SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended August 31, 1999
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
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(Name of Small Business Issuer in Its Charter)
California 94-3035367
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(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
221 Lathrop Way, Suite I
Sacramento, California 95815
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(Address of Principal Executive Offices) (Zip Code)
(916) 646-2020
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, No Par Value
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes XX No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year was $6,243,305.
The aggregate market value of the voting and non-voting common stock of the
issuer held by non-affiliates as of October 29, 1999, was approximately
$2,722,000 by reference to the average bid and ask price of the common stock as
quoted by Nasdaq OTC Bulletin Board on such date. As of October 29, 1999, there
were 4,305,428 issued and outstanding shares of issuer's common stock.
Traditional Small Business Disclosure Format (check one): Yes No XX
<PAGE>2
PART I
Item 1. Description of Business.
(a) Business Development
Ophthalmic Imaging Systems (the "Company," "Issuer" or "OIS") was
incorporated under the laws of the State of California on July 14, 1986. The
Company, headquartered in Sacramento, California, is engaged in the business of
designing, developing, manufacturing and marketing digital imaging systems and
image enhancement and analysis software for use by practitioners in the ocular
health field. Its products are used for a variety of standard diagnostic test
procedures performed in most eye care practices.
Since its inception, the Company has developed products that have addressed
primarily the needs of the ophthalmic angiography markets, both fluorescein and
indocyanine green. The current flagship products in the Company's angiography
line are its digital imaging systems, the WinStation 1024(TM) and WinStation
640(TM). These WinStation products are targeted primarily at retinal specialists
and general ophthalmologists in the diagnosis and treatment of retinal diseases
and other ocular pathologies.
The Company believes, however, that as the U.S. healthcare system moves
toward managed care, the needs of managed care providers are changing the nature
of demand for medical imaging equipment and services. New opportunities in
telemedicine (i.e., the electronic delivery and provision of health care and
consultative services to patients through integrated health information systems
and telecommunications technologies), combined with lower cost imaging devices
and systems, are emerging to allow physicians and managed care organizations to
deliver a high quality of patient care while reducing costs. OIS is applying its
technology in the ophthalmic imaging field to the development of new ocular
imaging devices and exploring telemedicine/managed care applications targeted at
the mass markets of general ophthalmology and optometry.
The Company's objective is to become a leading provider of a diverse range
of complimentary ophthalmic products and services for the ocular health care
industry. In this regard, the Company refocused its business strategy during
1998 to the marketing and sales of its angiography products as well as the
allocation of significant resources to the development of two ocular imaging
devices, the Digital Fundus Imager ("DFI") and the Digital Slit Lamp Imager
("DSLI"). These two new products, which were introduced during the first quarter
of fiscal 1999, represent a paradigm shift in imaging for ocular health
professionals by providing diagnostic imaging devices and digital imaging
systems that are affordable to the general ophthalmology and optometry markets.
The Company made the initial commercial delivery of these products during the
fourth quarter of fiscal 1999 and is currently focusing its development efforts
on its DFI and DSLI products, as well as features and enhancements to its
existing products.
On February 25, 1998, the Company and Premier Laser Systems, Inc., a
California corporation ("Premier"), entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement"), whereby Premier would offer to buy those shares of
the Company's common stock not already owned by it. As a condition to the Stock
Purchase Agreement, the Company agreed to amend its Rights Agreement to permit
Premier to acquire up to 51.3% of the Company's outstanding common stock in
private purchase agreements made simultaneously with the execution of the Stock
Purchase Agreement.
In August 1998, Premier notified that Company that, due to a variety of
factors, Premier would not be able to close the transactions contemplated under
the Stock Purchase Agreement. As a result, the Stock Purchase Agreement was
<PAGE>3
terminated. As a result of such termination, the Company made demand to Premier
for payment of a $500,000 termination fee (the "Termination Fee") as provided
for in the Stock Purchase Agreement. The Termination Fee, however, among other
things, was the subject of subsequent negotiations between the companies. For
additional information regarding the terms and conditions of the Stock Purchase
Agreement, see the Company's Form 8-K filed on March 9, 1998, and as referenced
in Note 9 of the Notes to Financial Statements included in Item 7 of this Form
10-KSB.
On October 21, 1999, the Company and Premier entered into an Agreement and
Plan of Reorganization (the "Merger Agreement"), whereby, upon requisite
shareholder approval, OIS will become a wholly-owned subsidiary of Premier and
each share of the Company's common stock, other than any dissenting shares and
any stock then owned by Premier, will convert into 0.80 shares of Premier common
stock. A copy of the Agreement and Plan of Reorganization by and Among Premier
Laser Systems, Inc., Ophthalmic Acquisition Corporation and Ophthalmic Imaging
Systems was filed as Exhibit 2.1 to the Company's Form 8-K filed on November 24,
1999.
To permit the acquisition by Premier and all other actions contemplated by
the Merger Agreement, the Company's Board of Directors (the "Board"), after
considering the terms of the Merger Agreement and an opinion rendered by the
Company's independent financial advisors as to the fairness of Premier's offer
to the shareholders of the Company, amended the Company's Rights Agreement,
effective October 20, 1999. These amendments are discussed more fully in the
Company's Form 8-K filed on November 24, 1999.
Also, on October 21, 1999, the Company, Premier and certain others entered
into two additional stock purchase agreements whereby, among other things,
Premier purchased 150 shares of the Company's Series B Preferred Stock at a
price of $25.00 per share with each share carrying the voting power of 1,000
shares of the Company's common stock. Previously, on October 18, 1999, the
Company filed a Certificate of Determination which designated the rights,
preferences, privileges and restrictions of the Company's Series B Preferred
Stock. Copies of these stock purchase agreements were filed on November 24, 1999
as Exhibits 4.2 and 4.3 to the Company's 8-K. See also "Sale of Unregistered
Securities" in Item 5 of this Form 10-KSB.
As a result of the foregoing transactions, Premier currently owns
approximately 49.5% of the Company's outstanding common stock and all
outstanding shares of the Company's Series B Preferred Stock, thereby giving
Premier majority voting control.
The Company has experienced operating losses for each fiscal year since its
initial public offering in 1992. At August 31, 1999, the Company had an
accumulated deficit in excess of $13 million and its current liabilities
exceeded its current assets by more than $3 million. The Company continues to
<PAGE>4
experience cash flow deficits and there can be no assurance that the Company
will be able to achieve or sustain significant positive cash flows, revenues or
profitability in the future.
Pending shareholder approval and consummation of the contemplated
transactions under the Merger Agreement, the Company is continuing to seek
sources of additional capital to meet its current and potential cash
requirements, including debt financing, issuing equity securities and entering
into other financing arrangements. There can be no assurance, however, that any
financing arrangements contemplated herein will be available and, if available,
can be obtained on terms favorable to the Company. Certain holders of options to
purchase shares of the Company's common stock may exercise those options. The
Company could receive substantial proceeds from the exercise of these stock
options; however, there can be no assurance that any stock options will be
exercised in the near term, if at all.
In the event that the transactions contemplated under the Merger Agreement
are not consummated, the Company's ability to continue as a going concern would
be seriously jeopardized, and would depend upon its ability to restructure
payment terms and/or obtain new financing to repay its debts. See "Management's
Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources"
in Item 6 of this Form 10-KSB.
(b) Business of Issuer
Products
WinStation Systems (640 & 1024)
The Company's WinStation systems and products (640 and 1024 resolution) are
primarily used by retina specialists and general ophthalmologists to perform a
diagnostic test procedure known as fluorescein angiography. This procedure is
used to diagnose and monitor pathology and provide important information in
making treatment decisions. Fluorescein angiography is performed by injecting a
fluorescent dye into the bloodstream. As the dye circulates through the blood
vessels of the eye, the WinStation system connected to a fundus camera, a
medical camera designed to photograph the inner surface of the eye called the
fundus, takes detailed images of the patient's retina. These digital images can
provide a "road map" for laser treatment.
Over the past 35 years, fluorescein angiography has been performed using
photographic film which requires special processing and printing. The Company's
WinStation systems allow for immediate diagnosis and treatment of the patient.
Images are automatically transferred to a data base and permanently stored on
optical laser disk or CD-ROM. The Company offers a variety of networking and
printer options.
The Company's WinStation systems also are used by ophthalmologists to
perform indocyanine green ("ICG") angiography. ICG angiography is a diagnostic
test procedure used in the treatment of patients with macular degeneration (a
leading cause of blindness afflicting over 5 million people in the United
States). ICG angiography, used for approximately 5% of patient angiography, is a
dye procedure that can only be performed using a digital imaging system.
<PAGE>5
Digital Fundus Imager
The DFI is intended for use by a majority of eye care practitioners,
including most ophthalmologists and optometrists. The DFI is a significantly
lower cost alternative to currently available fundus cameras for use in color
fundus imaging and fluorescein angiography, with the emphasis on imaging the
back of the eye. The system is unique in that it is the first "digital only"
fundus camera which utilizes a proprietary optical design allowing patients to
be imaged through a small pupil. The DFI is also capable of real-time video
capture, database management and archiving. These features can benefit
practitioners, particularly in the areas of patient screening, tracking and
monitoring relative to certain ocular pathologies, primarily retina, as well as
patient record retention. The Company is hopeful that there will be favorable
market acceptance of the DFI and that the DFI and related products will become a
significant product line for the Company. However, there can be no assurance
that this product line will be accepted by the target market, and, if accepted,
that it will be significant.
Digital Slit Lamp Imager
The DSLI is targeted at a market similar to that of the DFI with an emphasis
on imaging the front of the eye. Slit lamps are imaging devices used in
virtually all ophthalmic and optometric practices. The DSLI adapts to most slit
lamp models and, similar to the DFI, is capable of real-time video capture,
database management and archiving. Similar to the DFI, the DSLI is intended for
use by a majority of eye care practitioners, including optometrists practicing
in retail optometry chain outlets in the United States, teaching institutions
and military hospitals.
Other
The Company also developed the Glaucoma-Scope(R), designed for use by ocular
health providers that manage patients with glaucoma by providing a means for
comparing optic nerve head topography over a number of patient visits. While the
Company has sold Glaucoma-Scope(R) units in the past and continues to assess
potential market opportunities for this product, it no longer actively markets
this product for sale.
Markets
Having reviewed a broad selection of third party sources, including reports
by American Medical Information, the Company believes there are approximately
16,000 ophthalmologists in the United States and 28,000 ophthalmologists
practicing medicine in countries outside the United States. This group has been
traditionally divided into two major groups: anterior segment (front of the eye)
and posterior segment (back of the eye). Within these groups there are several
sub-specialties including medical retina, retina and vitreous, glaucoma, neuro,
plastics, pediatric, cataract, cornea and refractive surgery. There are
approximately 29,000 practicing optometrists in the United States, with the
preponderance of practicing optometrists worldwide located in the United States.
<PAGE>6
The WinStation market consists of current fundus camera owners and
anticipated purchasers of fundus cameras suitable for interfacing with the
Company's digital imaging system products. The Company believes there are now
over 8,500 fundus cameras in clinical use in the United States with an equal
number in the international market. It is estimated that new fundus camera sales
fluctuate between 800 and 1,000 units per year. It is estimated that annually
about 1,500 fundus cameras, including new and previously-owned, are sold
worldwide at an average selling price of approximately $20,000. The fundus
camera market is estimated to be approximately 65% penetrated in ophthalmology,
with a significant number of fundus cameras currently in use estimated to be
more than 5 years old, and approximately 5% in optometry. Of the total number of
fundus cameras worldwide, approximately 12,000 are suitable to be interfaced
with OIS digital imaging systems.
Currently the Company knows of six manufacturers of fundus cameras. These
manufacturers produce a total of 13 models, and OIS has designed optical and
electronic interfaces for each of them.
The primary target market for digital angiography systems is retinal
specialists who number approximately 2,000 in the United States. The Company's
digital imaging system sales have been driven in this segment by both
fluorescein and ICG angiography. The Company expects the demand for digital
angiography to continue as it is becoming a standard of care.
The primary target markets for the DFI and DSLI products are optometrists,
the majority of whom are among the approximately 29,000 practicing in the United
States, which number includes those employed by or affiliated with retail
optometry organizations; retinal specialists and general ophthalmologists who,
combined, number approximately 16,000 in the United States; 5,000 retail
optometry chain outlets in the United States; and teaching institutions and
military hospitals. As noted above, it is estimated that annually approximately
1,500 fundus cameras are sold worldwide at an average selling price of
approximately $20,000. The DFI is a significantly lower cost alternative to
currently available fundus cameras for use in posterior segment color fundus
imaging and fluorescein angiography. In addition, both the DFI and DSLI provide
the features, capabilities and benefits of digital imaging.
Although the Company no longer actively manufactures or markets the
Glaucoma-Scope(R) for sale, it continues to assess potential market
opportunities for this product.
Sales, Marketing and Distribution
The Company utilizes a direct sales force in marketing its products
throughout the United States and Canada. At August 31, 1999, the direct sales
force consisted of a marketing manager located at the Company's headquarters as
well as seven territory representatives and product specialists located
throughout the United States. These regional representatives and product
specialists provide marketing, sales, maintenance, installation and training
services. The Company also utilizes Company-trained contract employees to
provide certain installation and training services. Additionally, the Company
subcontracts service maintenance in several cities in the United States and
Canada for routine component replacement.
<PAGE>7
Internationally, the Company utilizes 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.
To promote sales, the Company prepares brochures, data sheets and
application notes on its products, participates in industry trade shows and
workshops, and advertises in trade journals, press releases, direct mail
solicitations, journal articles, and scientific papers and presentations.
The Company recently agreed with Premier on co-marketing and selling
arrangements whereby, among other things, Premier will distribute the Company's
products in certain international markets and the Company will distribute
certain of Premier's EyeSys products in the United States and Canada. In
anticipation of these arrangements, the Company and Premier have been selling
their optical products through a jointly managed EyeSys Vision Group, which made
its debut at the American Society of Cataract and Refractive Surgery meeting in
April 1999. It is unclear at this time whether this joint marketing and
distribution effort will result in any benefit to OIS.
Manufacturing and Production
The Company is primarily a systems integrator with proprietary software,
optical interfaces and electronic fundus camera interfaces. The Company also
manufacturers its DFI optical head and, in prior years, manufactured the optical
head for its Glaucoma-Scope(R) product. During the third quarter of 1999, the
Company entered into a manufacturing agreement with Premier (the "Manufacturing
Agreement"), whereby Premier began assembling and manufacturing the Company's
products. The Company continues to procure components and certain subassemblies
from vendors for delivery directly to Premier. Premier manufactures and
assembles the Company's products at its facilities in Irvine, California, from
which it delivers the products directly to the Company's customers.
Although to a far lesser extent than in previous years, the Company does
continue to carry inventories and assemble certain components principally for
supply to Premier in support of Premier's efforts under the Manufacturing
Agreement.
The Company has expended considerable resources in connection with the
outsourcing arrangement under the Manufacturing Agreement and has experienced
delays in the timely delivery of certain of its products during the transition
period. While both companies are collaborating to maximize efficiencies with
respect to the production of the Company's products under the Manufacturing
Agreement, continued delays in delivering products, if significant, could
adversely impact the Company.
The Company has been audited by the Food and Drug Administration ( the
"FDA") and was deemed to conform to Good Manufacturing Practices ("GMP"). The
Company has 510(k)'s on file for both the Glaucoma-Scope(R) and its digital
angiography products, including its DFI and DSLI.
<PAGE>8
Components, Raw Materials and Suppliers
As a systems integrator, a significant number of the major hardware
components in the Company's products are procured from sole source vendors.
Whenever possible, however, the Company seeks multiple vendor sources from which
to procure its components. Moreover, the Company works closely with its
principal component suppliers and the rest of its vendors to maintain dependable
working relationships and to continually integrate into the manufacturing of its
products, whenever possible, the most current, proven, pertinent technologies.
But, as with any manufacturing concern dependent on subcontractors and component
suppliers, significant delays in receiving products or unexpected vendor price
increases could adversely affect the Company.
Warranties
The Company generally provides a 12-month limited warranty for parts, labor
and shipping charges in connection with the initial sale of its products. The
Company also extends 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 OIS products on-site
at a doctor's office, the Company installs the system and trains the doctor and
the doctor's staff.
The Company also offers service plans for sale to its customers as a
supplement to the original manufacturer's warranties 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. With respect to its WinStation products, the Company is aware of two
primary competitors in the United States which produce and are delivering
digital fundus imaging systems in volume, Topcon and Zeiss. Both Topcon and
Zeiss, however, manufacture fundus cameras and produce angiography products that
interface mostly with their own fundus cameras. In contrast, the Company's
products interface with different models of fundus cameras from a wide variety
of manufacturers. Four other companies are known to have systems in primarily
the international market, and the U.S. market to a limited extent, each with
small market penetration.
The primary competition for the DFI comes from traditional fundus cameras
manufactured by Topcon, Kowa, Zeiss, Canon, Nidek and Nikon. None of the current
digital fundus cameras include a digital imaging system or certain other DFI
features, including live motion imaging. These fundus cameras, when combined
with an imaging system comparable to the DFI, are significantly more expensive
than the DFI. The Company is aware of two companies that currently have
prototype units that could be similar in function to the DFI, but such units
have not yet been introduced.
<PAGE>9
The Company is aware of five primary competitors for the DSLI, namely
Veatch, MVC, Kowa, Helioasis and Lombard. Additionally, there are approximately
four other companies which manufacture similar systems, but these systems
currently have little market presence. To the Company's knowledge, the DSLI is
the only product offering live motion imaging, database management, archiving
and voice annotation.
Although the Company will continue to work to develop new and improved
products, many companies are engaged in research and development of new devices
and alternative methods to diagnose and evaluate eye disease. Introduction of
such devices and alternative methods could hinder the Company's ability to
compete effectively and could have a material adverse effect on its business,
financial condition and results of operations. Many of the Company's competitors
and potential competitors have substantially greater financial, manufacturing,
marketing, distribution and technical resources than does the Company.
Research and Development
The Company's research and development expenditures in the periods ended
August 31, 1999 and 1998, were approximately $896,000 and $866,000,
respectively. The Company is currently focusing its development efforts on its
DFI and DSLI products, as well as features and enhancements to its existing
products. The direction and extent of future research and development efforts,
however, will depend, in large measure, on whether Premier and OIS consummate
the transactions contemplated under the Merger Agreement.
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(R) apparatus, and methods used by the
apparatus for topographically mapping the retina and comparing the mapping to
previous mappings. The Company anticipates aggressively defending this and
future patents, if any, although there can be no assurance that any patent will
not be circumvented or invalidated.
The Company has also developed a digital fundus imaging system incorporating
its Digital Fundus Imager, and has filed U.S. Utility and foreign PCT Patent
Applications directed to the system. While the Company believes that this
digital fundus imaging system is innovative and intends to continue to
aggressively pursue patent protection, there can be no assurance that a patent
will ultimately be obtained, that such a patent will provide commercially
valuable protection or that any patent, if obtained, will not be circumvented or
invalidated.
Further, although the Company believes that its products do not and will not
infringe on patents or violate proprietary rights of others, it is possible that
its existing rights may not be valid or that infringement of existing or future
patents, trademarks or proprietary rights may occur or be claimed to occur by
third parties.
<PAGE>10
In that regard, in September 1998, the Company received from Winstation
Systems Corporation ("WSC") a notice of an alleged trademark infringement,
because WSC is the owner of a federal trademark registration for WINSTATION
personal computers, while the Company has used the "OIS WinStation" trademark
for its ocular digital imaging systems. The WSC claim has been resolved with no
material adverse effect on the Company.
In the event that any of the Company's products, including the
Glaucoma-Scope(R), 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 trade secrets, know-how, continuing technological
innovation and other unpatented proprietary technology to maintain its
competitive position. 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. The Company anticipates aggressively defending its unpatented
proprietary technology, although there is no assurance that others will not
independently develop substantially equivalent proprietary information or
techniques, or otherwise gain access to the Company's trade secrets or disclose
such technology, or that the Company can meaningfully protect its rights to its
unpatented trade secrets and other proprietary technology.
The Company seeks to protect its unpatented proprietary technology, in part,
through proprietary confidentiality and nondisclosure agreements with employees,
consultants and other parties. The Company's confidentiality agreements with its
employees and consultants generally contain industry standard provisions
requiring such individuals to assign to OIS without additional consideration any
inventions conceived or reduced to practice by them while employed or retained
by OIS, subject to customary exceptions. There can be no assurance that
proprietary information agreements with employees, consultants and others will
not be breached, that the Company would have adequate remedies for any breach or
that the Company's trade secrets will not otherwise become known to or
independently developed by competitors.
<PAGE>11
Government Regulation
The marketing and sale of the Company's products are subject to certain
domestic and foreign governmental regulations and approvals. Pursuant to Section
510(k) of the Federal Food, Drug and Cosmetic Act ("FDCA"), the Company is
required to file, and has submitted, a pre-marketing notification with the FDA
which provides certain safety and effectiveness information concerning the
Company's diagnostic imaging systems, including its recently developed DFI and
DSLI and the Glaucoma-Scope(R). The FDA has approved the Company's pre-marketing
notification submittals, thereby granting the Company permission to market its
products, subject to the general controls and provisions of the FDCA. The
Company's products are classified as Class II devices (special controls) which
require, among other things, annual registration, listing of devices, good
manufacturing practices, labeling and prohibition against misbranding and
adulteration. Further, because the Company is engaged in international sales,
the Company's products must satisfy certain manufacturing requirements and may
subject the Company to various filing and other regulatory requirements imposed
by foreign governments as a condition to the sale of such products.
The Company has registered its manufacturing facility with both the FDA and
certain California authorities as a medical device manufacturer and operates
such facility under FDA and California requirements concerning Quality System
Requirements ("QSR"). As a medical device manufacturer, the Company is required
to continuously maintain its QSR compliance status and to demonstrate such
compliance during periodic FDA and California inspections. If the facilities do
not meet applicable QSR regulatory requirements, the Company may be required to
implement changes necessary to comply with such regulations.
This requirement, however, may be eliminated in the future. Under the
Manufacturing Agreement with Premier, the Company has outsourced the
preponderance of its assembly and manufacturing functions and it is the
Company's intention to eliminate completely such activities at its facilities.
Currently, however, the Company does continue to carry inventories and assemble
certain components principally for supply to Premier in support of Premier's
efforts under the Manufacturing Agreement. See "Manufacturing and Production."
Although the FDA has made findings which permit the Company to sell its
products in the marketplace, such findings do not constitute FDA approval of
these devices. And the Company cannot predict the effect that future legislation
or regulatory developments may have on its operations. Additional regulations,
reconsideration of approvals granted under current regulations, or a change in
the manner in which existing statutes and regulations are interpreted or applied
may have a material adverse impact on the Company's business, financial
condition and results of operations. Moreover, new products and services
developed by the Company, if any, also may be subject to the same or other
various federal and state regulations, in addition to those of the FDA.
Insurance
The Company maintains general commercial casualty and property insurance
coverage for its business operations, as well as product liability insurance. As
of August 31, 1999, the Company has not received any product liability claims
<PAGE>12
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, 1999, the Company had 26 employees, of which 23 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.
Item 2. Description of Property.
The Company leases, on a month-to-month basis under a triple net lease,
approximately 9,675 square feet of office, manufacturing and warehouse space in
Sacramento, California. The Company also leases an approximately 200 square foot
sales office in Simsbury, Connecticut on a month-to-month basis. Management
believes that its existing facilities are suitable and adequate to meet its
current needs. The Company pays monthly lease payments, with respect to these
properties, in the aggregate of approximately $7,400. Management believes its
existing leased facilities are adequately covered by insurance. Although the
Company has no current plans to renovate, improve or develop any of its leased
facilities, its future plans with respect to facilities will depend, in large
measure, on whether Premier and OIS consummate the transactions contemplated
under the Merger Agreement.
Item 3. Legal Proceedings.
In 1999, the Company received correspondence from two European distributors
indicating that the termination of their services, as proposed, would be in
violation of European law. The Company is not aware of any formal action being
brought by either distributor, but it will respond and defend itself, if
necessary, to minimize any adverse impact on operations.
In addition, a former employee of OIS has brought an action against the
Company under Section 132(a) of the California Workers' Compensation Act. The
Company has retained legal counsel and believes this action is without merit. On
August 19, 1999, the Company filed a petition for dismissal with the Workers'
Compensation Appeals Board, and is still awaiting a determination on its
petition. It will continue to defend itself vigorously.
Except as indicated above, to management's knowledge, there are no material
legal proceedings presently pending or threatened to which the Company (or any
of its directors or officers in their capacity as such) is, or may be, a party
or to which property of the Company is, or may be, subject.
<PAGE>13
Item 4. Submission Of Matters To A Vote Of Security Holders.
There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of its fiscal year ended August 31, 1999 covered by
this Annual Report on Form 10-KSB.
PART II
Item 5. Market For Common Equity And Related Stockholder Matters.
The shares of common stock of the Company have been listed and principally
quoted on the Nasdaq OTC Bulletin Board under the trading symbol "OISI" since
May 28, 1998 and prior thereto on the Nasdaq Small-Cap Market. In May 1998, the
NASD notified the Company that the Company no longer satisfied Nasdaq Small-Cap
Market listing requirements and, in accordance with the terms of the Nasdaq
Listing Qualifications Panel decision, the Company's common stock was delisted
therefrom on May 27, 1998. Further, due to the Company's inability to comply
with the Boston Stock Exchange listing requirements, the Company's common stock
was delisted therefrom on March 3, 1998.
The following table sets forth the high ask and low bid prices for the
Company's common stock as reported on the Nasdaq Small-Cap Market through May
27, 1998, and thereafter on the Nasdaq OTC Bulletin Board. These prices reflect
inter-dealer prices, without retail markup, markdown or commissions, and may not
necessarily represent actual transactions.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year 1998 Fiscal Year 1999
---------------------------- --------------------------
High Low High Low
Ask Bid Dividend Ask Bid Dividend
-------- ------ ----------- ------- ----- -----------
First Quarter............................. 1-3/16 3/4 -- 3/4 3/8 --
Second Quarter............................ 2 1/2 -- 13/16 3/8 --
Third Quarter............................. 2 9/16 -- 9/16 .33 --
Fourth Quarter............................ 1-5/16 7/16 -- 1-7/16 .33 --
</TABLE>
On October 29, 1999, the closing price for the Company's common stock, as
reported by the Nasdaq OTC Bulletin Board, was $1.38 per share and there were
approximately 139 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 with Imperial
Bank, 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.
<PAGE>14
Sale of Unregistered Securities
On October 21, 1999, the Company and Premier entered into two stock purchase
agreements pursuant to which Premier purchased 150 shares of the Company's
Series B Preferred Stock and shall automatically purchase an additional 50
shares of Series B Preferred Stock whenever one or more persons exercise any
outstanding options issued by the Company to purchase 50,000 shares of the
Company's common stock. The Series B Preferred Stock has 1,000 votes per share
and is not transferable by Premier. For every share of Series B Preferred Stock
purchased by Premier, Premier will cancel $25 worth of outstanding debt owed to
Premier by the Company. The Company's Series B Preferred Stock is convertible at
the holder's option into common stock, currently at a one-for-one ratio. The
conversion ratio is protected against certain dilutive events such as stock
splits. The terms and privileges of the Series B Preferred Stock and the
material terms of the stock purchase agreements with Premier were disclosed in
the Company's 8-K, filed on November 24, 1999, as well as Exhibits 3.1, 4.2 and
4.3 thereto.
Item 6. Management's Discussion And Analysis Or Plan Of Operation.
This report contains forward-looking statements within the meaning of the
federal securities laws. The Company intends such forward-looking statements to
be covered by the safe harbor provisions contained in Section 27A of the
Securities Act of 1933, as amended, and in Section 21E of the Exchange Act of
1934, as amended. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on its operations and future prospects include, but are not limited to,
changes in: economic conditions generally and the medical instruments market
specifically, legislative or regulatory changes affecting OIS, including changes
in healthcare regulation, the availability of working capital, the introduction
of competing products, and other risk factors described herein. These risks and
uncertainties, together with the other risks described from time to time in
reports and documents filed by OIS with the SEC should be considered in
evaluating forward-looking statements, and undue reliance should not be placed
on such statements. Indeed, it is likely that some of the Company's assumptions
will prove to be incorrect. The Company's actual results and financial position
will vary from those projected or implied in the forward-looking statements, and
the variances may be material.
To date, the Company has designed, developed, manufactured and marketed
ophthalmic digital imaging systems and 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 technology and
sales of digital ophthalmic imaging systems. The primary target marked for the
Company's digital angiography systems has been retinal specialists who number
approximately 2,000 in the United States (approximately 12-13% of
ophthalmologists in the United States).
<PAGE>15
The Company is currently attempting to expand its role in the ophthalmic
imaging field by developing new ocular imaging devices and applications targeted
at the broader markets of general ophthalmology and optometry.
In this regard, commencing in fiscal year 1998, OIS has applied significant
resources to the development of two ocular imaging devices, the DFI and the
DSLI. The Company is focusing the majority of its current development,
manufacturing, marketing and sales efforts on its DFI and DSLI products, and
commenced delivering these products during the fourth quarter of fiscal 1999
after experiencing certain delays.
At the 1998 Annual Meeting of the American Academy of Ophthalmology (the
"1998 AAO Meeting") held during the first quarter of fiscal 1999, the DFI
received considerable interest and the Company has received significant purchase
commitments for the product. However, the Company has limited financial and
operational resources, including manufacturing, marketing and selling capacity
to meet any significant demand resulting from the introduction of this product.
To address this situation, during the third quarter of fiscal 1999, the Company
entered into the Manufacturing Agreement with Premier whereby Premier began
assembling and manufacturing the Company's products, including the DFI and DSLI.
Initial deliveries of revenue generating products manufactured by Premier under
the Manufacturing Agreement were made during the third quarter of fiscal 1999.
The Company entered into the Manufacturing Agreement to reduce the cost of
manufacturing its products and to take advantage of Premier's manufacturing
capabilities, but there can be no assurance that this arrangement will provide
the Company the anticipated benefits.
In addition, the Company recently agreed with Premier on co-marketing and
selling arrangements whereby, among other things: (a) the Company will
distribute in the United States and Canada certain of Premier's EyeSys products;
and (b) Premier will distribute the Company's products in certain international
markets. In anticipation of these arrangements, the Company and Premier have
been selling their ophthalmic products through a jointly managed EyeSys Vision
Group, which made its debut at the American Society of Cataract and Refractive
Surgery meeting in April 1999. It is unclear at this time whether these
arrangements will result in significant, if any, benefit to OIS.
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. The Company has experienced operating
losses for each fiscal year since its initial public offering in 1992. At August
31, 1999, the Company had an accumulated deficit in excess of $13 million and
its current liabilities exceeded its current assets by more than $3 million. The
Company continues to experience cash flow deficits and there can be no assurance
that the Company will be able to achieve or sustain significant positive cash
flows, revenues or profitability in the future.
On October 21, 1999, the Company and Premier entered into the Merger
Agreement whereby, upon requisite shareholder approval, the Company will become
a wholly-owned subsidiary of Premier. The Company's Board has approved the
Merger Agreement and the transactions contemplated thereby, including the
acquisition of the Company, and has agreed to submit the Merger Agreement to the
Company's shareholder for their approval.
<PAGE>16
To permit the acquisition by Premier and all other actions contemplated by
the Merger Agreement, the Board, after considering various factors, amended the
Company's Rights Agreement effective October 20, 1999.
In addition, the Company and Premier entered into two stock purchase
agreements on October 21, 1999 with respect to the Company's Series B Preferred
Stock whereby, among other things, Premier purchased 150 shares of the Company's
Series B Preferred Stock.
As a result of the foregoing transactions, Premier currently owns 49.5% of
the Company's outstanding common stock and all 150 outstanding shares of the
Company's Series B Preferred Stock, thereby giving Premier majority voting
control
Results of Operations
The Company incurred a net loss of $1,242,840, or $.30 per share, during
fiscal 1999 compared to a net loss of $2,735,019, or $.68 per share, during
fiscal 1998. The 1999 figures include an extraordinary gain of $350,000, or $.08
per share, resulting from the negotiated reduction of certain professional fees
and expenses previously recorded in connection with the terminated Stock
Purchase Agreement with Premier (see Note 13 of Notes to Financial Statements
included in Item 7 of this Form 10-KSB). The per share figures are basic amounts
in accordance with Financial Accounting Standards No. 128 (see Note 1 of Notes
to Financial Statements included in Item 7 of this Form 10-KSB).
The 1998 figures reflect the adverse impact on revenues and corporate
operations resulting from efforts associated with the terminated 1998 stock
purchase agreement with Premier, including significant costs and professional
fees and expenses in connection therewith. The principal contributing factor to
the significantly reduced loss in 1999 was a substantial reduction in those
acquisition expenses, including the positive impact of the extraordinary item.
Nevertheless, some negative impact on earnings was attributable to continuing
diversion of the Company's resources and management's attention to acquisition
matters in 1999.
The results of operations do not include any amounts with respect to a
potential contingent liability in connection with the collection of taxes from
the Company's customers, which amount has been estimated on the basis of
numerous factors and assumptions that might, in the least favorable combination,
reach $1.3 million. Management believes that the probability of such an
assessment is remote and accordingly, has not recorded a liability in its
financial statements. However, there can be no assurance that the amount that
might ultimately be assessed for prior periods would not materially affect the
Company's results of operations or cash flows in any given reporting period.
(See Note 12 of Notes to Financial Statements included in Item 7 of this Form
10-KSB).
The Company's fiscal 1999 revenues of $6,243,305 were essentially flat with
revenues of $6,277,370 in fiscal 1998, and reflect, to some extent, the adverse
impact of management's efforts continuing to be directed to acquisition and
related matters during the year and less time devoted to the generation of
sales. The 1999 revenue levels were also negatively affected by the allocation
of the Company's selling resources away from its core WinStation products to its
<PAGE>17
low-cost digital imaging systems incorporating its recently developed ocular
imaging devices, the DFI and the DSLI. These products were introduced at the
1998 AAO Meeting and the Company made its initial commercial deliveries of these
products during the fourth quarter. While the Company has received significant
purchase commitments for these products, revenues from sales of the DFI and DSLI
units accounted for only approximately 3% of the Company's 1999 revenues.
Deliveries of these products have been slower than anticipated for a variety of
reasons, including delays associated with the outsourcing of the manufacture and
assembly of the Company's products during the year under the Manufacturing
Agreement with Premier, as well as certain delays inherent in the launch of new
technology-based products.
Contribution to revenues from sales of Glaucoma-Scope(R) units have been
negligible and management does not anticipate near-term sales improvement from
the Glaucoma-Scope(R).
Gross margins were approximately 38% in fiscal 1999 as compared to
approximately 34% in fiscal 1998. The lower gross margins for 1998 reflect the
adverse impact of increased reserves for potential field upgrades recognized for
certain systems delivered during 1998. The Company continues to evaluate its
expenses in this area consistent with current and anticipated business
conditions. The Company hopes its current manufacturing relationship with
Premier will provide certain efficiencies and improve gross margins. While
initial deliveries of revenue generating products manufactured by Premier under
the Manufacturing Agreement were made during the third quarter of 1999, this is
a new arrangement and its impact is not clearly ascertainable at this time. The
Company has expended considerable resources in connection with the outsourcing
arrangements under the Manufacturing Agreement and has experienced delays in the
timely delivery of certain of its products during the transition period. While
both companies are collaborating to maximize efficiencies with respect to the
production of the Company's products under the Manufacturing Agreement,
continued delays in delivering products, if significant, could adversely impact
the Company.
Sales and marketing and general and administrative expenses accounted for
approximately 46% of revenues for the fiscal year ended August 31, 1999 as
compared to approximately 63% for the previous fiscal year. Expenses were
$2,868,089 in fiscal 1999 as compared to $3,957,205 in fiscal 1998, representing
an decrease of approximately 27%. The 1998 sales and marketing and general and
administrative expenses were abnormally high in relation to revenues because of
significant investment banking, legal and other professional costs recognized
during the second and third quarters of 1998 associated with the negotiation of
the Stock Purchase Agreement. In 1999, such expenses returned to more normal
levels due to the termination of the Stock Purchase Agreement. In addition, the
1999 amounts reflect the termination of certain management personnel during the
latter half of 1998. The Company is currently implementing marketing and selling
alternatives in an effort to reduce costs and/or improve efficiencies in this
area, including consolidating its current product offerings and entering into
co-marketing and selling arrangements with Premier.
Research and development expenses increased by approximately 3% to $895,605,
or approximately 14% of revenues in fiscal 1999 from $866,745, or approximately
14% of revenues in fiscal 1998. The Company intends to continue to focus its
research and development efforts on its new digital image capture products and
reducing cost configurations for its current products. The extent and focus of
<PAGE>18
future research and development efforts will depend, in large measure, on
whether Premier and OIS consummate the transactions contemplated under the
Merger Agreement.
Interest income was $1,659 during fiscal 1999 versus $1,381 during fiscal
1998. Interest expense accounted for $181,867 and $65,187 in 1999 and 1998,
respectively. The primary contributing factor to the increased interest expense
during 1999 versus 1998 is associated with increased average daily borrowings
and unsecured advances from Premier during 1999, which borrowings and unsecured
advances were made after the first quarter of 1998.
Export Sales
Revenues from sales to customers located outside of the United States
accounted for approximately 14% and 17% of the Company's net sales for the years
ended August 31, 1999 and 1998, 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 $215,532 in fiscal 1999 as
compared to $956,258 in fiscal 1998. The cash used in operations during 1999 was
expended principally to fund the net loss during the year, but was substantially
offset by the reduction in inventory levels resulting as a consequence of the
Manufacturing Agreement with Premier as well as a significant increase in
customer deposits. The cash used in operations during 1998 was expended
principally to fund the net loss during the year. This amount was offset in
large measure by collections of accounts receivable and, to a lesser extent,
increases in accrued liabilities, particularly those liabilities accrued in
connection with significant investment banking, legal and other professional
costs recognized during the second, third and fourth quarters of 1998 associated
with the negotiation and termination of the Stock Purchase Agreement as well as
on-going negotiations with Premier.
Net cash used in investing activities was $27,974 during fiscal 1999 as
compared to $163,460 during fiscal 1998. The Company's primary investing
activities consist of equipment and other capital asset acquisitions. The
Company does not currently have any pending material commitments for capital
expenditures and the Company has deferred significant capital acquisition
decisions pending improved cash flow.
The Company used cash of $92,673 in financing activities during fiscal 1999
as compared to generating cash of $1,491,604 during 1998. The principal use of
cash in financing activities during 1999 was the net repayment of borrowings
under the Credit Agreement which is more fully described immediately below. The
<PAGE>19
principal sources of cash from financing activities in 1998 were the net
proceeds from the exercise of certain warrants issued pursuant to a private
placement of the Company's common stock in November 1995 and borrowings under
the Note to Premier (as defined below), which amounts were partially offset by
net repayments of borrowings under the Credit Agreement. Principal repayments on
notes payable to parties other than Premier were negligible in 1998.
As discussed in further detail in Note 4 of the Notes to Financial
Statements included in Item 7 of this Form 10-KSB, on July 13, 1999, the Company
entered into an accounts receivable credit agreement (the "Credit Agreement")
with Imperial Bank (the "Bank"). The Credit Agreement allows for up to an 80%
advance rate on eligible accounts receivable balances. The Bank has full
recourse against the Company under the Credit Agreement and the Credit Agreement
remains in effect from year to year unless terminated in writing by the Company
or the Bank. Borrowings under the Credit Agreement bear interest at the Bank's
prime lending rate plus 10%. The minimum monthly amount charged by the Bank is
the greater of interest calculated in the manner described above or $1,200.
Under the terms of the Credit Agreement, borrowings are secured by substantially
all of the Company's assets. There were no amounts outstanding under the Credit
Agreement at August 31, 1999.
Additionally, as discussed further in Note 7 of the Notes to Financial
Statements included in Item 7 of this Form 10-KSB, on April 30, 1998, the
Company executed a promissory note in favor of Premier (the "Premier Note"). The
Company has borrowed the maximum principal amount of $500,000 available under
the Premier Note, which principal amount outstanding, together with any and all
accrued interest, was payable the earlier of written demand by Premier or April
30, 1999. Under the terms of the Premier Note, borrowings bear interest at the
rate of 8 1/2% per annum, are secured by certain of the Company's assets and are
subordinate to borrowings under the Credit Agreement with the Bank. Premier also
has made certain unsecured advances to the Company which are not specifically
covered by the Premier Note. At August 31, 1999, the Company had recorded
approximately $1.6 million of indebtedness to Premier, including principal and
interest outstanding under the Note and unsecured advances, as well as charges
and credits pursuant to the terms of the Manufacturing Agreement, and excluding
a $500,000 termination fee in connection with the terminated Stock Purchase
Agreement in 1998 over which there is disagreement between Premier and the
Company as to whether the Company is entitled to said termination fee and
whether such termination fee can be used as an offset to the Company's debt to
Premier. Pursuant to terms of the Merger Agreement, the parties have agreed that
no payments will be required with respect to amounts owing as of August 31, 1999
during the term of the Merger Agreement. If the transactions contemplated under
the Merger Agreement are not consummated and demand for payment is made by
Premier, the Company's ability to continue as a going concern could be seriously
jeopardized, and would depend upon its ability to obtain new financing to repay
the debt to Premier.
At August 31, 1999, the Company's cash and cash equivalents were $178,007.
Even if no demand is made for payment of amounts owing under the Premier Note
and the transactions contemplated under the Merger Agreement are consummated,
the Company's existing cash balances together with ongoing collections of its
accounts receivable and available borrowing capacity under the Credit Agreement
may not be adequate to meet its liquidity and capital requirements in the
immediate term. Substantial delays in the delivery of the Company's products,
including the mass introduction of its DFI and DSLI products, would result in
reduced anticipated cash flow from sales of such products as well as potential
increased costs associated therewith. Additionally, such delays could prompt
<PAGE>20
customers to request return deposits which would further adversely impact the
Company's cash position. Further, demand for payment by the Bank of amounts
claimed pursuant to a stock appreciation right granted to the Bank in connection
with a Credit Agreement could also result in the immediate need for additional
cash. At August 31, 1999, the Company had accrued approximately $294,000 in
liability under the stock appreciation right.
Pending shareholder approval and consummation of the contemplated
transactions under the Merger Agreement, the Company is continuing to seek
sources of additional capital to meet its current and potential cash
requirements, including debt financing, issuing equity securities and entering
into other financing arrangements. There can be no assurance, however, that any
financing arrangements contemplated herein will be available and, if available,
can be obtained on terms favorable to the Company. Certain holders of options to
purchase shares of the Company's common stock may exercise those options. The
Company could receive substantial proceeds from the exercise of these stock
options; however, there can be no assurance that any stock options will be
exercised in the near term, if at all.
In the event that the transactions contemplated under the Merger Agreement
are not consummated, the Company may have difficulty in meeting any significant
demand for its products without an infusion of capital or other improvements in
its liquidity position. Its ability to continue as a going concern would be
seriously jeopardized, and would depend upon its ability to restructure payment
terms and/or obtain new financing to repay its debts.
Inflation
The Company believes that inflation has not had a material or significant
impact on the Company's revenue or on its results from operations.
Item 7. Financial Statements.
The Company's financial statements for fiscal year 1999 are attached hereto.
Item 8. Changes In And Disagreements With Accountants
On Accounting And Financial Disclosure.
The Company filed a Current Report on Form 8-K and an Amendment No. 1 to
that Current Report on Form 8-K on August 27, 1998 and September 8, 1998,
respectively, to report the resignation of Ernst & Young LLP as the Company's
auditors. Ernst & Young terminated its relationship with the Company because of
certain conflicts of interest it had with Premier, Company's majority
shareholder. The decision to change accountants was approved by the Board of
Directors of OIS.
On October 23, 1998, the Company retained the accounting firm of Perry-Smith
& Co. to serve as the Company's independent auditors.
Neither of the principal accountant's reports on the financial statements
for either of the past two years contains an adverse opinion or disclaimer of
opinion, and neither was modified as to uncertainty, audit scope or accounting
<PAGE>21
principles. There were no disagreements with Ernst & Young on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure.
PART III
Item 9. Directors, Executive Officers, Promoters And Control Persons;
Compliance With Section 16(A) Of The Exchange Act.
Information required by Item 9 of Form 10-KSB is incorporated herein by
reference to the Issuer's definitive Proxy Statement, which will be filed with
the SEC no later than 120 days after the close of Issuer's fiscal year, for the
Special Meeting of Shareholders to vote on the merger with Premier.
Item 10. Executive Compensation.
Information required by Item 10 of Form 10-KSB is incorporated herein by
reference to the Issuer's definitive Proxy Statement, which will be filed with
the SEC no later than 120 days after the close of Issuer's fiscal year, for the
Special Meeting of Shareholders to vote on the merger with Premier.
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 Issuer's definitive Proxy Statement, which will be filed with
the SEC no later than 120 days after the close of Issuer's fiscal year, for the
Special Meeting of Shareholders to vote on the merger with Premier.
Item 12. Certain Relationships And Related Transactions.
Information required by Item 12 of Form 10-KSB is incorporated herein by
reference to the Issuer's definitive Proxy Statement, which will be filed with
the SEC no later than 120 days after the close of Issuer's fiscal year, for the
Special Meeting of Shareholders to vote on the merger with Premier.
Item 13. Exhibits And Reports On Form 8-K.
A. Exhibits
<TABLE>
<S> <C> <C>
Exhibit Number Footnote Reference
Description of Exhibit
2.1 Stock Purchase Agreement, dated as of February 25, 1998, by and (13)
between OIS and Premier.
2.2 Agreement and Plan of Reorganization By and Among Premier, (18)
Ophthalmic Acquisition Corporation and OIS, dated as of
October 21, 1999.
<PAGE>22
2.3 Series B Preferred Stock Purchase Agreement dated as of October 21, (19)
1999 by and among OIS and Premier.
2.4 Agreement dated as of October 21, 1999 by and among OIS, Premier, (20)
Walt Williams, Daniel S. Durrie and Randall C. Fowler.
3.1 Articles of Incorporation of OIS, as amended. *
3.2 Amendment to Articles of Incorporation (Certificate of Determination (11)
of Preferences of Series A Junior Participating Preferred Stock of
OIS).
3.3 Amendment to Articles of Incorporation (Certificate of (21)
Determination of Preferences of Series B Preferred Stock
of OIS).
3.4 Amended Bylaws of OIS. *
3.5 Amendment to Amended Bylaws of OIS dated January 28, 1998. (16)
4.1 Specimen of Stock Certificate. *
4.2 Rights Agreement, dated as of December 31, 1997, between OIS (10)
and American Securities Transfer, Inc., including form of
Rights
Certificate attached thereto.
4.3 Amendment to Rights Agreement, dated as of February 25, 1998, between (14)
OIS and American Securities Transfer, Inc.
4.4 Second Amendment to Rights Agreement, effective as of October 20, (22)
1999, between OIS and American Securities Transfer, Inc.
10.1 Lease Agreement, dated as of July 10, 1987, between OIS (as *
tenant) and Transamerica/Emkay Income Properties I, as
amended on July 23, 1990 and June 11, 1991.
10.2 Seventh Amendment to Lease Agreement, effective as of July 18, 1996. (7)
10.3 Confidentiality Agreement, dated March 27, 1992 between OIS and *
Steven R. Verdooner.
<PAGE>23
10.4 Assignment dated October 23, 1990 of U.S. Patent Application *
for Apparatus and Method for Topographical Analysis of the
Retina to the Issuer 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).
10.5 Form of International Distribution Agreement used by OIS and *
sample form of End User Software License Agreement.
10.6 Original Equipment Manufacturer Agreement, dated April 1, *
1991, between the Issuer and SONY Medical Electronics, a
division of SONY Corporation of America.
10.7 Original Equipment Manufacturer/Value Added Reseller Agreement, dated *
May 7, 1991, between the Issuer and Eastman Kodak Company.
10.8 The Company's 1992 Nonstatutory Stock Option Plan and sample form of *
Nonstatutory Stock Option Agreement.
10.9 Cross-Indemnification Agreement, dated February 14, 1991, among *
Dennis Makes, Steven Verdooner and Richard Wullaert.
10.10 Key Man Life Insurance Policies in the amount of $1,000,000 *
for each of Dennis J. Makes and Steven R. Verdooner, with
the Issuer as the named beneficiary.
10.11 Stock Option Plan. (1)
10.12 Rental Agreement dated May 1, 1994 by and between the Issuer and (2)
Robert J. Rossetti.
10.13 Security and Loan Agreement (with Credit Terms and Conditions) (3)
dated April 12, 1995 by and between the Issuer and
Imperial Bank.
10.14 General Security Agreement dated April 12, 1995 by and between the (3)
Issuer and Imperial Bank.
10.15 Warrant dated November 1, 1995 issued by the Issuer to Imperial Bank (4)
to purchase 67,500 shares of common stock.
10.16 Amended Loan and Security Agreement (with Credit Terms and (4)
Conditions) dated November 1, 1995.
<PAGE>24
10.17 Registration Rights Agreement dated November 1, 1995 between the (4)
Issuer and Imperial Bank.
10.18 Amended Loan and Security Agreement (with Credit Terms and (6)
Conditions) dated April 4, 1996.
10.19 Amended Loan and Security Agreement (with Credit Terms and (7)
Conditions) dated July 12, 1996.
10.20 Amended Loan and Security Agreement (with Credit Terms and (7)
Conditions) dated November 21, 1996.
10.21 Amended Loan and Security Agreement (with Credit Terms and (8)
Conditions) dated June 3, 1997.
10.22 Amended Loan and Security Agreement (with Credit Terms and (9)
Conditions) dated August 28, 1997.
10.23 Amended Loan and Security Agreement (with Credit Terms and (9)
Conditions) dated October 24, 1997.
10.24 Amended Loan and Security Agreement (with Credit Terms and (9)
Conditions) dated November 3, 1997.
10.25 Amended Loan and Security Agreement (with Credit Terms and (9)
Conditions) dated November 21, 1997.
10.26 Agreement of Purchase of Receivable (Full Recourse) dated (9)
November 18, 1997 between the Issuer and Imperial Bank.
10.27 Agreement of Purchase of Receivable dated July 13, 1999 between the (23)
Issuer and Imperial Bank.
10.28 Employment Agreement dated November 20, 1995 between the Issuer and (4)
Steven R. Verdooner.
10.29 Amendment dated effective July 14, 1997 to Employment Agreement dated (16)
November 20, 1995 between the Issuer and Steven R. Verdooner.
10.30 The Company's 1995 Nonstatutory Stock Option Plan and sample form of (5)
Nonstatutory Stock Option Agreement.
<PAGE>25
10.31 The Company's 1997 Nonstatutory Stock Option Plan and sample form of (12)
Nonstatutory Stock Option Agreement.
10.32 Promissory Note dated April 30, 1998 from the Issuer to Premier Laser (15)
Systems, Inc. in the maximum amount of $500,000 due in full upon the
earlier of (i) written demand by Premier or (ii) April 30, 1999.
10.33 Security Agreement dated April 30, 1998 by and between the Issuer and (15)
Premier Laser Systems, Inc.
10.34 Form of Indemnification Agreement between the Issuer and each of its (16)
directors, officers and certain key employees.
10.35 Manufacturing Agreement dated March 7, 1999 between the Issuer and (17)
Premier Laser Systems, Inc.
11.1 Computation of net loss per share. (23)
23.1 Consent of Perry-Smith & Company LLP, Independent Auditors. (23)
27 Financial Data Schedule (for SEC use only). (23)
</TABLE>
- ------------------------------
* Incorporated by reference to the Company's Registration Statement
on Form S-18, number 33-46864-LA.
(1) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended August 31, 1993, filed on
November 26, 1993.
(2) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended August 31, 1994, filed on
November 29, 1994.
(3) Incorporated by reference to the Company's 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 Company'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 Company's Registration Statement
on Form S-8, filed on May 28, 1996, number 333-0461.
<PAGE>26
(6) Incorporated by reference to the Company'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 Company's Annual Report on Form
10-KSB for the fiscal year ended August 31, 1996, filed on
November 29, 1996.
(8) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended May 31, 1997, filed on
July 15, 1997.
(9) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended August 31, 1997, filed on
December 1, 1997.
(10) Incorporated by reference to Exhibit 1 of the Company's Form 8-K,
filed on January 2, 1998.
(11) Incorporated by reference to Exhibit A of Exhibit 1 of the
Company's Form 8-K, filed on January 2, 1998.
(12) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended November 30, 1997,
filed on January 14, 1998.
(13) Incorporated by reference to Exhibit 2.1 of the Company's
Form 8-K, filed on March 9, 1998.
(14) Incorporated by reference to Exhibit 4.1 of the Company's
Form 8-K, filed on March 9, 1998.
(15) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended May 31, 1998, filed on
July 15, 1998.
(16) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended August 31, 1998, filed on
December 15, 1998.
(17) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended February 28, 1999,
filed on April 14, 1999.
(18) Incorporated by reference to Exhibit 2.1 of the Company's
Form 8-K, filed on November 24, 1999.
(19) Incorporated by reference to Exhibit 4.2 of the Company's
Form 8-K, filed on November 24, 1999.
<PAGE>27
(20) Incorporated by reference to Exhibit 4.3 of the Company's
Form 8-K, filed on November 24, 1999.
(21) Incorporated by reference to Exhibit 3.1 of the Company's
Form 8-K, filed on November 24, 1999.
(22) Incorporated by reference to Exhibit 4.1 of the Company's
Form 8-K, filed on November 24, 1999.
(23) Exhibit filed herewith.
B. Reports on Form 8-K.
On November 15, 1999, Issuer filed a Form 8-K to report that its past
results of operations do not include any charges related to a potential
contingent liability for sales taxes payable in an amount to be estimated on the
basis of numerous probabilities that might, in the least favorable combination,
reach $1.3 million.
On November 24, 1999, Issuer filed a Form 8-K to report (a) the filing of a
certificate of determination with the California Secretary of State on October
18, 1999, establishing the rights and privileges of Issuer's convertible Series
B Preferred Stock; (b) the further amendment of Issuer's Right's Agreement; (c)
the execution of that certain Series B Preferred Stock Purchase Agreement, dated
October 21, 1999, by and between Issuer and Premier, allowing Premier to
purchase shares of Series B Stock; (d) the execution of that certain Agreement,
dated October 21, 1999, by and among the Issuer, Premier and three of Issuer's
outside directors, and the resulting issuance of 150 shares of Series B Stock to
Premier on October 21, 1999; and (e) the execution of the Merger Agreement.
<PAGE>28
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Issuer
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OPHTHALMIC IMAGING SYSTEMS Date: November 18, 1999
By /s/ STEVEN R. VERDOONER
----------------------------------------
Steven R. Verdooner, President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Issuer and in the capacities and
on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ STEVEN R. VERDOONER President, Chief Executive November 18, 1999
- ------------------------ Officer and Director
Steven R. Verdooner (Principal Executive Officer)
/s/ STEVEN C. LAGORIO Chief Financial Officer and November 18, 1999
- ----------------------- Secretary
Steven C. Lagorio (Principal Financial Officer and
Principal Accounting Officer)
/s/ WALT WILLIAMS Director November 19, 1999
- ------------------------
Walt Williams
/s/ R. JOSEPH ALLEN Director November 19, 1999
- -------------------------
R. Joseph Allen
/s/ DANIEL S. DURRIE, M.D. Director November 18, 1999
- ---------------------------
Daniel S. Durrie, M.D.
/s/ RANDALL C. FOWLER Director November 23, 1999
- --------------------------
Randall C. Fowler
</TABLE>
<PAGE>i
OPHTHALMIC IMAGING SYSTEMS
FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1999 AND 1998
AND
INDEPENDENT AUDITOR'S REPORT
<PAGE>1
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Ophthalmic Imaging Systems
We have audited the accompanying balance sheet of Ophthalmic Imaging
Systems as of August 31, 1999, and the related statements of operations,
stockholders' deficit, and cash flows for the years ended August 31, 1999 and
1998. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ophthalmic Imaging Systems
as of August 31, 1999, and the results of its operations and its cash flows for
the years ended August 31, 1999 and 1998, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14 to the
financial statements, current liabilities exceed current assets by $3,171,044.
In addition, the Company has a history of losses from operations resulting in an
accumulated deficit of $13,247,811. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As more fully described in Note 12 to the financial statements, the Company
has evaluated its exposure for the collection of taxes on sales to customers
located in other states. Management believes that the probability of assessment
by state tax authorities is remote and accordingly, a liability has not been
recorded in the accompanying financial statements.
PERRY-SMITH & CO., LLP
November 5, 1999
<PAGE>2
OPHTHALMIC IMAGING SYSTEMS
BALANCE SHEET
August 31, 1999
1999
-------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 178,007
Accounts receivable, net of allowance for
doubtful accounts of approximately
$156,000 379,175
Inventories (Note 2) 361,092
Prepaid expenses and other current assets 99,978
-------------------------
Total current assets 1,018,252
-------------------------
Furniture and equipment, at cost, net (Note 3) 303,130
Other assets 7,385
-------------------------
Total assets $ 1,328,767
=========================
(Continued)
<PAGE>3
OPHTHALMIC IMAGING SYSTEMS
BALANCE SHEET
(Continued)
August 31, 1999
1999
-------------------------
LIABILITIES AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 595,414
Accrued liabilities (Note 5) 1,301,444
Accrued warrant appreciation right 293,709
Deferred extended warranty revenue 89,392
Customer deposits 429,546
Note payable to related party (Note 7) 1,470,852
Capitalized lease obligation (Note 6) 8,939
-------------------------
Total current liabilities 4,189,296
-------------------------
Capitalized lease obligation (Note 6) 18,811
Total liabilities 4,208,107
-------------------------
Commitments and contingencies (Notes 8 and 12)
Stockholders' deficit (Note 9):
Preferred stock, no par value, 20,000,000 shares
authorized; none issued or outstanding
Common stock, no par value, 20,000,000 shares
authorized; 4,155,428 shares issued and
outstanding 10,462,604
Deferred compensation (94,133)
Accumulated deficit (13,247,811)
-------------------------
Total stockholders' deficit (2,879,340)
-------------------------
Total liabilities and stockholders' deficit $ 1,328,767
=========================
The accompanying notes are an integral part of these financial statements.
<PAGE>4
OPHTHALMIC IMAGING SYSTEMS
STATEMENT OF OPERATIONS
For the Years Ended August 31, 1999 and 1998
<TABLE>
<S> <C> <C>
1999 1998
-------------------- ----------------
Revenues:
Net sales $ 6,011,825 $ 6,064,180
Other revenue 231,480 213,190
-------------------- ----------------
Total revenues 6,243,305 6,277,370
Cost of sales 3,892,243 4,124,633
-------------------- ----------------
Gross profit 2,351,062 2,152,737
-------------------- ----------------
Operating expenses:
Sales and marketing 1,783,146 1,929,752
General and administrative 1,084,943 2,027,453
Research and development 895,605 866,745
-------------------- ----------------
Total operating expenses 3,763,694 4,823,950
-------------------- ----------------
Loss from operations (1,412,632) (2,671,213)
Other income (expense):
Interest income 1,659 1,381
Interest expense (181,867) (65,187)
-------------------- ----------------
Total other income (expense) (180,208) (63,806)
-------------------- ----------------
Net loss before extraordinary item (1,592,840) (2,735,019)
-------------------- ----------------
Extraordinary item (Note 13):
Gain on forgiveness of debt 350,000
-------------------- ----------------
Net loss $ (1,242,840) $ (2,735,019)
==================== ================
Basic loss per share before extraordinary item $ .38 $ .68
==================== ================
Basic loss per share $ .30 $ .68
==================== ================
Shares used in the calculation of net loss
per share 4,155,428 4,030,428
==================== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>5
OPHTHALMIC IMAGING SYSTEMS
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended August 31, 1999 and 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
Total
Common Stock Deferred Stockholders'
------------- Compen- Accumulated Equity
Shares Amount sation Deficit (Deficit)
---------- ------------ ------------- ---------------- ---------------
Balance,
September 1, 1997 3,905,428 $ 10,244,615 $ (306,894) $ (9,269,952) $ 667,769
Issuance of common
stock upon exercise
of warrants 250,000 213,750 213,750
Deferred compensation
related to stock
options granted to
non-employees 4,239 (4,239)
Stock option compen-
sation expense 119,833 119,833
Net loss (2,735,019) (2,735,019)
---------- ------------ ------------- ---------------- ---------------
Balance,
August 31, 1998 4,155,428 10,462,604 (191,300) (12,004,971) (1,733,667)
Stock option compen-
sation expense 97,167 97,167
Net loss (1,242,840) (1,242,840)
---------- ------------ ------------- ---------------- ---------------
Balance,
August 31, 1999 4,155,428 $ 10,462,604 $ (94,133) $(13,247,811) $(2,879,340)
=========== ============ ============== ================= ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>6
OPHTHALMIC IMAGING SYSTEMS
STATEMENT OF CASH FLOWS
For the Years Ended August 31, 1999 and 1998
<TABLE>
<S> <C> <C>
1999 1998
Cash from operating activities:
Net loss $ (1,242,840) $ (2,735,019)
Adjustments to reconcile net loss to net cash
used in operating activities:
Accrued warrant appreciation right 25,522 16,690
Depreciation and amortization 133,465 133,038
Provision for doubtful accounts 25,221 30,747
Stock option compensation expense 97,167 119,830
Loss on retirement of assets 2,771
Net changes in operating assets and liabilities:
Accounts receivable 102,588 1,106,810
Inventories 326,317 106,643
Prepaid expenses and other current assets (74,014) 67,444
Accounts payable 158,484 (379,579)
Accrued liabilities (73,901) 581,040
Deferred extended warranty revenue (23,779) 19,557
Customer deposits 327,467 (23,459)
------------ -------------
Net cash used in operating activities (215,532) (956,258)
------------ -------------
Cash flows used in investing activities:
Acquisition of furniture and equipment (27,974) (163,460)
------------ -------------
Cash flows from financing activities:
Repayment of short-term borrowings (98,175) (212,827)
Proceeds from note payable to related party 8,372 1,462,480
Capitalized lease obligation (2,870) 30,435
Principal payments on notes payable (2,234)
Issuance of common stock 213,750
------------ -------------
Net cash (used in) provided by
financing activities (92,673) 1,491,604
------------ -------------
Net (decrease) increase in cash and cash equivalents (336,179) 371,886
Cash and cash equivalents, beginning of the year 514,186 142,300
------------ -------------
Cash and cash equivalents, end of the year $ 178,007 $ 514,186
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>7
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Ophthalmic Imaging Systems (the "Company"), was incorporated in California
in July 1986. The Company is primarily engaged in the business of
designing, developing, manufacturing, and marketing digital imaging
systems, image enhancements and analysis software, and related products and
services for use by practitioners in the ocular healthcare field.
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which require the Company's
management to make estimates and assumptions that affect the amounts
reported therein. Actual results could vary from such estimates.
Concentrations of Credit Risk and Export Sales
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and trade receivables. The Company places its temporary cash
investments with high credit quality financial institutions. Concentrations
of credit risk with respect to trade receivables are limited due to the
Company's policy of requiring deposits from customers, the number of
customers and their geographic dispersion. The Company maintains reserves
for potential credit losses and such losses have historically been within
management's expectations. No single customer during fiscal year 1999 or
1998 comprised 10% or more of net sales.
Revenues from sales to customers located outside of the United States
accounted for approximately 14% and 17% of net sales during the years ended
August 31, 1999 and 1998, 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.
Revenue Recognition and Warranties
The Company generally 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.
<PAGE>8
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition and Warranties (Continued)
Customers may purchase extended warranty coverage for additional one or two
year periods. Revenues from the sale of these extended warranties are
deferred and recognized as other revenue on a straight-line basis over the
term of the extended warranty contract.
Income Taxes
Deferred income taxes are accounted for pursuant to Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, as a result of
differences in the timing of recognition of certain revenues and expenses
for financial statement and income tax reporting purposes.
General business credits are accounted for as a reduction of federal income
taxes payable under the flow-through method.
Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share
is similar to the previously reported fully diluted earnings per share.
Diluted earnings per share has not been presented for 1999 or 1998 as the
inclusion of potential common shares would have an antidilutive effect on
the loss per share. All net loss per share amounts have been restated to
conform to Statement No. 128 requirements.
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 $19,000 and $41,000 during
the years ended August 31, 1999 and 1998, respectively. Cash paid for
income taxes amounted to approximately $800 for each of the years ended
August 31, 1999 and 1998.
Stock Based Compensation
The Company has elected to follow accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its stock option plans. Under APB 25, if
the exercise price of the Company's employee stock options equals or
exceeds the fair value of the underlying stock on the date of grant as
determined by the Company's Board of Directors, no compensation expense
is recognized. See Note 9 for pro forma disclosures of compensation
expense.
<PAGE>9
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. INVENTORIES
Inventories consist of the following as of August 31, 1999:
Raw materials $ 221,478
Work-in-process 17,106
Finished goods 122,508
------------------------
$ 361,092
=======================
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following as of August 31, 1999:
Research and manufacturing equipment $ 653,247
Office furniture and equipment 440,282
Demonstration equipment 183,938
Vehicles 25,010
-------------------------
1,302,477
Less accumulated depreciation
and amortization (999,347)
-------------------------
$ 303,130
=========================
4. SHORT-TERM BORROWINGS
The Company entered into an accounts receivable credit agreement (the
"Agreement") with a bank (the "Bank") on July 13, 1999. The Agreement
allows for up to an 80% advance rate on eligible accounts receivable
balances. Borrowings are secured by substantially all assets of the Company
and bear interest at the Bank's prime lending rate plus 10%. The minimum
monthly amount charged by the Bank is the greater of interest calculated in
accordance with the immediately preceding sentence or $1,200. The Agreement
remains in effect from year to year unless terminated in writing by the
Company or the Bank.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of August 31, 1999:
Accrued compensation $ 334,898
Accrued warranty expenses 271,475
Other accrued liabilities 695,071
-------------------------
$ 1,301,444
=========================
<PAGE>10
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. CAPITALIZED LEASE OBLIGATIONS
The Company leases certain office equipment under the terms of a capital
lease. Payments of $740 with interest at 9.8% are due in 60 monthly
installments. Future minimum lease payments are as follows:
Year Ending
August 31,
2000 $ 8,880
2001 8,880
2002 8,880
2003 7,400
-----------------------------
34,040
Less amount representing interest (6,290)
-----------------------------
$ 27,750
============================
7. NOTE PAYABLE TO RELATED PARTY
On April 30, 1998, the Company executed a promissory note (the "Note") in
favor of a related party (the "Related Party"). The Company has borrowed
the maximum principal amount of $500,000 available under the Note, which
principal amount outstanding, together with any and all accrued interest,
was payable the earlier of written demand by the Related Party or April 30,
1999. Under the terms of the Note, borrowings bear interest at the rate of
8.5% per annum, are secured by certain of the Company's assets and are
subordinate to borrowings under the accounts receivable credit agreement
with the Company's Bank (see Note 4). The Related Party also has made
certain unsecured advances to the Company which are not specifically
covered by the Note.
At August 31, 1999, approximately $1,600,000 in principal and interest was
outstanding under the Note and unsecured advances of which $151,806 of
accrued interest was included in other accrued liabilities.
Subsequent to August 31, 1999, the Company and the Related Party entered
into a Merger Agreement whereby, among other things, the parties have
agreed that no payments will be required with respect to amounts owing as
of August 31, 1999 under the Note and unsecured advances during the term of
the Merger Agreement (see Note 15).
<PAGE>11
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. COMMITMENTS
Operating Leases
The Company leases its facilities under month-to-month leases. The lease
agreements require minimum lease payments of approximately $7,400 per
month.
Rental expense charged to operations for all operating leases was
approximately $90,000 and $120,000 during the years ended August 31, 1999
and 1998, respectively.
9. STOCKHOLDERS' EQUITY
Common Stock
Of the 15,844,572 shares of common stock authorized but unissued as of
August 31, 1999, 2,506,747 shares are reserved for issuance under the stock
option plans.
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 were 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 were $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 were subject to adjustment upon the occurrence of
certain events. The A and B Warrants expired on February 19, 1997 as
amended and November 21, 1997, respectively. During the year ended August
31, 1997, 210,526 and 335,338 A and B Warrants, respectively, were
exercised resulting in aggregate net proceeds to the Company of
approximately $757,000.
The private placement underwriter was issued a warrant to purchase 250,000
shares of the Company's common stock at $.95 per share. The warrant was
transferred to a Related Party in connection with a transaction executed
concurrently with a Stock Purchase Agreement defined immediately below. The
proceeds noted herein are net of, among other things, the underwriters'
commission equal to 10% of the gross proceeds received by the Company.
<PAGE>12
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. STOCKHOLDERS' EQUITY (Continued)
Stock Purchase Agreement
On February 25, 1998, the Company entered into a Stock Purchase Agreement
(the "Stock Purchase Agreement") with a related party (the "Related Party")
pursuant to which, among other things: (I) the Related Party agreed to
commence a tender offer ("Tender Offer") to acquire all shares of the
Company's common stock not held by the Related Party or its affiliates in
exchange for a combination of cash and the Related Party's securities; and
(ii) the Company agreed to recommend that shareholders tender their shares
of the Company's common stock in the Tender Offer and not to solicit any
competing acquisition proposals. As a condition to the Stock Purchase
Agreement, the Company agreed to amend its Rights Agreement ("Rights
Agreement") dated as of December 31, 1997, by and between the Company and
its rights agent, to permit the Related Party to acquire up to 51.3% of the
Company's outstanding Common Stock in private transactions to be made
simultaneously with the execution of the Stock Purchase Agreement.
Simultaneous with execution of the Stock Purchase Agreement, the Related
Party entered into individual purchase agreements with certain
shareholders, providing for these parties to sell to the Related Party an
aggregate of 730,360 shares of the Company's common stock. Additionally,
the Related Party purchased from one of the shareholders a warrant to
purchase 250,000 shares of the Company's common stock. The Related Party
exercised the warrants on February 26, 1998, resulting in aggregate net
proceeds to the Company of approximately $214,000.
In August 1998, the Company was notified by the Related Party that the
Related Party would be unable to proceed with its previously proposed
acquisition of the remaining 48.7% interest in the Company by the
termination date of the Stock Purchase Agreement. As a result, the Stock
Purchase Agreement was terminated. As a result of such termination, the
Company made demand to the Related Party for a $500,000 termination fee
(the "Termination Fee") as provided for in the Stock Purchase Agreement.
The Related Party has not yet acknowledged the validity of the Termination
Fee and the Termination Fee, among other things, was the subject of
subsequent negotiations between the Company and the Related Party.
Accordingly, the Company has not recognized the Termination Fee in its
financial statements (see Note 15).
Other Warrants
In 1993, the Company issued a warrant to the Bank that provided a
line-of-credit. The warrant was amended several times in connection with
amendments to the line-of-credit. 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 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 $293,709, inclusive of interest, under the Stock Appreciation
Right at August 31,1999, and it is reflected as a current liability on the
accompanying balance sheet. The Appreciation Right was due on April 1,
1998.
<PAGE>13
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans
The Company has four stock-based compensation plans, which are described
below. The Company applies APB 25 and related Interpretations in accounting
for its stock options because, as discussed below, the alternative fair
value accounting provided for under SFAS 123 requires use of option
valuation models that were not developed for use in valuing stock options.
Under APB 25, because the exercise price of the Company's stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
In 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 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. The maximum number of shares of the Company's common
stock which may be optioned and sold under the Plan is 116,667, of which
1,667 options remained available for granting as of August 31, 1999. As of
August 31, 1999, stock options to purchase 55,000 shares at an exercise
price of $1.00 were granted and outstanding under the Plan. No options were
exercised during the year ended August 31, 1999.
In 1992 and 1993, the Company's Board of Directors and Shareholders,
respectively, approved a second Stock Option Plan (the "Option Plan") under
which all officers, employees, directors and consultants may participate.
The Plan expires December 2002.
Options granted under the Option Plan may be either incentive stock options
or non-qualified stock options and will generally have a term of ten years
from the date of grant, unless otherwise specified in the option agreement.
The Exercise prices of incentive stock options granted under the Option
Plan will be at 100% of the fair market value of the Company's common stock
on the date of grant. The exercise prices of non-qualified stock options
granted under the Option Plan cannot be less than 85% of the fair market
value of the Company's common stock on the date of grant. The maximum
number of shares of the Company's common stock which may be optioned and
sold under the Option Plan is 150,000, of which 26,024 remained available
for granting of options as of August 31, 1999. As of August 31, 1999, stock
options to purchase 101,576 shares at exercise prices ranging from $.94 to
$4.25 were granted and outstanding under the Option Plan. No options were
exercised during the years ended August 31, 1999 or 1998.
In 1995, the Company's Board of Directors approved a Nonstatutory Stock
Option Plan (the "Nonstatutory Plan") under which all officers, employees,
directors and consultants may participate. The Nonstatutory Plan expires
November 2005. Options granted under the Nonstatutory Plan are
non-qualified stock options and will generally have a term of five years
from the date of grant, unless otherwise specified in the option agreement.
The exercise prices under the Nonstatutory Plan will be at 100% of the fair
market value of the Company's common stock on the date of grant. The
maximum number of shares of the Company's common stock which may be
optioned and sold under the Nonstatutory Plan is 1,035,000, of which 5,000
options remained available for granting as of August 31, 1999. As of August
31, 1999, stock options to purchase 725,000 shares at exercise prices
ranging from $1.94 to $4.50 were granted and outstanding under the
Nonstatutory Plan and none of the granted options were exercised.
<PAGE>14
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
In October 1997, the Company's Board of Directors approved a Nonstatutory
Stock Option Plan (the "1997 Nonstatutory Plan") under which all officers,
employees, directors and consultants may participate. The 1997 Nonstatutory
Plan expires October 2002. Options granted under the 1997 Nonstatutory Plan
are non-qualified stock options and will have a term of not longer than ten
years from the date of grant. The exercise prices under the 1997
Nonstatutory Plan will be at 100% of the fair market value of the Company's
common stock on the date of grant, unless otherwise specified in the option
agreement. The maximum number of shares of the Company's common stock which
may be optioned and sold under the Plan is 1,000,000, of which 187,020
options remained available for granting as of August 31, 1999. As of August
31, 1999, stock options to purchase 763,396 shares at exercise prices
ranging from $.38 to $1.094 were granted and outstanding under the 1997
Nonstatutory Plan and none of the granted options were exercised.
A summary of the status of the Company's stock option plans and changes
during the periods is presented below:
<TABLE>
<S> <C> <C>
Weighted
Average
Exercise
Options Price
-------------- --------------
Balance, September 1, 1997 1,257,992 $ 1.96
Options granted 272,000 $ 1.17
Options canceled (24,916) $ 3.13
--------------
Balance, August 31, 1998 1,505,076 $ 1.80
Options granted 513,480 $ .53
Options canceled (373,584) $ 1.86
--------------
Balance, August 31, 1999 1,644,972 $ 1.39
==============
</TABLE>
The weighted average fair value of options granted during the years ended
August 31, 1999 and August 31, 1998 was $.42 and $.86, respectively.
<PAGE>15
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
The following table summarizes information about the stock options
outstanding at August 31, 1999:
<TABLE>
<S> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
-------------------- --------------------
Weighted
Average Weighted- Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Number Life Price Number Price
------------------- ------------- --------------- --------------- ----------- -------------
$ .38 - $1.38 1,295,972 6.11 $ 1.08 831,866 $ 1.17
$1.38 - $3.00 260,000 1.00 $ 2.43 244,700 $ 2.43
$3.00 - $4.50 89,000 3.41 $ 4.36 60,970 $ 4.35
------------- ----------
1,644,972 1,137,536
============ ===========
</TABLE>
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if
the Company has accounted for its employee stock options granted subsequent
to August 31, 1995 under the fair value method of that Statement. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended August 31, 1999 and 1998, respectively;
dividend yield of zero; volatility factors of the expected market price of
the Company's common stock ranged from 1.436 to 1.54 for both years;
risk-free interest rate of 6%; and a weighted-average expected life of 5
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
Years Ended August 31,
----------------------
1999 1998
--------------- --------------
Pro forma net loss $ (1,515,840) $ (2,982,019)
=============== ==============
Pro forma net loss per share $ (.38) $ (.74)
=============== ==============
<PAGE>16
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
During the year ended August 31, 1998, the Company recorded deferred
compensation of approximately $4,000 for financial reporting purposes to
reflect the deemed fair value of the certain options granted to
non-employees. Deferred compensation is being amortized over the vesting
period of the related options. No such expense was required during the year
ended August 31, 1999. For the year ended August 31, 1999 and 1998, the
amortized deferred compensation expense was approximately $97,000 and
$120,000, respectively.
Since SFAS 123 is applicable only to options granted subsequent to August
31, 1995, its pro forma effect will not be fully realized until 2000.
10. INCOME TAXES
There was no provision (benefit) for income taxes during the years ended
August 31, 1999 or 1998.
The significant components of the Company's deferred tax assets and
liabilities are as follows:
1999
-------------------------
Deferred tax assets:
Net operating loss carryforwards $ 2,229,000
Inventory reserves 965,000
Accrued warrant appreciation right 126,000
Payroll related accruals 165,000
Warranty accrual 116,000
Sales and accounts receivable reserves 106,000
Uniform capitalization 66,000
Deferred revenue 38,000
Depreciation 9,000
------------------------
Total deferred tax assets 3,820,000
Valuation allowance (3,820,000)
------------------------
Net deferred taxes $ -
=========================
<PAGE>17
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. 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:
<TABLE>
<S> <C> <C>
Years Ended August 31,
------------------------
1999 1998
---------------- ------------------
Federal benefit expected at statutory rates $ (423,000) $ (930,000)
Net operating loss with no current benefit 423,000 930,000
---------------- ------------------
$ - $ -
================== ==================
</TABLE>
In connection with the Company's private placement of common stock (Note 9)
a change of ownership (as defined in Section 382 of the Internal Revenue
Code) 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.
During 1998 another change of ownership occurred when a shareholder
acquired more than 50% of the Company's common stock (Note 9). The
resulting limitation on net operating loss and tax credit carry forwards is
approximately $168,000 per year.
As a consequence of these limitations, as discussed above, the Company has
at August 31, 1999, a net operating loss carryover of approximately
$6,209,000 for federal income tax purposes which expires between 2007 and
2012, and a net operating loss carryforward of approximately $2,325,000 for
state income tax purposes which expires between 2000 and 2004. Federal and
state tax credit carryforwards of approximately $68,000 and $39,000 will
begin to expire in 2002 and 2017, respectively.
11. 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 years ended August 31,1999 or
1998. During the year ended August 31, 1999, the Company made a minimum top
heavy required contribution in the amount of $19,219 pursuant to IRS
Code Section 416(c).
<PAGE>18
12. CONTINGENCIES
Collection of Taxes from Customers
In a prior year, a state taxing authority made inquires of the Company
regarding the collection of sales or use taxes from customers in this
state. The inquiry was favorably resolved without any adverse consequences
to the Company. The Company evaluates such inquiries on a case-by-case
basis and will vigorously contest any such claims for payment of sales or
use taxes which it believes are without merit.
However, Management has prepared an analysis of sales to customers in those
jurisdictions for which the Company does not collect sales or use taxes.
Certain assumptions were made in the preparation of this analysis,
including but not limited to:
o The Company's customers have not remitted any sales or use tax to
state or local taxing authorities.
o Potential interest and penalties have been included on sales
activity from the Company's inception.
o Sales or use taxes have been provided at the effective tax rates
for each taxing authority for which the Company may have had a
sale.
The analysis indicates maximum potential liability of $1,300,000.
Management believes that the probability of such an assessment is remote
and accordingly, has not recorded a liability in the accompanying financial
statements.
However, there can be no assurance that the amount of any sales or use
taxes that might ultimately be assessed for prior periods would not
materially affect the Company's results of operation or cash flows in any
given reporting period.
13. EXTRAORDINARY ITEM
In May 1999, the Company reached an agreement with a financial advisor to
significantly reduce the aggregate amount of professional fees and expenses
previously recorded in connection with the terminated Stock Purchase
Agreement with the Related Party (see Note 9).
14. ABILITY TO CONTINUE AS A GOING CONCERN
For the years ended August 31, 1999 and 1998, the Company incurred losses
of $1,242,840 and $2,735,019, respectively, and at August 31, 1999, the
Company had an accumulated deficit of $13,247,811. In addition, current
liabilities exceed current assets by $3,171,044. These factors, among
others, may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.
<PAGE>19
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
14. ABILITY TO CONTINUE AS A GOING CONCERN (Continued)
On October 21, 1999, the Company entered in an agreement and plan of merger
(the "Merger Agreement") with a related party. The Company's Board of
Directors has approved the Merger Agreement and the transactions
contemplated thereby, and has agreed to submit the Merger Agreement to the
Company's shareholders for their approval (see Note 15).
Pending shareholder approval and consummation of the contemplated
transactions under the Merger Agreement, the Company is continuing to seek
sources of additional capital to meet its current and potential cash
requirements, including debt financing, issuing equity securities and
entering into other financing arrangements. There can be no assurance,
however, that any financing arrangements contemplated herein will be
available and, if available, can be obtained on terms favorable to the
Company. In light of the Merger Agreement, certain holders of options to
purchase shares of the Company's common stock may be inclined to exercise
those options. The Company could receive substantial proceeds from the
exercise of these stock options; however, there can be no assurance that
any stock options will be exercised in the near term, if at all.
In the event that the transactions contemplated under the Merger Agreement
are not consummated, then the Company's ability to continue as a going
concern would be seriously jeopardized, and would depend upon its ability
to restructure payment terms and/or obtain new financing to repay its
debts.
15. SUBSEQUENT EVENTS
On October 21, 1999, the Company and a related party (the "Related Party")
entered into an agreement and plan of reorganization (the "Merger
Agreement"), whereby, upon requisite shareholder approval, the Company will
become a wholly-owned subsidiary of the Related Party and each share of the
Company's common stock, other than any dissenting shares and any stock then
owned by the Related Party, will convert into 0.80 shares of the Related
Party's common stock. The Merger Agreement will terminate on January 31,
2000 or earlier based on the occurrence of certain events set forth in the
Merger Agreement. Under the Merger Agreement, among other things, the
parties have agreed that no payments will be required during the term of
the Merger Agreement with respect to amounts owing by the Company to the
Related Party as of August 31, 1999 (see Note 7).
The Company's Board of Directors (the "Board") has approved the Merger
Agreement and the transactions contemplated thereby, including the
acquisition of the Company, and has agreed to submit the Merger Agreement
to the Company's shareholders for their approval.
To permit the acquisition by the Related Party and all other actions
contemplated by the Merger Agreement, the Board, after considering the
terms of the Merger Agreement and an opinion rendered by the Company's
independent financial advisors as to the fairness of the Related Party's
offer to the shareholders of the Company, amended the Company's Rights
Agreement effective October 18, 1999 (see Note 9).
<PAGE>20
OPHTHALMIC IMAGING SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(Continued)
15. SUBSEQUENT EVENTS (Continued)
The Company and the Related Party also executed a Series B Preferred Stock
Purchase Agreement on October 21, 1999 whereby, among other things, the
Company agreed to sell to the Related Party, upon the issuance by the
Company of shares of its common stock pursuant to the exercise of stock
options, shares of the Company's Series B Preferred Stock at a price of $25
per share with each share carrying the voting power of 1,000 shares of the
Company's common stock.
Also on October 21, 1999, the Company, the Related Party and three of the
Company's outside directors (the "Exercising Directors") entered into a
stock purchase agreement (the "Agreement") pursuant to which, among other
things, the Exercising Directors each exercised options to purchase 50,000
shares of common stock at an exercise price of $0.375 per share resulting
in net proceeds to the Company of $56,250.
The stock purchased by the Exercising Directors is restricted and subject
to repurchase by the Company until the earlier of May 9, 2000 or the
Effective Date of the Company's acquisition by the Related Party, as
defined by the Merger Agreement. Also under the terms of the Agreement, the
Related Party purchased 150 shares of the Company's Series B Preferred
Stock at a per shared price of $25 in exchange for the Related Party's
cancellation of certain of the Company's debt in aggregate amount of
$3,750. These 150 shares of Series B Preferred Stock are also restricted
and subject to repurchase by the Company if the Company repurchases any of
the common stock purchased by the Exercising Directors.
As a result of the foregoing transactions, the Related Party owns 49.5% of
the Company's outstanding common stock and all 150 outstanding shares of
the Company's Series B Preferred Stock, resulting in sole voting power of
53%.
OPHTHALMIC IMAGING SYSTEMS
CALCULATION OF NET LOSS PER SHARE
The following table sets forth the calculation of basic and diluted loss per
share:
<TABLE>
<S> <C> <C>
1999 1998
================= ==============
Numerator for basic and diluted net loss per share $ (1,242,840) $ (2,735,019)
================= ==============
Denominator for basic net loss per share:
Weighted average shares 4,155,428 4,030,428
Effect of dilutive securities (1):
Employee stock options -- --
Warrants and other -- --
----------------- --------------
Dilutive potential common shares -- --
================= ==============
Denominator for diluted net loss per share 4,155,428 4,030,428
================= ==============
Basic net loss per share $ (0.30) $ (0.68)
================= ==============
Diluted net loss per share $ (0.30) $ (0.68)
================= ==============
(1) No amounts are included, as amounts are anti-dilutive.
</TABLE>
CONSENT OF CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the incorporation by reference in the Form 10KSB, Item
7 of our report, dated November 5, 1999 related to the financial statements of
Opthalmic Imaging Systems.
PERRY-SMITH & CO., LLP
Sacramento, California
November 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
10-KSB FOR THE PERIOD ENDED AUGUST 31, 1999 FOR OPHTHALMIC IMAGING SYSTEMS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> AUG-31-1999
<CASH> 178,007
<SECURITIES> 0
<RECEIVABLES> 535,175
<ALLOWANCES> 156,000
<INVENTORY> 361,092
<CURRENT-ASSETS> 1,018,252
<PP&E> 1,302,477
<DEPRECIATION> (999,347)
<TOTAL-ASSETS> 1,328,767
<CURRENT-LIABILITIES> 4,189,296
<BONDS> 0
0
0
<COMMON> 10,462,604
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,328,767
<SALES> 6,011,825
<TOTAL-REVENUES> 6,243,305
<CGS> 3,892,243
<TOTAL-COSTS> 3,892,243
<OTHER-EXPENSES> 3,763,694
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 181,867
<INCOME-PRETAX> (1,592,840)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,592,840)
<DISCONTINUED> 0
<EXTRAORDINARY> 350,000
<CHANGES> 0
<NET-INCOME> (1,242,840)
<EPS-BASIC> (0.30)
<EPS-DILUTED> 0
</TABLE>
