
cost reduction measures, including personnel cutbacks, management
anticipates that expenses in this area will continue to run above
historical levels for the foreseeable future, in particular conjunction
with the hiring of additional senior management level personnel targeted
for the fourth quarter of fiscal 1997.
<PAGE>13
Research and development expenses, as a percentage of revenues, were
approximately 13% in the third quarter of 1997 versus approximately 12%
in the third quarter of 1996. For the first nine months of fiscal 1997,
such expenses accounted for approximately 15% of total revenues as
compared to approximately 10% during the comparable period of 1996.
Expense levels increased in actual dollar terms to $256,808 during the
third quarter of 1997 from $217,899 in 1996. During the first nine
months of fiscal 1997, expense levels also increased in actual dollar
terms to $754,234 versus $585,747 in 1996. The Company anticipates that
it will incur increased expense levels in the 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 $15,196 during the second quarter of fiscal 1997 versus
$166,321 during the same period of 1996. Other expense during the first
nine months of fiscal 1997 was $42,475 as compared to $234,762 during the
comparable period of 1996. The primary contributing factor to these
changes was a significant decrease in interest expense during 1997 versus
1996 associated with an existing credit line, in particular conjunction
with an alternative stock appreciation right pursuant to a warrant
previously issued to the Company's Bank. 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 $151,000 during the quarter ended May
31, 1996. The Company had previously recognized interest expense of
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 the 1996 nine-month period, the Company
recognized as interest expense approximately $208,000 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, but
have not as yet agreed to the definitive terms thereof.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used cash of $1,333,281 and $787,046
in the first nine months of fiscal 1997 and 1996, respectively. The cash
used by operations in 1997 resulted primarily from the net loss during
the period and the increase in accounts receivable associated with timing
of product deliveries toward the end of the period, which amount was
partially offset by a reduction in inventory levels during the period.
The cash used by operations in the first nine months of fiscal 1996
resulted primarily from the net loss during the period and increases in
accounts receivable and inventory, which amounts were partially offset by
increases in accounts payable and other current liabilities, excluding
borrowings under the Credit Agreement.
<PAGE>14
Cash used in investing activities was $134,494 during the first nine
months of 1997 as compared to $104,409 during the same period for 1996.
The Company's primary investing activities consist of equipment and other
capital asset acquisitions. The Company does not currently have any
pending material commitments regarding capital expenditures. The
Company, however, will continue to upgrade its existing management
information systems, which may result in increased near-term capital
expenditures. In addition, the Company 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.
The Company generated cash of $586,595 from financing activities during
the first nine months of fiscal 1997 as compared to $2,413,966 during the
same period of fiscal 1996. The cash generated from financing activities
during the 1997 period was principally the net proceeds from the exercise
of warrants issued pursuant to a private placement of the Company's
common stock in November 1995, and, to a lesser extent, net proceeds from
the exercise of stock options issued to employees, which amounts were
partially offset by repayments of borrowings under the Credit Agreement.
The sources of cash from financing activities during the 1996 period were
principally the net proceeds from a private placement of the Company's
common stock in November 1995, the net proceeds from the exercise of
certain A Warrants issued pursuant to said private placement in May 1996
and, to a lesser extent, borrowings under the Credit Agreement.
Principal repayments on notes payable was negligible in both 1997 and
1996.
As indicated above, 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 an increase in
operating losses as a result of incurring additional expenses in
connection with activities relating to the development and marketing of
telemedicine/ managed care products and services. Accordingly, the
Company anticipates that it could continue to experience negative cash
flow from operations in the near-term. In addition, as indicated in Note
5 of the Notes to Condensed Financial Statements, the Company is
currently negotiating with the Bank to extend the Credit Agreement which
expired in July 1997. While the Company has negotiated previous such
extensions with the Bank, there can be no assurance that it will be able
to negotiate further extensions. The potential impact of not negotiating
an extension from the Bank is that the Bank could demand payment of the
balance owing against the Credit Agreement, which amount was $500,000 as
of May 31, 1997. 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 May 31, 1997, including accrued interest
thereon, was approximately $246,000, would be due.
<PAGE>15
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. In this regard, the Company has received a commitment to
exercise a significant number of these warrants from certain of the
warrant holders, and while the Company is currently in active discussions
with such warrant holders regarding said exercise, there can be no
assurance that any such warrants will be exercised in the near-term, if
at all.
<PAGE>16
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
In November 1996, the expiration date for the unexercised A Warrants issued
pursuant to the Private Placement of the Company's Common Stock effective
November 21, 1995, was extended from November 21, 1996 to February 19, 1997.
In February 1997, said expiration date was extended from February 19, 1997 to
March 5, 1997.
During the quarter, the Company issued 11,800 shares of its Common Stock
in consideration of $35,400 from the exercise of stock options granted
under the Company's 1992 Nonstatutory Stock Option Plan. The Common Stock
issued upon the exercise of the options were issued pursuant to an exemption
under rule 701 promulgated under the Securities Act of 1933 (the "Securities
Act"). There were no underwriting discounts or commissions paid in
connection with such issuance.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the accompanying Index to Exhibits
below are filed as a part hereof and are incorporated by reference as
noted.
(b) No reports on Form 8-K were filed during the quarter for which this
report was filed.
<PAGE>17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
undersigned has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPHTHALMIC IMAGING SYSTEMS
(Registrant)
By: STEVEN R. VERDOONER
Steven R. Verdooner,
President and Chief Financial Officer
(principal executive officer and
principal financial and accounting officer)
Dated: July 15, 1997
<PAGE>18
INDEX TO EXHIBITS
Exhibit Footnote
Number Description of Exhibit Reference
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 (7)
July 18, 1996.
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 (1)
Agreement between 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.
<PAGE>19
10.7 Assignment dated October 23, 1990 of U.S. Patent *
Application for Apparatus and Method for Topo-
graphical 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
Irrevocable 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 Simmons, 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>20
10.15 Warrant dated February 12, 1993 issued by the (1)
Registrant to Steven 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 (1)
Registrant to 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 (2)
the Registrant and Robert J. Rossetti.
10.19 Security and Loan Agreement (with Credit Terms (3)
and Conditions) dated April 12, 1995 by and
between the Registrant and Imperial Bank.
10.19(a) General Security Agreement dated April 12, 1995 (3)
by and between the Registrant and Imperial Bank.
10.19(b) Warrant dated November 1, 1995 issued by the (4)
Registrant to Imperial Bank to purchase 67,500
shares of Common Stock.
10.19(c) Amended Loan and Security Agreement (with Credit (4)
Terms and Conditions) dated November 1, 1995.
10.19(d) Registration Rights Agreement dated November 1, (4)
1995 between the Registrant and Imperial Bank.
10.19(e) Amended Loan and Security Agreement (with Credit (6)
Terms and Conditions) dated April 4, 1996.
10.19(f) Amended Loan and Security Agreement (with Credit (7)
Terms and Conditions) dated July 12, 1996.
10.19(g) Amended Loan and Security Agreement (with Credit (7)
Terms and Conditions) dated November 21, 1996.
10.19(h) Amended Loan and Security Agreement (with Credit
Terms and Conditions) dated June 3, 1997.
10.20 Purchase Agreements dated November 21, 1995 (4)
between the Registrant, JB Oxford & Company and
certain Investors.
10.20(a) Warrant Agreement dated November 21, 1995 between (4)
the Registrant, JB Oxford & Company and certain
Investors.
<PAGE>21
10.20(b) First Amendment Warrant Agreement dated November (7)
21, 1996 between the Registrant, JB Oxford &
Company and certain Holders.
10.20(c) Registration Rights Agreement dated November 21, (4)
1995 between the Registrant, JB Oxford & Company
and certain Investors.
10.21 Employment Agreement dated November 20, 1995 (4)
between the Registrant and Steven R. Verdooner.
10.22 Employment Agreement dated November 20, 1995 (4)
between the Registrant and R. Michael Clark.
10.25 The Registrant's 1995 Nonstatutory Stock Option (5)
Plan and sample form of Nonstatutory Stock Option
Agreement.
* 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) Incorporated by reference to the Registrant's Annual Report on Form 10-
KSB for the fiscal year ended August 31, 1996 filed on November 29, 1996.
</TABLE>
EXHIBIT 10.19(h)
[IMPERIAL BANK LETTERHEAD]
June 3, 1997
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 "Agreement") between Imperial Bank
("Bank") and Ophthalmic Imaging Systems ("Borrower") dated April 12, 1995
in connection with the above-referenced loan ("Loan"), and from time to
time, the Bank and Borrower hereby modify the 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 July 5, 1997, at
which time all outstanding principal, accrued but unpaid interest and
other charges thereinafter shall be due and payable in full".
Borrower shall pay Bank a $1,000 fee for this modification, which shall be
due and payable upon execution hereof by Borrower.
Bank hereby waives the Borrower's violation of the minimum quick ratio and
minimum working capital covenants for the period ending 11/30/96. Bank
hereby also waives the violation of the covenant which reads: "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 has received a minimum of $250,000 in new equity in addition to
the $500,000 in new equity described above."
Except for the above-described waiver, the Agreement shall remain unaltered
and in full force and effect. This letter is specific as to content and
time and shall not constitute a waiver of any other current or future
default or breach of any covenants contained in the Agreement or the terms
and conditions of any other documents signed by Borrower in favor of Bank.
The Bank may still exercise its rights or any other or further rights
against Borrower because of any other breach not waived above.
Ophthalmic Imaging Systems
June 3, 1997
Page 2 of 2
Sincerely,
THOMAS D. JORGENSEN
Thomas D. Jorgensen
Assistant Vice President
Special Markets Group
Accepted and agreed to:
OPHTHALMIC IMAGING SYSTEMS
By: STEVEN R. VERDOONER
Title: President
Date: June 6, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10QSB FOR OPHTHALMIC IMAGING SYSTEMS FOR THE PERIOD ENDED MAY 31, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 170,145
<SECURITIES> 0
<RECEIVABLES> 1,971,638
<ALLOWANCES> 0
<INVENTORY> 1,340,847
<CURRENT-ASSETS> 3,614,383
<PP&E> 1,147,998
<DEPRECIATION> (737,725)
<TOTAL-ASSETS> 4,092,743
<CURRENT-LIABILITIES> 2,361,247
<BONDS> 0
0
0
<COMMON> 9,581,542
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,731,496
<SALES> 1,975,085
<TOTAL-REVENUES> 1,975,085
<CGS> 1,195,359
<TOTAL-COSTS> 1,195,359
<OTHER-EXPENSES> 760,862
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,196
<INCOME-PRETAX> 3,668
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,668
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,668
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>